What is a personal health insurance policy?

This sort of plan is tailored to an individual’s needs and requirements; factors such as age, health, family medical history, and so on are taken into account while deciding the premium amount. Policies typically include long waiting periods, and patients with pre-existing ailments must wait until the waiting period is over before receiving treatment.

What is the process for Group Health Insurance?

This type of insurance policy covers several people under a single insurance plan. Typically, businesses pay the premium and provide group coverage to their employees as a bonus. Depending on the policy, coverage may also include family members. When you opt for a group insurance plan and pay the premium, coverage begins on the first day, including pre-existing diseases. In case of a medical emergency, the covered individual can use the group insurance policy or plan to obtain cashless services at a network hospital or a hospital of their choosing and opt for reimbursement.

Difference between Group Insurance and Individual Health Insurance Plans:

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Benefits of ULIPs: 

With a long-term investment in ULIPs, several benefits come organically. 

1. Insurance Plus Investment: A ULIP offers a safe way to create wealth while also providing life insurance, which are the two primary areas of concern for most people.
2. Flexibility to Switch Between Funds: ULIPs allow you to smoothly switch between funds based on your risk appetite, which is likely to alter over time and as you get older.
3. Premium Waivers: Some plans offer an inbuilt feature that allows the premium to be waived off in case of the parent’s unfortunate demise, without affecting the plan’s validity. 
4. Tax Benefits: A policyholder is eligible for a tax deduction during all three phases: investment, earnings, and withdrawal. The premium can be deducted under Section 80C of the tax code. Furthermore, partial withdrawals and the maturity amount are tax-free. If certain conditions are met, Section 10 (10D) of the Income Tax Act exempts the policy’s maturity returns from income tax.
5. Ease of Additional Investment: When surplus funds are available, you can purchase a ULIP at a reduced premium or top-up later during the policy’s duration. Top-up premiums provide the same tax advantages as regular premiums.
6. Flexible-Premium Paying Modes: ULIPs provide several convenient premium payment options to assist you in planning your finances. You can pay your premium(s) in one of three ways: single, limited, or regular. One-time premium payment; restricted premium yearly, half-yearly, quarterly; monthly recurring premium are some of the choices.

What are the charges? 

Premium Allocation Charges: 

When a ULIP insurance is issued, the insurer must complete several activities, including underwriting the policy, medical tests, commission costs, and so on. These are all one-time costs that must be paid in the first year because the insurer will deduct them from the first-year premium. If the ULIP plan premium allocation charges are 15% and the premium is ₹50,000, the ULIP charges will be removed at ₹7,500, leaving ₹42,500 to invest.

Administration Charges: 

The administration of the policy attracts a fee. This fee is charged every month; the charges are levied by canceling the units from the funds in proportion to the rate. 

Fund Management Charges: 

These expenses, which are regulated by IRDAI at 1.5 percent per year and charged as a percentage of the fund value, go toward administering your money.

Discontinuance or Surrender Charges: 

A discontinuation charge is imposed if the ULIP plan is surrendered prematurely within the first four years.

Partial Withdrawal Charges: 

Investors have the option to prematurely withdraw the ULIP plan after the first three years if they need to. However, according to the policy terms, early withdrawal incurs some penalties.

Mortality Charges: 

These charges are collected by the insurer for providing death cover to the insured; and are calculated after considering the age, health conditions, and the insurer mortality table.

Switching Charges: 

Investors are free to switch the fund into which their premium is invested a couple of times per year, without a charge. Following the free-limit exhausts, each switch is subject to a charge of between ₹100 to ₹500, depending on the insurer’s terms.

Premium Redirection Charges: 

You can direct future premiums to a lower-risk fund without changing the fund or making any changes to the existing fund structure. You will incur some additional charges as a result of doing so.

Rider Charges:

The additional charges are applied whenever an investor adds a rider to a ULIP plan to receive additional advantages. An investor, for example, must pay extra premiums for a critical illness rider on a ULIP policy.

Guarantee Charges:

If an investor opts for guaranteed returns in the policy, then there are certain charges imposed by the insurer to ensure the payout. Because most ULIPs offer market-linked returns rather than guaranteed returns, they’re utilized. These are typically found in ULIPs that have a high NAV guarantee.

Miscellaneous Charges:

Under the category of miscellaneous costs, the insurer imposes some modest charges on a few things, such as if a policyholder chooses to alter the premium frequency from half-yearly to annually, they must pay a little fee, and so on.

Should you invest? 

If I am honest, investing in ULIP is not recommended because it doesn’t provide adequate life cover and the return generated is sub-optimal when compared to other investment options like Mutual Funds. Insurance is an expense and should not be equated with an investment. 

What’s wrong with them? 

They neither give appropriate insurance nor a viable investment solution.

Let’s look at the two factors separately to better understand the idea.

Insurance:

The majority of the time, consumers are unable to determine what type of insurance coverage they require. For example, if you are the sole earner in a family of four, a life insurance policy of Rs 5 lakh (see example below) is just insufficient in the event of your untimely death. If you haven’t left them much in the way of inheritance and/or if you owe them money, the effect is amplified. Then there’s inflation, which eats away at your savings. To give some perspective, a ULIP will cost Rs 5 lakh per year if a term plan with a cover of Rs 50 lakh costs Rs 7000 per year.

Investment:

The most significant aspect working against them is the expensive fees. A considerable portion of the premium you pay is removed in the form of various fees and levies, with distributor commissions being the most significant component. It minimizes the proportion of your premium that is invested to generate returns. It has a significant impact on the total wealth you can accumulate over time. We’ve highlighted one element of ULIP, its various charges, below.

ULIP: Unit Linked Insurance

The charges levied by ULIPs are listed in the table below. Keep in mind that these charges aren’t precisely concealed. You’ll find them in your policy documents, but you probably won’t give them any credence. After deducting the following charges, which account for about 7% of the total invested amount, the real invested amount is calculated.

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While dealing with one of our clients, who is in her 70’s, we came to know that the bank branch which previously used to manage her wealth has dubiously sold her insurance policy disguised as bank FD’S and this is not an isolated case there are innumerable other cases, which is much worse.

In the above case, the beneficiary was uninformed and deceived, but there are other cases where the insurance agents sell substandard products to earn a higher share of the commission.

The insurance business is dependent on commission, and there is no secret to it. While buying an insurance policy, you need to know whether the person sitting at the other side of the table has the best interest of you or them.

Now the question is, how to go about selecting an insurance policy?

1. You need to identify your goals: Don’t go by the products but rather focus on the solution. Insurance products are designed to solve a problem, e.g., health insurance will help you cope up with the cost of rising medical expenditure. Therefore, depending on your age and health condition, you need to get a health cover for yourself or your family. A better approach would be to consult your financial advisor before getting one. Just because there’s a hot product in the market, which is selling like crazy, doesn’t suggest it would serve your purpose.
2. Understand the product and take your time to decide: Compare different products and understand the intended benefits it provides. Would you randomly go to a mobile store and buy a phone? I guess not. At first, you will compare its features, consider your budget, and then buy it. Similarly, in the case of insurance, understanding,  comparing, and taking time before making the decision is equally important. Also, the discount factors of policies should never influence your buying process. As insurance is a long-term commitment, it’s better to scrutinize everything and make rational decisions.

Do I really need it?

If I’m being honest with you, you only require two insurance coverage. The first is health, and the second is life. It’s better to avoid the rest of the floating policies in the market. I am pretty sure you have heard about the endowment plan and a bunch of ULIP plans, and what not? I can bet only a handful of people need these products; the rest of us would be better off avoiding them.

If these products are so shabby why are they being sold in the market?

The answer is very simple, they come up with an inherent feature of guarantee – ‘A guaranteed amount‘, and most people trade an optimal return for a guaranteed amount. Insurance is an expense and not an investment, so next time when you plan to get one, ask yourself if you really need one or not.

A Good Financial Adviser + Good Insurance Product + You = Life-long Commitment 

Your primary concern as a policyholder is that the insurance you purchased fulfills its purpose. 

Imagine a not-so-pleasant scenario: you or a loved one is experiencing a medical emergency, and you made an insurance claim that was either denied outrightly or was not covered. At that vital moment, it is only your advisor who will assist you in settling your claim. In case of your term insurance and get your family claim settled, ensuing hiccup-free experiences. Now you can notice that a lifetime commitment requires not only a product but also an advisor.

Till now we have covered the need for identifying goals, comparing and selecting a product, and also the importance of financial advisors, so we are left with one last important question, how to identify the right advisor?

A salesperson discusses the product he or she will be selling, which is an exciting new product that has recently entered the market as he is interested in the hefty commission and concluding sales as soon as possible.

On the contrary, an advisor would prioritize goals over the product, they will identify your need, and only if required they will ask you to get insurance. They will not be in a hurry to conclude sales and offer you enough time to take the final decision.

Most importantly, your financial advisor will be there for you every step of the way. Long-term relationships are more important to them than short-term profits.

Written by: Bappaditya Roy Chowdhury 

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