It is critical to have a critical illness cover
Mr. Rahul Arora is a software professional in his early 40s. He works for a well known MNC and draws around Rs 1,00,000/- p.m. He is the single income earner of the family and has a home maker wife and two school going kids. He has a reasonably good health profile.
One day he suddenly collapses in office and is rushed to the nearby hospital by his colleagues. The diagnosis-he has suffered a brain haemorrhage due to which he has had a partial paralytic stroke.
How do people react when they hear of such incidents happening around them to friends, relatives, colleagues and acquaintances?
First reaction : Sympathy for the person and his family
The second : Fear.”What if it happens to me too?”
But then they convince themselves. ”Only a handful of unfortunate people go through this, so it is not likely to happen to me”.
As much as we would like to believe this, the statistics differ. Today, due to our unhealthy and stressful lifestyles, the percentage of people contracting critical illnesses has increased dramatically. The good part is that due to medical advancement, the successful recovery rates have also increased. However, the treatment is extremely expensive and given that medical inflation in our country is significantly higher than economic inflation, it can wipe out a major portion of our life savings.
While timely treatment and successful recovery is priority, financial preparedness is also essential. It would ensure that one can focus only on getting better without having to worry about the costs involved.
Buying a critical illness cover for the family would help take care of this.
What is a critical illness cover?
A critical illness cover or policy reimburses the policy holder for the covered amount if he or she is diagnosed as suffering from any of the specified illness like heart attack, cancer, kidney failure, stroke, a major organ transplant etc. One can cover himself or herself for such risks either by buying a stand-alone critical illness policy or by taking an additional cover for the same with the main health policy. There are a variety of such policies offered by leading life/general insurance companies with specific benefits like hospitalization benefit, surgical benefit, post hospitalization benefit etc. You can choose one based on your requirement.
You can choose one based on your requirement. And in case you do not have one already, please avail of a critical illness policy right away when you are in a good health condition.
Because, as it is rightly said ‘Health Insurance can be bought only when you do not need it, because when you really need it, you are no longer eligible to get it’.
Plan your investments like how you would plan for that much awaited holiday.
The holiday season is around the corner with the schools about to break for summer vacations. Most families are ready to embark on that much awaited trip which has been eagerly and meticulously planned. Believe it or not, managing your finances which is perceived to be a complicated affair in fact requires just the same kind of planning!
- What should be the destination?
Your investment objective – First you have to decide what are the milestones you have to save for – like buying a house, childrens’ education and marriage or retirement.
- How long should your trip be?
Your investment horizon – This would mainly depend on the investment objective and factors like the age of the investor, details of his dependents etc.
- What should you pack?
The type of investments you should make in various avenues like equity, debt schemes, govt. securities. This would be determined by the person’s personal risk appetite, his age, current job profile and the investment horizon. Any investment plan you choose is a trade-off between risk and reward. Greater the risk you are willing to assume, higher the reward.
- How much would this trip cost?
How much money would you have to save regularly/set aside to reach your desired investment objectives.
- How much cash should you carry along with you?
Your short term liquidity requirements – Though liquid investment schemes like a savings a/c is very convenient as cash can be withdrawn immediately, these have a much lower yield compared to less liquid investments. Hence it is advisable to just keep the amount which you might require in an emergency as cash.
- Is your holiday likely to get extended for some reason?
Most people form a rough idea of how long they are likely to live based on the average life span. It is important to keep in mind and provide for the risk of running out of savings if one lives too long.
Costs and Charges in a Unit Linked Insurance Plan
While we are on the topic of ULIPs and after having discussed and understood the working, features and benefits of a ULIP in the last two articles, it is also essential to know what are the various kinds of expenses and charges involved with a ULIP. Though ULIPs are transparent and the client gets to know exactly how much of his premium goes towards charges once he has taken the policy, Insurance Companies seldom talk about it in detail while marketing and selling their policies. Unit Linked Policies with huge recurring expenses eat away a major portion of the profits earned by way of NAV appreciation.
- Premium Allocation charges – These are charges to cover the running expenses of a policy and to pay for issuance and distribution commissions. These are a percentage of the regular/single premium paid and are usually high in the first year. For Example – If a product has an allocation charge of 5 % in the 1st year, an amount of Rs 5000 would be deducted from the first annual premium of Rs 100000/- towards this expense.
- Policy Administrative charges – These are levied for the administration of the policy – IT, operational etc. These charges usually get adjusted in Unit Value or the NAV, and the NAV is declared after adjusting these costs.
- Fund Management Fee – All Unit Linked plans have underlying funds constituting of various financial instruments like equity, debt, money market etc. The Fund Management Fee or FMC is levied to pay for managing these instruments – cost of buying and selling them for various funds. The fund option which has a higher percentage of equity would have higher charges.
- Mortality charges – This covers the cost of providing life protection for the insured and is expressed as per thousand of the Sum Assured or life cover. For example if a person aged 35 buys a ULIP with a life cover of Rs 10 Lakhs and a mortality charge of 1.5 , the recurring mortality charge would be (1.5* 10Lakhs)/1000 = Rs 1500.
- Rider charges– These pay for other protection benefits that the policyholder has chosen- accident benefit, critical illness etc.
- Surrender charges – If the policyholder wishes to close the policy or withdraw partially during the term, this charge may apply. Usually this charge is applicable only for withdrawal in the first few years.
- Transaction charges – These are specific charges levied when the client does transactions like switching between funds or top ups.
What makes a Unit Linked Insurance Plan (ULIP) so popular
Over the last few years ULIPs have become the most popular category among the insurance products.
The reason? They provide multiple benefits and have various features and options to meet the specific needs of each client.
- Life Protection – A person’s life protection needs depend on the stage of life he or she is at- young and just started working, married with children, nearing retirement etc. A ULIP allows one to choose the death benefit (subject to a stipulated minimum) which is adequate enough and also maintain a balance between life cover and savings.
- Investment/Savings – A ULIP provides the client with the option of investing as per his or her personal risk profile in the equity markets, debt markets, or a mix of the two.
- Switch option – The client can switch between the funds and manage his portfolio actively. For instance, if he finds a substantial increase in the fund value due to a boom in the equity markets, he can switch a part of it into debt and thus lock-in/protect his profits from market fluctuations. The switch option can also be used to change the fund option for future premiums as the risk orientation of the client changes.
- Cover Continuance /Premium Holiday – Insurance policies are long term contracts. Sometimes, the client may find himself facing a situation where he may find it difficult to pay future premiums. This option gives client the option of paying only for a limited number of years, or stop payments for sometime and resume when it is convenient.
- Transparency – In a traditional insurance plan, it is difficult to determine the accrued value of the policy. However, in a ULIP the investment is represented by allocated units and a NAV which is a real time indicator of the value of the investment. Hence a policyholder can easily find out the value that the policy has accrued on a certain date.
- Riders for extra benefits – Riders are extra benefits which can be attached to a policy for extra protection for a nominal charge. The client can choose from waiver of premium, disability benefit, accident benefit, critical illness riders etc.
- Liquidity – A Unit Linked Insurance Plan allows the policy holder to withdraw partially or fully (as per the specific policy plan) in times of emergency without any penalty.
- Tax Benefits – Annual premium payment up to Rs 1 Lac is eligible for tax benefit u/s 80 C and the maturity benefit is tax free u/s 10( 10D) subject to the premium not being more than 10 % of the life cover.
How does a Unit Linked Insurance Plan exactly work?
Unit Linked Insurance Plans (ULIPs) are aggressively marketed by Insurance companies as investment plans with a life cover and benefits like flexibility, market linked returns and transparency. Thanks to it, most of us are quite likely to have invested in one at some point in time.
Here is how your ULIP actually works and how and where does your money get invested from the date of payment of premium till maturity.
- Choose the premium amount, the amount of insurance you need (subject to a minimum and maximum amount as per IRDA guidelines).
- Decide the policy term and the portfolio strategy (choose from the available combinations of debt/equity) for investment.
- The premium amount less the charges is invested in to the fund of your choice.
- In case of the unfortunate death of the insured during the policy term, the insurance amount plus the accumulated fund value is paid to the nominee.
- If the insured survives the policy term, the Fund Value is paid on maturity.
Your banker as your financial planner – Pros and Cons
Further to the previous article (Emergence of banks in India as financial planning outfits), whom should you hand over the task of managing your investments??
Your bank – with whom you have been dealing for years for your banking transactions and which now has a full-fledged wealth management division too (which they also keep aggressively advertising about every time you visit them).
OR
One of the Wealth Management/Broking firms or independent financial planners who specialize in this area.
Pros and cons of having your bank as your financial planner
Advantages/Benefits
- Higher credibility/accountability The relationship/wealth manager dealing with you represents the organization which has a good brand visibility and is perceived to have more accountability compared to an independent advisor/agent as the client can always approach the organization in case of a problem/grievance.
- Ease of transacting – The Relationship Manager usually act as a one stop shop for the client and goes an extra mile and even take care of the banking related issues of the client.
- Greater comfort level – The client feels more comfortable revealing his financial health to an employee/ representative of the bank with whom he has been banking for a long time.
- Better logistics support – Financial planning divisions of banks are equipped with a good research team, financial planning tracking software, infrastructure etc. which makes the process simpler and ensures smooth functioning.
Now, the concerns –
- Increased competition among banks has resulted in Relationship Managers being given stiff sales targets by their employers due to which they may be forced to be more sales focused than customer focused.
- They have to function within certain guidelines set by their seniors/ organization which could sometimes come in the way of their exercising their independent professional judgment while working on the client’s portfolio.
- Most of the financial planning exercise in banks is more person driven than process driven and the client usually looks upon the Relationship Manager as a trusted advisor .High attrition rates among them, with all banks trying to acquire the best of the lot leads to the clients having to deal with a new relationship manager frequently, causing customer dissatisfaction.
Sriraksha Financial Planning Services 