Time to purchase mediclaim policy from private insurance companies?

Yes, as per the survey of India’s Best Medical Insurance Companies conducted by Hindustan Times – MaRS and published in Hindustan Times edition of 28^th March 2011.  As per the survey, Star Health & Allied Insurance is the best medical insurance company in claim settlements followed by Tata AIG.  In customer services, TATA AIG tops the list with ICICI Lombard coming at second place.  Interesting to note that National Insurance is the only public sector insurance company in the top 5 list.

This is a welcome outcome for private health insurance companies, since in life insurance, people still prefers LIC due to its better claim settlement ratio.

Link to various posts on survey:

http://goo.gl/fT9hI

http://goo.gl/jvEbD

http://goo.gl/BTIWC

http://goo.gl/DyPX5

http://goo.gl/5ykoo

http://goo.gl/bJinc

http://goo.gl/2soCY

Is Insurance Agent filling your proposal form?

Most of us generally purchase insurance policy through an agent.  The agent serves as a point of contact between the insurance company and us.  Sometimes due to lack of time or knowledge or sometimes due to sheer ignorance or casual approach, we never fill the insurance policy form (known as proposal form) ourselves.  We depend on the agent to fill up the relevant details and sign the proposal form.  Many individuals do not even care to check the correctness of the filled information.  Such casualness or ignorance can at times be costly.

Also read: Should life insurance be taken from the

company charging the lowest premium?

 The curious case of Naval Agarwal

Naval Agarwal had taken a LIC policy for Rs. 2 lakh through an agent in April 2001.  He died in April 2003 and an insurance claim was lodged with LIC by his nominee, Ashish Agarwal.  LIC rejected the claim on the grounds that the insured had withheld material information at the time of purchase of the policy.  The material information in this case was of not disclosing existing insurance policy of Rs. 1 lakh.  In the proposal form, the insured is required to disclosed existing insurance policies, if any.  In this case, the details of existing life insurance policy of Rs 1 lakh purchased in March 2000 was not disclosed.  LIC’s contention was that in case insured had specified details of his earlier policies, LIC would have treated the new policy as ‘high risk insurance’ and would had consider the risk cover accordingly.

Ashish, after unsuccessfully approaching to the Insurance Ombudsman, went to Consumer Dispute Redressal Forum.  Ashish argued that the proposal form was filled in by the agent and his father only signed the proposal form at the places indicated by the agent. Further both the new and the old policies were purchased from the same LIC agent and he should have been aware about the earlier policy details.  Hence it was the mistake of LIC agent to suppress the facts.

The Consumer Forum noted that “it is a general practice in the day to day insurance business that the Agent fills up the lengthy form and the insured signs on the dotted lines as instructed by the Agent. Therefore, there is no doubt in our mind to suppose that the insured has signed on the form as directed by the LIC Agent without any idea that he was supposed to fill up the particulars of the previous policy.”  Forum noted that the agent was LIC’s agent and he should have been aware about the existence of earlier policy and should have filled in the data accurately.  Thus as per their views, there was no deliberate act on the part of the insured of hiding the material details and LIC is liable to pay the claim along with interest and damages.

Important things to keep in mind while filing the proposal form

The above case went in favour of the insured; however, look at the efforts required to claim a sum of Rs 2 lakh.  It took 8 years to receive the amount after unsuccessfully approaching to the company and Insurance Ombudsman.  And all this was due to an error on the part of agent at the time of filling up the proposal form.

Hence it is important to ensure that all details are entered correctly in the proposal form.  Bachhat advices to ensure following things at the time of filling the proposal form:

1. Ensure the form is filled by you.  In case you are not sure about any requirement, take the help of agent but eventually the form should be filled by you.  In an extreme case of agent filling up the form, ensure to read it thoroughly before signing.
2. Never sign a blank form and trust on agent to fill up the details.
3. Ensure that all the facts are stated.  Do not try to hide any facts, howsoever irrelevant they may seem to be.
4. Sometimes agent will tell you to suppress certain facts to reduce the premium amount.  Never do that.  The agent will get the commission for the policy and you will suffer at the time of claim.  This is particularly true for mediclaim policies.
5. In case certain details are not relevant or not applicable, instead of leaving them blank, cross them out or write not applicable against them.
6. In case you come to know about any errors in the form after taking the policy, inform the insurance company of the same immediately.

Above precautions will help in minimizing your troubles and mental agony at the time of claim.

Have you any time experience agent trying to suppress the facts in the proposal form?  Do you fill the form yourself or your agent does it for you?  Do share your views and feedback with Bachhat.

Birla Sun Life Foresight Plan: Costs increases as the Guarantees increases

It has been said umpteen numbers of times not to mix the insurance and investment aspects.  To maximize gains, one should purchase the cheapest insurance option (read term insurance) and should invest the balance funds optimally.  However, Indians always like to mix insurance with investment and insurance companies are known for capitalizing on this tendency.  Add a tax flavor and we feel it is a great investment opportunity.

Birla Sun Life Foresight Plan is one such plan which has been recently launched and gives the combined benefit of insurance and opportunity to invest.  It is a ULIP plan with unique guarantees on investment.  It comes under two options: Self Managed and Guaranteed Option.  

Self Managed option is similar to any other ULIP plans wherein your premium amount after deducting all charges is invested in the market.  However, unlike other ULIPs, the plan provides 10 options to choose from for investment.  The option ranges from choosing 100% investment in equities to 100% in debt instruments.  Depending on the option one chooses, the net premium will get invested.

The other option is Guaranteed Option and needs to be properly understood before opting.  This option is available only if one chooses the 5 year premium payment term.

We have heard a lot about guaranteed NAV funds which promises to give the highest NAV achieve during initial 5 to 8 years of the policy term, irrespective of the fund value at the time of maturity.  Birla Sun Life Foresight Plan’s Guaranteed Option provides that benefit along with an additional guarantee.  It also guarantees that the premium is invested on the best day of the year, irrespective of the actual date of payment of premium.  For eg:  Suppose the fund value during the start of the year is Rs. 1,00,000,  the day you paid your premium, it was Rs. 1,05,000 and by the end of the year it increases to Rs. 1,15,000.  However during that year, the fund had hit a low of Rs. 95,000.  This option assumes that the investment is made during the lowest point of year, which is Rs. 95,000 in our example, and will guarantee the return of ~21% instead of the actual return of ~10% for that year.  Such guaranteed return is calculated for all the years in which premium is paid and is determined at the end of the 5^th year of policy.  The guaranteed amount at the time of the maturity will be higher of the fund value, highest NAV achieve during the first 7 years of policy or the NAV derived from the above additional guarantee. 

 

Sounds great? Actually it is not.  Since the variation in the fund value will not be significant if one considers the fact that the major portion of the fund will be invested in debt instruments and the high cost of providing this guarantee.  The fund management charge is 1.35% p.a. In addition to this, to provide investment guarantee, additional charge of 0.25% p.a. (under Single Premium Option) or of 0.40% p.a. (under 5 years premium payment term) shall be levied. This is in addition to the premium allocation charge of 5% of basic premium.  For self managed option, depending on the fund chosen, fund management charge of 1.00% to 1.35% p.a. is applicable.  Premium allocation charge remains the same at 5% of basic premium.

The minimum premium amount of Rs. 2,00,000 for single premium option and Rs. 1,00,000 for 5 years premium payment term is also quite high as point of entry in to this plan.  Further, despite such high premiums, the plan fails to provide adequate insurance cover with the maximum cover of just Rs 30,00,000 on a premium of Rs. 1,00,000 p.a. (assuming individual, age of less than 45 years, opts for 5 year premium payment term) and one will be required to purchase additional cover.

Whether it makes sense to go for this plan?

Any financial product with an element of guarantee in it should be dealt with cautiously.  Each guarantee has its cost and as the number of guarantees increases the cost also rises.  The cost in this plan is (i) in the form of additional fund management charges & investment guarantee and (ii) reduced returns.  To provide the guarantee, over a period of time, the fund will be required to park major portion of the investment in debt instruments.  Thus over a period of 10 years, the annualized returns will not be significant.  Surely it is difficult to predict the returns; however after deducting various charges, it will be surprising if the returns are in double digits.  Thus this is not an ideal plan for those looking for long term value creation.  Even for conservative investors, who prefers security of returns, Bachhat advises to go for bank fixed deposits (which nowadays are offering interest up to 10% p.a.) or opt for long term debt funds.  As regards the insurance cover, go for the cheaper term cover.

New Pension System – A good investment alternative but requires more clarity on performance

New Pension System (NPS) was introduced as a defined contribution pension system for government employees in 2003 and was extended to all citizens of India from July 2008.  To make it more popular, tax incentives were extended, wherein any investment made in NPS by an individual would qualify for tax deduction under section 80C.  However, these incentives failed to attract investors to NPS, which is otherwise a good investment vehicle for retirement planning. Till 7^th Feb 2011, less than 40,000 subscribers have registered for NPS which is low for a good scheme running for more than 2 years now.

Due to the structure of NPS, neither the fund managers of NPS nor the employers were interested in popularizing it.  To give more fillip to the scheme, this budget has further boosted its tax attractiveness.  Before analyzing the tax benefits extended in the budget, let’s first understand more about NPS in detail.

Also read:  What’s the budget has in store for salaried employees?

What is NPS?

New Pension System has been introduced to enable individuals to save for their retirement.  In NPS, a subscriber contributes money every year till retirement and is invested as per the investment pattern selected by the subscriber.  On retirement, part of the investment corpus (called as pension wealth) accumulated is paid as lump sum while the balance goes in purchasing a life annuity which will ensure stable monthly income to the subscriber till death.

Who can invest in NPS?

Any Indian citizen, whether resident or non-resident, can invest in this scheme provided he is between 18 to 60 years of age as on the date of submission of application.

How to Invest in NPS?

Tier I and Tier II are the two types of accounts available for investment in NPS.  A subscriber needs to have Tier I account before opening Tier II account.  The difference between the two accounts is on limitation of withdrawals.  Tier I account is non-withdrawable account.  i.e. one cannot withdraw any contribution made in this account before retirement.  Tier II offers flexibility and the subscriber is free to withdraw his savings from this account whenever required.

NPS is regulated by Pension Fund Regulatory & Development Authority (PFRDA).  PFRDA has appointed six fund managers to manage the fund and a subscriber has to choose one with whom he wishes to place his money.  These managers manage the investment made by the subscriber as per the investment mandate selected.  ICICI Prudential, IDFC, Kotak Mahindra, Reliance Capital, SBI and UTI are appointed as Pension Fund Managers (PFM).  A subscriber has to compulsorily select one of these fund managers; otherwise the application shall be rejected.   In case he is not satisfied with a performance of a fund manager, he has the option to switch to another manager.  However, this option can be utilized only once in a financial year.

PFRDA has also appointed various service providers to act as Point of Presence (POP) to accept applications and contributions to the scheme.  They are the subscribers’ point of contact and are responsible for providing range of services to the NPS subscribers.  The complete list of such service providers is available on PFRDA website.  After submitting the application and the initial contribution amount, subscriber will receive a welcome kit which will contain the subscriber’s unique Permanent Retirement Account Number (PRAN) card, telephone and internet password.  The PRAN will be the primary means of identifying and operating the account.

How much to contribute per annum?

	Tier I	Tier II
Minimum contribution at the time of account opening	Rs. 500	Rs. 1000
Minimum subsequent contribution per transaction	Rs. 500	Rs. 250
Minimum contribution in a year	Rs. 6000	Rs. 250
Minimum number of contribution in a year	1	1
Minimum account balance to be maintained at the end of the year	Not applicable	Rs. 2000

The contributions can be made through cash, local cheque or demand draft.  Further there are no restrictions on maximum amount of contribution. 

Where do the funds get invested?

After selecting the fund manager, the subscriber needs to select any one of the two approaches available to invest the money.  NPS offers the following two approaches:

1.     Active Choice – Individual funds

2.     Auto Choice – Lifecycle Fund

Active Choice – Individual Funds

Under active choice, subscriber has an option to decide how the money is to be invested in the following options:

Asset Class	Descriptions	Limits
E	Investment in equity market instruments	Up to 50%
C	Investment in fixed income instruments other than Government securities	Up to 100%
G	Investment in Government Securities	Up to 100%

A subscriber can invest up to 50% of its pension wealth in equities and the balance either in fixed income instruments or government securities or both.  Equity investment will be similar to index fund and the returns will be identical to index returns.  In case, subscriber does not want to have exposure to equity markets, he has an option to invest the entire portion in either Asset Class C or G or divide the investments amongst them.  Once the option is selected, the pension fund managers will manage your investment in the said proportion.  A subscriber has an option to change his allocation pattern for subsequent investments.

Auto Choice – Lifecycle Fund

In case an individual do not want to choose the allocation pattern or in case he is not aware which allocation pattern is right for him, he can choose Auto Choice option.  If the subscriber does not select any option, by default Auto Choice will be selected.  In this option, the investments are made in a life-cycle fund.  The proportion of funds across the above 3 asset classes will be determined by a pre-defined portfolio.  When the subscriber is young, major portion of the investment will go to equities.  As he grows old, the exposure to equities will reduce and government securities will increase.  Till the age of 36 years, 50% will be invested in equities, with 30% in asset class C and balance 20% in government securities.  With each passing year thereafter, exposure to equities and asset class C will be reduce by 2% and 1% respectively and exposure to government securities will increase by 3%.  This will continue till the age of 55 years when the maximum exposure (80%) will be in government securities and balance 20% equally divided between equities and asset class C.

Withdrawal features:

As stated above, no withdrawals before retirement are permitted in Tier I account, whereas Tier II account provides flexibility of withdrawals.

The withdrawal options can be summarized as below:

Criteria	Benefits
At any point in time before 60 years of age	20% can be withdrawn in lump sum. Balance 80% has to be utilized to purchase a life annuity from a life insurance company.
On attaining the age of 60 years and up to 70 years of age	On reaching 60 years, maximum of 60% can be withdrawn in lump sum. Subscriber has an option to either withdrawn this in lump sum or in phased manner with minimum 10% every year.  Any amount lying to the credit at the age of 70 shall be compulsorily withdrawn in lump sum. Balance shall be utilized to purchase a life annuity from a life insurance company.
Death due to any cause	In such event, option will be available to nominee to receive either 100% in lump sum.  If nominee wishes to continue with NPS, he / she need to subscribe to NPS individually.

Tax Benefits for investing in NPS:

Though there is no limit for investment in NPS, contribution made by individual to NPS gets counted for Section 80C deduction limit of Rs. 1,00,000.  With effect from April 2011, the budget has made it more lucrative by allowing contribution made by employers up to 10% of the basic salary as tax free.  This is over and above Rs. 1,00,000 limits available under section 80C. 

At present, the lump sum receipt at the time of retirement and the annuity thereafter is taxable at the hands of the subscriber.  However, though details are still awaited, the Direct Taxes Code has proposed to exempt annuity income from tax.

Why should I invest in NPS?

NPS is a good instrument of investment for retirement planning.  Besides the tax benefits, it is also simple, portable (the account continues even if the subscriber changes city, job or pension fund manager) and regulated.  However, the most interesting aspect of NPS is its low cost.  In fact, NPS is highlighted as the lowest cost investment avenue.  While the charges in NPS are really low, it is necessary to look in to their details to benefit from them.

Following are the charges under NPS:

Intermediary	Charge Head	Service charges	Method of Deduction
Central Recordkeeping Agency	PRA* Opening Charges	Rs. 50	Through cancellation of units.
	Annual PRA Maintenance cost per account	Rs. 280
	Charge per transaction	Rs. 6
POP	Initial subscriber registration and contribution upload	Rs. 40	To be collect upfront
	Any subsequent transactions	Rs. 20
Custodian	Asset servicing charges	0.0075% p.a. for electronic segment and 0.05% p.a. for physical segment	Through NAV deduction
PFM charges	Investment Management Fees	0.0009% p.a.	Through NAV deduction.

*Permanent Retirement Account

Generally a mutual fund charges 0.5% to 1.0% p.a. as charges for managing funds.  Index fund charges around 1.0% whereas charges for debt fund are in the range of 0.5%.  As compare to that, NPS charges just 0.0084% p.a. which is ridiculously low.  However, one needs to take into account the other transaction charges also which one normally does not pay in mutual fund investments.  Back of the envelope calculation suggest that NPS is cheaper when the annual contribution is more than Rs. 50,000 assuming 50% investment in Asset Class E and balance in other asset class.  Otherwise he will be better off investing in mutual funds.

Performance of NPS funds:

The performance of NPS funds is not readily available on PFRDA website.  Based on the NAVs of the funds, 1 year performance was measured and is given in the table below in percentage terms. The historical data for Kotak, ICICI and IDFC pension funds were not available. 

Fund Manager	Tier I Asset Class			Tier II Asset Class
	E	C	G	E	C	G
SBI	5.7	13.0	12.8	5.1	16.0	13.1
UTI	7.4	9.1	13.2	9.2	6.7	16.1
Reliance	8.5	7.7	8.6	8.5	6.6	5.3

Comparable one year returns:

Nifty BeES	Debt Income Funds (1)	Gilt Funds(2)
9.3	13.0	12.8

Notes:

1. Denotes average returns of 5 star rated debt income funds

2. Denotes average returns of 5 star rated Gilt medium and long term funds

Source: Valueresearchonline, respective pension fund’s websites

As can be seen from the table, the performance of the funds varies significantly amongst them.  The variation is even more in fixed income securities and government bonds. Further, the performance of Asset Class E which tracks the Index is also lower than Nifty BeES index fund.  However, the performance of other class of assets is better than their comparables.  Hence it is imperative that before investing, one needs to check the performance history of pension fund managers.

Being so good, should I immediately open a NPS account?

NPS is a good retirement planning alternative available.  It provides cost as well as tax advantages for long term investment.  But the performance of the fund managers is not readily available and the compilation above shows that it varies significantly amongst various managers.  Moreover, the size of funds managed by them is not known.

This should form part of one’s investment portfolio, but we need to wait for some more time to check the consistency of performance amongst fund managers. PFRDA should take steps to provide more disclosures and make NPS more transparent.

Have any of you already invested in NPS?  If yes, how has the investment fare till date?  Feel free to provide your comments and suggestions on this article.  Thanks.

Happy Retirement: Your tax liability decreases as you grow older

One category of individuals who are smiling their way to bank is senior citizens.  Finance minister said that 3 is lucky number for him and he has showered triple bonanza for senior citizens. 

 

First of all, the age limit to qualify for senior citizenship has been reduced by 5 years from 65 to 60 years. The individuals who fall under this category will see their tax outgo reducing by Rs. 9,270 for male individuals and Rs. 6,180 for female individuals.

Secondly, the basic exemption limit is marginally enhanced from Rs. 2,40,000 to Rs. 2,50,000 leading to a tax saving of Rs. 1,030.

However, the main benefit to senior citizens comes once they reached 80 years of age.  Such individuals are classified as ‘Very Senior Citizens’ and for them the basic exemption limits have been hiked to Rs. 5,00,000.  This is more than double of the existing limits of Rs. 2,40,000 and will lead to substantial tax saving of Rs. 26,780.

The table below gives an overview of how the senior citizens have benefitted from the budget proposals.

Taxable Income	Males (aged 60 to 65 yrs)			Females (aged 60 to 65 yrs)
	Existing	Proposed	Savings	Existing	Proposed	Savings
5 Lakh	14,420	5,150	9,270	11,330	5,150	6,180
10 Lakh	35,020	25,750	9,270	31,930	25,750	6,180
15 Lakh	158,620	149,350	9,270	155,530	14,9350	6,180
20 Lakh	313,120	303,850	9,270	310,030	30,3850	6.180

Taxable Income	Senior Citizens (aged 60 yrs & above but less than 80 yrs)			Very Senior Citizens (aged 80 yrs and above)
	Existing	Proposed	Savings	Existing	Proposed	Savings
5 Lakh	26,780	25,750	1,030	26,780	NIL	26,780
10 Lakh	150,380	149,350	1,030	150,380	123,600	26,780
15 Lakh	304,880	303,850	1,030	304,880	278,100	26,780
20 Lakh	459,380	458,350	1,030	459,380	432,600	26,780

This article was also carried in Mumbai's edition of DNA of 1st March 2011.