Now all of us know that Smoking is injurious to health (thanks to the government regulations that require a prominent skull and bones and a written warning to be printed on all cigarette packets). A somewhat less prominent written warning is also printed on all gutka pouches and packets. Apart from the direct money spent on purchasing these tobacco products (which anyway ranges from Rs. 1000 to Rs. 2500 per month for most tobacco slaves) the indirect costs in terms of health care and loss of productivity costs due to the various illnesses caused by tobacco usage is quite substantial. To that long list of expenses caused by use of tobacco please add the extra costs of Insurance. In fact the extent of such extra costs on Insurance came home to me when we received a query from a reader.

Here is that query: “I am 38 years old and am thinking of buying a 30 year Unit Linked Insurance Plan where I will pay a premium of Rs. 39,000 per annum for a sum assured of Rs. 75 lacs. After deducting all the charges including mortality, the indicative fund value at the end of 30 years comes to be around Rs. 4.50 lakhs at a gross return of 6% p.a. and Rs. 9 lakhs at a gross return of 10% p.a. If I invest the premium amount in a PPF for the same tenure the fund value would total to around Rs. 44 lakhs @ 8% p.a. Since I am getting such a poor return should I investing in PPF rather than buy this policy.”

For advising him we needed to work out the cost of a 30-year term policy for Rs. 75,00,000.

The below mentioned table is as per the above illustration for a male aged 38 years with a 30 year tenure for a sum assured of Rs. 75,00,000

On that basis at that time the cheapest premium worked out to Rs. 22,000. Assuming he invested the difference of Rs. 17,000 (Rs. 39,000 less Rs. 22,000) in PPF @ 8% p.a. it would accumulate to around Rs. 19 lakhs. So we advised him to take a term policy and invest the remaining amount in to various investment instruments depending upon his risk appetite to get better returns. Also his tenure for investment was quite long so we suggested him to go for a more aggressive portfolio that includes equity. But there was a sting in the tale. The customer came back and told us that in spite of excellent medical reports he was getting the term policy at a premium of Rs. 36,000 p.a. and not Rs. 22, 000 as we had told him. On further enquiry we realized that the additional premium was not because of any health issues but because he was a smoker and the premiums indicated were for non-tobacco users only. Now of course the equations changed completely. The money left from the premium payable on the ULIP plan was only Rs. 3,000 and the gross amount accumulated on that would be much lower than the fund value even at the lower return of 6%. This was happening because the ULIP plan did not differentiate between a healthy non-smoker and a healthy smoker. We asked him to take the ULIP policy immediately if it was still available.

But this episode bought home to me the financial costs of using tobacco. Here is an example to put the figures in perspective. Assume that the direct and indirect cost of smoking/gutka is around Rs. 3,000 p.m. on a very conservative basis. If the same money were put in a diversified equity plan for 20 years (and return is 15% p.a.) the funds would be enough to pay for a course that costs Rs. 14,00,000 in today’s money (assuming inflation at 6% p.a.). So the next time you light up that cigarette or reach for the gutka pouch please remember that the money for that is directly coming at the cost of your’s child’s higher education.

Our readers who are in their 30s and 40s and looking for sum assured of Rs. 75,00, 000 for a tenure of 30 years can refer the table below which compares the premiums for tobacco and non tobacco users.

But wait the story does not end here. I was using the same illustration with a young cousin of mine to convince him to give up smoking. Instead he sought my advise on an ingenious plan. What if he does not tell the insurance company that he is a smoker and uses the resultant savings in premium to build up the nest egg? I told him that plan would not work because firstly the insurance company would not pay on the policy in case he died but also they would anyway discover the fact that he smoked in the medical tests. But he refused to give up. He said he would give up smoking for a while before he applied for the insurance so that the medical tests will not reveal that he smoked. I pointed out that it will still not work as the premium he was paying would be completely wasted as the insurance company was not going to pay the claim on the policy if anything happened to him. It would be extremely irresponsible of him to take such a risk with his family’s future. Not one to give up easily he asked what would the insurance company do if a policy holder who was a non smoker at the time he took the policy started smoking later. Well I was stumped at that one. The Insurance Company would probably have to pay if a non-smoker (at the time the policy was taken) turns into a smoker later on. But I pointed out that this did not apply to him in any case since he was already a smoker. “Stop postponing the inevitable, Vaibhav and quit smoking now “ I advised him.

Hopefully he has taken the advice. What about you?

(Smoking and tobacco usage have been used interchangeably in this article – lower premiums are available only where the policyholder does not use tobacco in any form – smoking, chewing, snuff, etc.)

It is often said that the true character of a society is judged by how it treats its elders. The senior citizens of a country need to be taken care of by the society in general and by their children in particular.

Now a days lot of benefits have been granted to senior citizens in India so that they can live a fulfilled life. These are available in the form of special saving schemes, pension schemes, postal schemes, mediclaim policies and the likes which I have already written about in my earlier columns.

In this piece I would like to dwell on the income tax benefits available to senior citizens.

As described under Income tax Act, a senior citizen is a person who was of 65 or above of age during the year. It is worth mentioning that Income tax act contains many beneficial provisions for senior citizens. So what are these? Let’s understand.

Firstly senior citizens do not have to pay any income tax upto the income limit of Rs. 2,40,000 as against limit of Rs. 1,60,000 applicable for ordinary individual.

As a senior citizen you can claim deduction of upto Rs. 100,000 each year under Section 80C, in respect of money deposits made under Senior Citizens saving scheme rules, 2004. This provision is significant when other avenues for claiming tax deductions under Section 80 C like life insurance premium, payment towards pension plan, contribution to PPF account, ULIP etc. are no longer remain attractive to senior citizens. Though for income tax purpose you are a senior citizen if you have completed 65 years of age, however for the purpose of depositing money under the senior citizen scheme, the age limit is only 60 years and not 65. This age limit is relaxed to 55 years in case you have taken VRS and the retirement money is invested within a period of three months in the scheme. The rate of interest under this scheme is 9% currently which is higher than on any other risk-free investment avenue available today and that too with tax deduction.

The general deduction in respect of insurance premium for health insurance popularly known as Mediclaim is Rs. 15,000 for a family. However if premium is paid for senior citizen, the amount of deduction available goes up to Rs. 20,000. In case the premium is paid for the parent who is a senior citizen, the person paying the premium can claim a separate deduction of Rs. 20,000 in addition to claim of Rs. 15,000 in respect of premium paid for self, spouse and children. In case of the person paying the premium, as well as his parents who are senior citizens, the deduction available for each category will be up to Rs. 20,000 each.

The income tax also allows deduction for expenditures actually incurred for treatment of family members in respect of some specified diseases. Section 80DDB allows a deduction of Rs. 40,000 for treatment of self, spouse, siblings, parents, and children upto Rs. 40,000 for expenditure incurred for treatment of specified disease. However this deduction goes up to Rs. 60,000 in case the person to be treated is a senior citizen.

Senior citizens can submit Form no. 15H for no deduction of tax at source to the payer of money like interest, withdrawals from NSS account, and income from units of mutual funds and total tax liability is nil for the year in question.

As a senior citizen if you are not engaged in any business or profession, you will not be required to file a return of Income even if you fall into the criteria on ownership/occupation of immovable property or subscription of a telephone under the popularly known as one by six scheme. However, you will have to file a return of income under the scheme if you fulfill any of the other four criteria.  This exemption is available only if the senior citizen does not have any taxable income.

This way we find that Income tax act has provided quite a few benefits to senior citizens to help them wade through their old age, by way of higher benefit for Mediclaim when the medical cost constitute a significant portion of their budget.

The Income tax Act also treats the senior citizens fairly when it allows them to provide benefit of investing in senior citizen saving scheme at a higher rate of interest and at the same time let them claim the same as deduction under Section 80C.

As it is the rising inflation and higher costs of medical treatments have made life difficult for an average person. What to talk of woes of those who have handicapped person to support where he is concurrently spending on the treatment.

Thus to mitigate these financial hardships faced by the handicapped persons and their parents, Income Tax Act offers many benefits in the form of deduction from total income with reference to the handicapped person. Not only this, there are some insurance products which have been devised by insurance companies for the benefit of parents/ guardians of handicapped dependents.

Unfortunately many of us are not aware of these benefits.

So what are these benefits?

You can claim tax benefit under Section 80 DD which allows the deduction for money spent on maintenance of your handicapped dependent or for providing for your dependent through payment of insurance premium. You are allowed a deduction of Rs.50,000 in respect of any expenditure incurred for medical treatment, training or rehabilitation of your dependent with disability. In case of severe disability you are entitled to an enhanced deduction of Rs. 100,000.

In addition to deduction in respect of expenses incurred on the treatment of such a person, , Section 80DD also allows deduction in respect of any money paid to Life Insurance Corporation (LIC) or any other insurer for the purpose of buying specified scheme or insurance for the purpose of maintenance of such dependent. The aggregate deduction under Section 80DD in respect of treatment, maintenance as well for payment of money under the scheme approved can not exceed Rs. 50,000 in case of disability and Rs, 100000 in case of severe disability.

For claiming the deduction in respect of the above, you have to furnish a medical certificate from a Government Hospital certifying the disability of the dependent and a self declaration certifying the expenditure incurred on account of medical treatment (including nursing), training and rehabilitation of the handicapped dependant. You do not have to preserve the actual receipts for expenses incurred. However you will have to produce the actual receipts in case you claim payment to LIC, UTI etc for the purpose of buying insurance or other schemes for maintenance of such dependent.

Not only this, Income Tax also extends benefits to the handicapped person himself. The Section 80U of the income tax act allows a deduction of Rs. 50,000 from his income, provided the disability of the person has been certified by the medical authority. This deduction of Rs. 50,000 gets enhanced to Rs. 100,000 if the person suffers from severe disability. In order to claim this deduction, the person needs to obtain a certificate from one of the specified medical authorities and keep it up to date in case this needs to be renewed periodically.

Insurance companies have also come up with specialized schemes for those who have handicapped dependents. But not many of us are aware of them.

The health insurance cover provided by National Trust needs special mention. The trust has introduced “Niramaya” health Insurance Scheme for persons with disabilities like Autism, Cerebral Palsy and Mental Retardation etc. Under this scheme, for those who have family income of less than Rs. 15,000 per month, you need to make a payment of Rs. 250 per year. For the person having family income of more than Rs. 15,000 per month is required to pay an amount of Rs.500 per year. For the families which are Below Poverty Line (BPL) this scheme is free, provided the applicant holds the BPL card. This scheme covers health expenses up to a limit of Rs. 100,000 per year for the person suffering from these disabilities. The scheme is administered by National Trust in collaboration with ICICI Lombard. Under this scheme even existing disease are covered without any medical check up. Moreover this plan covers routine expenses like medical check up, transportation and corrective surgery etc. which are not covered under regular health insurance products.

Besides, , Life Insurance corporation of India also offers two insurance policies – Jeevan Aadhar and Jeevan Vishwas for the benefits of parents or guardian of person with physical disabilities which qualify for tax benefit under Section 80DD.

. These policies ensure that the dependent person with physical handicap does not have to depend on anybody for financial support in case something happens to his parent or guardian. The Jeevan Aadhar is a non- profit policy and is relatively cheaper whereas the Jeevan Vishwas is a policy which participates in profits.

Under both these polices insurance the life of the person, on whom the handicapped person is dependent, is insured. In case the dependent dies before the guardian/parent the policy the parent/guardian will have the option to either keep the policy for a reduced paid-up sum assured or entitled to receive the refund of premiums paid.

However if the parent/guardian dies before the dependent, 20% of the lump sum assured becomes payable for the benefit of the dependent. Moreover the balance is paid by way of monthly annuity for 15 years for sure and thereafter for life on the life of dependent.

In addition to income tax benefits available to the parents or guardian for maintenance and medical treatment of handicapped dependent, there are many affordable medical and insurance products specially devised for such handicapped person, which are a great help.

The physical and mental agony experienced by the parents/ guardian of such dependents cannot be taken away but Government of India, National Trust, LIC and other charitable institutions are doing commendable job to reduce the financial agony of such a family.

It is important that all of us look for such benefits available and talk these about in various media to take it across as many people as possible.

This is our bit of social work which can give relief to handicapped persons and their parents.

Taking into account the overwhelming response to my article captioned

“Benefits for Special Needs People” in DNA on June 15, 2010 having mention of Insurance scheme Niramaya administered by The National Trust, and subsequent requests for the details of the scheme, I am giving the details of Niramaya in this article.

Niramaya is the Insurance scheme specifically designed for the “Special needs people” who are suffering from Autism, Cerebral Palsy, Mental Retardation, multiple disabilities (sclerosis) and other similar diseases. The scheme has turned out be a real boon for the family of these people who have been financially burdened with medical costs. Around 85,000 people registered under this scheme are availing the benefit of this novel group health insurance scheme. The number is still very small considering the number of people who need to benefit, and this is due to very low awareness about this scheme in general public. Thus I felt it is important that all of us contribute in our own ways to create awareness about the scheme.

Salient Features:

This scheme covers existing disease without any medical check up and no premedical check up is required for enrolling under this scheme. This scheme is unique in the sense that there is no upper or lower age limits for enrollment. The other unique feature about this scheme is that the premium charged for coverage under this scheme is uniform across all the age groups.

What it covers:

The Niramaya scheme covers overall medical expenses upto Rs. One lac within separate sub limits, besides many other expenses, which are normally not covered under regular health insurance plans like OPD treatment, regular medical check up, corrective surgery for existing disability etc. in addition to the regular expenses on hospitalization. This scheme also covers expenses incurred for transportation of the patient as well as cost of alternative medicines.

The sub limits within overall cover of Rs. One lac are given below:

The sub limits within the overall cover for Rs. 15,000 for OPD are as given below:

How to get covered

The scheme is administered by The National Trust (www.thenationaltrust.in) in collaboration with ICICI Lombard General Insurance Company Limited. The applications for this insurance scheme are accepted through registered organization which are primarily trusts and NGOs. (The area wise list of registered organizations and the enrollment forms are available on the website of the National Trust mentioned above). The applicant is required to submit the fully filled in enrollment form to the trust along with the proof of payment of applicable fee. The families Below Poverty Line (BPL) need to submit the copy of BPL card as there is no fee payable in such cases. In case they do not have BPL card, they can obtain copy of income certificate from the authority which is competent to issue the BPL card.

The enrollment can be done throughout the year but the process of covering the patients under this scheme has two cut off periods. People enrolled from 1^st September to 28^th February under first phase are covered from 2^nd April and those enrolled from 1^st March to 31^st August in second phase are covered from 2^nd October. The registered organization furnishes the details to The National Trust. The details received from the NGOs are forwarded to ICICI Lombard who in turn issues the health card, which are forwarded to the concerned registered organization through which the respective applications had come.

The application for renewal should be done well in advance accompanied with payment of proof of appropriate fee. The fee is required to be directly deposited into the account of The National Trust.

Medical screening is not insisted for enrollment under the scheme. Every beneficiary is issued a Smart/biometric cards once he/she is covered which enables him in accessing the services in empaneled hospitals.

The costs involved:

A family having income of less than Rs. 15,000 per month needs to make a payment of Rs. 250 annually for the person inflicted. Families having income of more than Rs. 15,000 per month are also eligible but the insurance premium payable would be Rs. 500 for the patient. For the BPL families, this scheme is provided free of cost as the cost is borne by the Government. .

Earlier Niramaya like other regular health insurance plans used to offer cashless facilities which have been discontinued w.e.f. 11^th March 2010 and now only offers reimbursement facilities for expenses incurred. The cashless facility will be resumed once the deficit is covered.

This way we see that Niramaya can bring ray of life to the lives of special needs people with its novel features, nominal premiums and above all the genuine intentions.

I request you to take the message across amidst your family members and acquaintances and who knows you become harbinger of lighting up a person’s life whose life is special for all of us.

Not only this you will be lending a helping hand to The National Trust to save on the publicity costs which is around 40% of the overall costs , including servicing cost of this insurance scheme.

With the inter-regulatory spat over ULIPs being firmly settled in its favor, IRDA has taken very little time in announcing sweeping new regulations that will change the very essence of how ULIPs are structured and sold today.

So what are the significant changes and how will it change how ULIPs are sold. The changes are both from the regulator side as well as the proposed changes in the DTC that will become effective from the year beginning on April 1, 2011.

First let’s look at what the current draft of the DTC says.

Under the DTC all receipts from any life insurance policy is treated as revenue. However full deduction is allowed for any receipts from a life insurance policy if the amount is received at the completion of the original period of contract or death and

the capital sum assured is at least 20 times the premium payable in any year.

In simple words it means that under the DTC (effective next year onwards) tax exemption will be available for sums received under the insurance policies only if those sums are received on maturity (or earlier on death) and also if it has a certain minimum level of death protection. Since tax is a major driver for buying Insurance policies (a rather unfortunate situation) this single change itself will make sure that any potential mis-selling around the tenure of the policy will be limited.

Combine this change with the fact that a 5 year compulsory lock in period has been introduced by IRDA will make sure that this is perceived as at least a 5 year product. In the other very significant change IRDA now requires charges to be spread over the first five years (and not front loaded as is the case currently) and has additionally introduced a maximum spread of 4% between the gross yield and the net yield at the end of 5 years. These two changes when combined will ensure that the commission structures and other charges are kept reasonable.

On the pension front the revised discussion paper on the DTC, in a surprise announcement, has also promised an EEE treatment for “approved annuities”. It is not very clear which kind of “annuity plans” will be approved but in any case it will breathe new life in the moribund annuity market. “If”, as is being speculated, the approval of the annuity plan is linked to the corpus coming only from the NPS then it will sound the death knell for accumulation pensions plans (for example those being offered by Life Insurance companies) offered outside the NPS system.

If all the changes proposed above (especially those in the Direct Taxes code) which are yet to be finalized and legislated, are actually enacted then it would change the investment landscape in the country.

At the risk of sticking my neck out let me do a bit of crystal gazing for the next financial year:

1. It goes without saying that commissions on ULIPs will reduce significantly and be spread over a longer period. This will force the much-needed professionalisation of the financial services distribution industry, which will contract as the non-serious players leave the industry. However the serious challenge of consumers paying for advise separately from execution will continue to remain (this is a subject matter of another article) and hence mis-selling though reduced will continue to be driven by the products that offer relatively higher fee to the distributors.

2. At some point (and I am really sticking my neck out here) SEBI will have to relent and allow for fees to be paid to intermediaries upfront as well. Maybe this may take time but I think there may not be an alternative if the retail MF industry is not to become extinct.

3. We will see an increase in the mortality charges in ULIPs as these are not taken into account while calculating net yield and thus can be used to pay some additional commissions to the distributors.

4. 5 year or more single premium plans will become popular – as they are currently- but collections will not be as high as they are today simply because of the high life protection required to make the plans tax exempt. This requirement will prevent too many applications coming in from the high net worth band. They will do some circumvention by putting in applications in the name of their younger children etc. but the high cost of the protection plus the difficulties in doing financial underwriting for large insurance polices will ensure that the maximum investments are kept in check.

5. There will be an increased focus on risk products (term insurance as well as Income protection plans)

6. There will be a big focus on online distribution of products (or telephone assisted online distribution) with simple products specifically tailor made for online consumers as the insurance companies look for cost effective channels for distribution.

Of course there will be lots of other ramifications as well.

We are in for some very interesting times from the next financial year. I would welcome readers views on what they expect will happen next.

Recently I came across a newspaper report mentioning the number of insurance policies being lapsed. According to the said report, during the year 2009, insurance policies worth Rs. One trillion had lapsed and their number was over 9 lacs. And this number did not account Unit Linked Insurance Plans (ULIPS). In the same year, 1.73 million policies of Private Insurers worth Rs. 47,000 crore lapsed as against 1.28 million policies worth Rs. 25,000 crore lapsed during 2008.

The lapse ratio (a proportion of policies lapsed during a year vis-à-vis

policies in force at that time) in respect of one of the leading Private Insurance company stood at 53% in 2009, implying that 53% of the insurance policies were not renewed when they fell due for renewal. The reasons could be many but most important one which I could figure out is the selection of misfit Insurance Advisor, which is the first step we make towards insuring our lives.

This way we see that the number of Insurance policies as well as the amount of lapsed policies is on the rise and the major reason for this as mentioned above is wrong selection of insurance advisor who indulge in misselling. This mis selling happens when an insurance advisor sells an Insurance product without evaluating and matcing the insurance needs and financial strength of the customer.

The above statistics of lapse ratio made me appreciate how important it is to select a right insurance advisor which is equivalent to selecting your family physician.

So what qualities/ merits one should look into while selecting the Insurance Advisor?

• He/ She should possess financial integrity. A person with intergiety will only put a customer’s interest before his own interest. Integrity of an insurance agent should be verified by checking with mimimum two strong refernces provided by the Insurance advisor who are known to you also.

• He/ She should possess good level of enthusisam and dynamism.

• He/ She should have excellent analystical skills which makes him competent enough to evaluate various insurance products available in the market.

• He/ She should be abreast with latest developments in the insurance industry as well at his company level as insurance is a dynamic sector and keeps on changing constantly.

• He/ She should be into full time insurance business. This is important as only a full time person can spend time to keep himself abreast on the various products available in the market as well as to give you after sales service. Inadequate after sales services is another major factor leading to lapse of policies .

To quote my own experience here, I had taken an insurance policy from a new entrant in the business through an insruance advisor. After debiting my first premium amount, I have not heard from him since then. I myself serviced my own policy by finding ways and means of keeping it alive. A lay person may not be able to ensure that his life insurance policy remains in force in case there is no one to provide after sales service.

Thus it is very important that you select the person who can understand your financial position and insurance needs. Do not retain a person who does big ticket insurance only because later on he may not be able to provide you after sales service. Moreover the big ticket insurance advisor may even persuade you to buy insurance beyond your insurance needs.

It is always good to verify that the insurance advisor has been in this field for a reasonable period of time. Many insurance policies are taken by first year insurance agents and when they are not able to fulfil the criteria for continuance as an insurance advisor, you are left with no one to take care of after sales service of policies taken through them.

It is not advisable to select the advisor only because he/she has been referred to you by one of your relatives or friends, overlooking all the above mentioned merits.

Also do not buy insurance products from an insurance advisor, who is operating from place other than the place where you reside say in a different city. I know number of insurance agents coming to Mumbai on annual pilgrimage to solicit and get insurance business from their friends and relatives staying in Mumbai. Buying an insurance policy from an insurance advisor from a place other than place of your residence creates administrative problems of payment of premiums year after year. Getting after sales service becomes another big limitation in such long distnace relationships.

This is also important when a claim in resepct of such insurance product arises. A local insurance advisor will be able to give you better services than an insurance advisor loacted in a different city.

Thus above pointers will enable you to appreciate the importance of having a right person as an Insurance advisor, who can help you in identifying the proper insurance product for you at the selection stage.

A good insurance advisor plays an equally important role in servicing the insurance policy during continuance of the policy. His role is most important at final stage of an insurance product, when a claim in respect of an insurance policy is to be made. Unless you have someone to run around for you in the eventuality of you not being around.

Ensure that you have an insurance advisor who will walk an extra mile to help you dependents.

To Summarise here, I will say that it is very important to have a good insurance advisor not only at the stage of buying an insurance product but also, during the currency of the insurance policy till the final stage of of claim.

All in all your insurance advisor should be able to work right for concept to commissioning…till After Sales Service!

“I have a mediclaim policy for the last 5 years for myself and my wife. We were recently blessed with a child. The only thing that marred the joyful experience was the refusal of the TPA to reimburse the expenditure of Rs. 23,000 incurred during the hospitalization of my wife while giving birth. Is the TPA correct in refusing to reimburse this claim. How do I get this money? My agent had never told me that pregnancy expenditure is not covered. What is the use of a mediclaim policy that does not pay when you are hospitalized.”

This is one of many such emails that we receive at Apnapaisa daily from anguished mediclaim policy holders. Now pregnancy and childbirth related expenditure is permanently excluded from most individual mediclaim policies issued by the Insurance companies. Even in a few cases where it is allowed it is only for a limited sum of money (irrespective of the total sum assured) and that too after you have renewed the policy with the same company for quite a few years.

Similarly there are a host of other permanent (or temporary) exclusions that are not covered by most of the mediclaim policies such as :

• Wars, Invasion, Act of foreign enemy

• Nuclear weapons or radiations due to nuclear waste or fuel

• Circumcision unless necessary for treatment of a diseases or necessitated due to an accident

• Non-allopathic treatment

• Pregnancy and childbirth related complications

• Cosmetic, aesthetic and obesity related treatment

• Expenses arising from HIV or AIDS and related diseases

• Expenses arising due to misuse of liquor, intoxicating substances or drugs as well as intentional self injury

• Vaccination or Inoculation

• Vitamins, tonics, nutritional supplements covered only if needed as part of treatment.

• Any fertility, sub fertility or assisted conception operation or sterilization procedure.

• Cost of specs, lenses, hearing aids, crutches, limbs, artificial teeth

From the queries that we receive on our site it is clear that very few consumers are aware of these exclusions.

Clearly a lot of reasons exist for this ignorance :

First the consumers themselves :

For most people if you contrast the amount of time they spend on buying a pair of shoes versus buying a health insurance policy, the pair of shoes will show higher amount of time spent . Clearly unlike a pair of shoes that will be worn for maybe a year or at most a few years, a health insurance policy will be there with him for a substantial part of his lifetime. For that he will blindly depend on the suggestion of the agent without looking into the details himself. I think it is important enough purchase that he should spend some time to read the policy wording (or at least a detailed look at the brochure )

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There are two types of exclusions – permanent and temporary besides diseases covered with a limit.

Permanent Exclusions

• These are the main exclusions of the policy, which are never covered, in an insurance plan. These are the famous list of causes or condition because of which the claims are rejected and the company says that we don’t cover these diseases or we don’t cover these plans.

Temporary exclusions

• These are exclusions, which are there for some period of time say one year or two year. Diseases like cataract, hernia and many more come under this category. Other than that pre existing diseases if any are covered after certain number of years. This keeps on varying from policy to policy. It may start from completion of one policy year till five policy years.

Diseases covered with a limit:

• There are certain diseases which are covered within the policy but with a certain limit. Say for example a policy may say that it will cover Cataract but with a limit of only Rs. 15,000. This means that whatever cost you incur due to hospitalization for cataract, the maximum you can claim is Rs. 15,000.

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Second the Health Insurance Industry itself

A recent trend that has many disturbing implications for the future is the practice of having permanent exclusions that are worded very widely or sometimes specific exclusions that are particular to that company only. We tried to do the research on quite a few products available in the market. Some of the exclusions mentioned in the policy wordings took even us by surprise when we examined them a little deeply. This simply means how important it is to read these exclusions before buying the policy and how misleading it can be to buy a policy before understanding the exclusions of the policy.

Here is a partial list of such “surprising” and “individualistic” exclusions:

1. Injury caused due to the performance of hazardous sports of any kind

2. Act of terrorism

3. Puberty & ageing

4. Artificial life maintenance

5. Hereditary conditions

6. Treatment for any mental illness or psychiatric illness.

7. Treatment relating to birth defects and external congenital illnesses

8. Treatment by a Doctor which is outside his discipline; referral-fees or out-station consultations; treatments rendered by a Medical Practitioner who shares the same residence as an Insured Person or who is a member of an Insured Person’s family, however proven material costs are eligible for reimbursement in accordance with the applicable cover.

Lets take an example of hereditary conditions. So if any of my father or my grand father was suffering from heart disease and I happen to get the same long after I have taken the policy , it may not be covered even though it was not pre-existing at the time when I took the policy. Similarly, artificial life maintenance system forms a part of permanent exclusion of a particular policy where this is the most costliest part of the hospitalization expenses in today’s time.

There is a huge necessity for the regulator to look in to the same, as most of the conditions mentioned in the exclusions part of the wordings are too complicated to be understood by the common person (in fact it took our team of seasoned experts here about 2-3 days to make some sense of all the exclusions ). Secondly, if we pick up brochures of any of the company, then they mention a synopsis of the exclusions and not all of them. Lastly, any particular exclusion mentioned in two policies is different in wordings in both the policies. And it is very difficult for anyone to understand that both the exclusions effectively mean the same.

There is a huge need to standardize these exclusions. Any of the insurance company, which wants to keep exclusions over and above this list (or in a different wordings), should highlight the exclusions, which are not a part of those standardized exclusions. This will need to be enforced by IRDA – which is the regulator.

Contrary to popular opinion exclusions are not necessarily bad for consumers as most of them prevent the abuse of the system. If the abuse is allowed it will add to the cost of the cover and all consumers will suffer for the acts of a few. There is then a big need to carry out an extensive public awareness program about the standardized exclusions (and the need for them) as well as how to look at any exclusions that are different from the standard set of exclusions.

Let’s all hope that urgent steps are taken to make the health insurance policies more transparent and effective so that this essential pillar of social need can be spread far more widely.

I would welcome the views of the readers on this most vital issue.

A policeman stopped a person who was about to jump from the bridge. Obviously policeman stopped him and wanted to know the reason for this drastic step. The person trying to commit suicide informed that he was an insurance advisor and took nearly fifteen minutes to explain that why life is not worth living. Suddenly crowd gathered to see both the policeman and the Insurance Advisor jumping from the bridge together. This is the power of persuasion of an insurance advisor.

A lot of people are persuaded to buy an insurance policy without fully understanding the suitability of the policy for them. Thus it is important that you should ensure, before buying an insurance policy, so that it works best for you always and particularly when you are looking at tax benefits. However there are certain measures you need to ensure once you have taken the policy.

There are two pronged benefits on insurance policies. Firstly by way of a deduction under Section 80 C upto Rs. One lac in respect of premium paid on life insurance policy, secondly, on the money received from insurance company with accumulated bonus which is tax free under Section 10 (10D).

There are certain fine points you need to take note of while claiming tax benefits.

You are entitled for tax benefits for premium paid only if the insurance policy covers your life, your spouse’s and child’s life. As a parent you can claim the income tax benefit on the premium paid on the life of your child even though the child is not dependent on you. But if you pay insurance premium on the life of your dependent parent, then you cannot claim the benefit of Section 80 C.

What is the maximum limit for claiming tax benefit in relation to premium paid?

In case you pay more than 20% as premium of your sum assured, for any of the years during the term of the policy then tax benefit under 80C is not available. I will illustrate here with an example: Say you have taken an insurance policy for a sum assured of Rs. One lac and yearly premium in respect of this policy is Rs. 21,000, then the deduction in respect of the entire premium paid will not be available for deduction under Section 80C.

Now let us look at the tax aspects of the monies received. Any money received in respect of Life Insurance policy together with the accumulated bonus is exempt fully from income tax under Section 10(10D) presently.

However, money received on your insurance policy together with accumulated bonus in respect of life insurance policy issued after 1^st April, 2003, will be fully taxable if the amount of premium payable on the policy is more than twenty percent of sum assured for any of the years during the term of the policy as explained above.

But any money received on death of the person insured will be tax free though the premium for any of the year might have been more than 20% of the sum assured of the insurance policy.

But you are entitled for all these benefits only if your policy is not terminated before premium in respect of two years has been paid. Moreover as a policy holder you should not allow the policy to lapse by reason of failure to pay the insurance premium before premiums in respect of two years has been paid. Whereas for ULIPs, the policy should remain in force for at least five years and should not either be terminated or allowed to be lapsed for failure to pay premium.

It is important to know that either in case of Life Insurance policies or ULIPs, if the policy is terminated or allowed to be lapsed, then aggregate of all the deductions allowed in earlier years, will be added to the income of the year in which such policy is terminated or allowed to get lapsed for non-payment.

This way you see that by properly studying your policy will not only benefit your heirs but also benefit you big time while claiming tax benefits. But the essence of this is that you ensure proper and timely payment of your premiums to reap the real fruits of your harvest.

Recently, an incident reported in media caught everybody’s attention, where a lady who was allegedly drunk and was under the influence of alcohol banged her car into a traffic policeman, as well as a biker whom the traffic policeman was checking. Sadly both died in this unfortunate accident. There are many such instances which have been highlighted by the media in the past also. It is worth mentioning that at least in Mumbai we have seen that the traffic police’s consistent drive against drunk driving, has succeeded in reducing the road accidents to a significant extent, thus clearly establishing the connection between drunk driving and accidents.

In fact the Motor vehicle act states that if any person while driving (a) has in his blood, alcohol in any quantity, howsoever small the quantity may be or (b) is under the influence of a drug to such an extent as to be incapable of exercising proper control over the vehicle shall be punishable for the first offence with imprisonment for a term which may extend to six months. So drunk driving carries stiff legal penalties besides the social stigma that it brings and of course it also has an impact on your insurance policy.

Let’s turn to the impact of drunk driving on matters of insurance.

If we look at life insurance, there are two things to consider –

1) The death of the person herself/ himself while driving under the influence of alcohol. My colleagues and I spoke to various life insurance companies and also looked at various policy documents. We believe that the death caused in the above circumstances would still be covered under the basic life insurance policy, although in most cases if she/he has taken an additional rider for accident insurance (to pay additional sums of money over and above the basic sum insured in case of death due to an accident or the accidental disability benefit) , it will not be granted to the person driving under the influence of alcohol.

2) If we look at the Motor Insurance policy documents then the reading of the policy documents and discussions with the general insurance companies seem to suggest that the affected third parties ( in the reported case the policeman and the motor bike driver) will still be eligible to be paid the damages despite the driver causing the accident while under the influence of alcohol. Of course the courts reserve the right to decide who shall pay the damages (whether the owner of the vehicle or the insurance company) and in most such cases the court is likely to ask the owner to bear the payment rather than the insurance company. Coming to the damage to the car itself, this will not be payable by the Insurance company as the damage occurred due to the actions of the driver, who was drunk.

In most countries drunk driving or speeding gets you not only a suspension/cancellation of license but it also increases the insurance premiums for the future. But in India Car insurance policies are not issued with named drivers. In the UK your car insurance premium will depend on the age and the driving records of the named driver (and if you name more than one driver the premium will be higher) and the insurance monies are not payable if the accident is caused by a driver who is not named in the policy. In India this is a far cry as we are not even able to identify who was driving the car at the time of fatal accident ( Readers will remember the fatal accident at Bandra which was allegedly caused by a famous film star while under the influence but till today the prosecution has not been able to conclusively prove who was driving the car. Since selective increase in car insurance premiums is not an option in India ,everybody has to share the burden of the losses caused by a few drivers who indulge in drunk driving.

So more power to the Mumbai traffic policeman (and their counterparts in other cities) who make sure that the road accident rates come down by strictly enforcing the rules against drunken driving.

Remember this the next time you grumble about the delay caused at a check point while returning home late from the office or a party. And if you have downed a few and have still chosen to drive, I hope they put you in a cell and throw the key away.

Have you ever heard somebody saying, “ My hospital bill was Rs. 75,000 and my sum assured for mediclaim was Rs. 2 lakhs, but still the insurance company did not give me the claimed amount.”

A very common case in today’s world.

To understand why this happens we should first understand the whole concept of insurance. Simply put when a large number of people with similar profiles run a similar risk and where only a few will actually be affected then all the members of the group pool in the expected loss and the pooled amount is paid to the member(s) who actually suffers the loss. Let us take an example to understand this :

There is a group of 33 year old males with similar life styles and health status in a city who run the risk of incurring expenses on hospitalization due to illness, disease or accident. Now assume that statistics show that 2 people out of them will need to be hospitalized and on an average would incur an expense of Rs. 1.25 lacs each. That means the total expenditure of the group for hospitalization is likely to be Rs. 2.50 lacs for the year. If we divide that by 100 then if each member pays Rs. 2,500 (essentially a premium) then the total collection is Rs. 2.50 lacs which can be used for reimbursing to the members who actually suffer the loss. So the basic thing to understand in this example is that it is your own contribution (premium) that comes back to you if you suffer a loss. Thus it is in the interest of each member of the group to try and ensure that the people in the group have the least probability of incurring the loss and if at all they incur the loss then they should spend the minimum amount possible to recover from the loss. Theoretically lower the probable loss, lower will be the premium.

Now many things in this example are difficult to assume. Suppose if the probability is wrong and the number of people who need to be hospitalized are 4 instead of 2 and therefore the total expenditure on those 4 people is Rs. 5 lacs. The amount available in the pool is only Rs. 2.50 lacs which means only the first 2 gentlemen will get the claim amount and the last 2 will not get anything. Obviously this is unfair on people who fall sick later in the year. There is also a question of what to do with the money collected from the group at the beginning of the year before it is required for reimbursement to eligible members of the group. This is where the Insurance company steps in.

Firstly it markets the policy to a large number of people since insurance works on the principal of large numbers. Larger the number of people who pay premium lower is the probability that the assumed loss figure based on past experience will be exceeded. In any case the Insurance company bears the loss if it underestimates the amount of loss that will be incurred. Obviously while working out the premium it will keep a buffer. It also administers the reimbursement process to check on the genuineness of the claim and the amount of claim. Obviously it also has a profit margin for doing all this work.

Now let us understand the adjustments required to be made to the premium calculated in the above manner.

Firstly not everybody will have the same risk profile. For example not everybody will be aged 33 years as assumed in the above example. Other things remaining the same, somebody aged 40 years will have a higher probability of incurring hospitalization expenses as compared to a 33 year old. Thus the premium will need to be adjusted for such differences in risk profile whose impact on the probable loss is determinable. There could be differences in risk profile whose impact on the probable loss is not determinable. Best example could be a pre-existing disease. Whilst clearly it increases the probability of the loss by how much may be difficult to assess. Hence most companies would provide a buffer period before they accept risks arising from such pre-existing conditions. In some cases the risk profile may be so high that the person just cannot belong to the group. For example if somebody is already suffering from an organ failure, the probability of his incurring the loss is so high as compared to a healthy individual that it is not possible to include him in a standard group at all. In such cases the Insurance company will not provide the cover at all so as to not jeopardize the cover of the larger group.

Second adjustment required is on account of the expenses required to be incurred to make good the loss. Now typically when you are hospitalized for a disease then depending on which hospital, the class of room and the doctor you choose the actual expenses can vary by as much as 300-400%. Thus if you choose to get a heart bypass done by admitting yourself in a twin sharing room in a specific hospital it could cost you as low as Rs. 1.50 lacs but if you go to a plush hospital and get admitted in a suite room under a star doctor it may cost you upwards of Rs. 10 lacs also. So for the same disease the actual amount spent to make good the loss can vary significantly. If the entire loss is covered then the tendency for the insured is to go for the most expensive treatment possible thus increasing the burden on the pool. This is sought to be minimized by the concept of sub-limits and co-pay requirements. Nowadays quite a few mediclaim policies provide sub-limit for daily room rent at 1% of the sum assured and 2% of the sum assured for ICU.

Some policies also provide for sub limit for doctor’s fees. This is to make sure that you choose an option that is in line with the assumptions taken at the time of calculation of the premium. Of course you are free to use a room with a higher room rent or a doctor with a higher fee but would need to pay the surplus yourself. The second feature to limit the expenses is the concept of co-pay. All of us have heard (and have probably experienced) how some hospitals charge more if you are covered by Insurance or conduct unnecessary tests/procedures to puff up the overall bill. Now if the cost is to be met entirely by the Insurance company you may not have any incentive to make sure that such unnecessary charges are incurred/levied. Now if a certain percentage of the expenditure has to be paid by you (even if it is only 10-20%) you will make sure that such excess is not included in the bill thus bringing down the loss ratio for the entire pool. This is the rationale behind co-pay.

So sub-limits and co-pay are the two most common reasons for the full bill amount not being paid despite the overall amount of expense incurred falling well within the overall sum insured.

Then there is a list of items such as TV charges, telephone expenses, personal expenses such as shaving charges (unless required for medical reasons) , meals for patient or attendant, etc. that are in any case not covered by any Mediclaim policy.

In theory therefore a mediclaim policy that has sub-limits and/or co-pay requirements should be cheaper than a policy that does not have such requirements. However in practice it is not always so, as each insurance company works with its own set of probabilities on how many people will be hospitalized from the group and what will be the expenditure incurred to recover from the loss and the buffer required to be kept. So it is very much possible that a company that does not have any sub-limits or co-pay may still be cheaper than a company that has those features.

For a detailed comparison of all features visit this link http://www.apnainsurance.com/health-insurance-india/compare.html

Caution : The example worked out above has been simplified to make it understandable to a lay person and has several simplistic assumptions.