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Company health insurance or Separate health insurance?

Health Insurance vs Corporate Insurance

“At CAGRfunds, we do a weekly session of knowledge sharing within the team. Last week, we had a rather long discussion on whether a separate health cover is required if the employee is covered by his or her company health insurance (Mediclaim) policy.

So we started digging into the various critical reasons as to why we need health cover at all. We realized that depending solely on the health insurance provided by our companies can land us up in the following situations:

Corporate Health Insurance coverage is the same for all

The employer decides our coverage amount. So, if your coverage amount is 5 lacs and your hospital bills amount to 7 lacs, the balance comes out of your pocket. Therefore, you need to ascertain the adequacy of the coverage as per your own health conditions.

You may not be rewarded for being healthy

Most companies (especially the small and midsized ones) deduct insurance premiums from our salaries. For people having the same coverage amount, the premium is also the same year on year, irrespective of how healthy or unhealthy an individual might be. So, if you are a healthy non-smoker individual, you are perhaps paying the same premium as your colleague who is slightly unhealthier than you are.

Also, in an individual health insurance, a lot of policies give either “no claim bonuses” or discounts on subsequent premiums for claim free years. That means you have more security and you save more money if you take care of your health.

You do not have the flexibility to prioritize the features you want

Corporate Insurance is a general insurance that covers a group of employees. So, the features are generic and may not be completely in sync with what you prefer. For example, if there is a history of cancer or diabetes in your family (which puts you at risk for the same), there is a chance your corporate insurance will not cover it. Or, your corporate insurance may be capping your room rent to a small % of sum insured which is unlikely to cover even half of your actual room rent.

You will have zero health cover just when you need it the most

Corporate Insurance will only cover you till you are employed with the company. So, if you are currently depending on your corporate health cover, you will have none on retirement. If at that point in time, you decide to take a private health cover, it will cost you significantly higher than what it would cost if you take a policy when you are young.

You might face several issues on changing your employer

Drop in coverage amount

Your new employer may offer you a lower coverage than your previous employer. You might want to go for a separate health cover when that happens, but do take into consideration the increased premium that you will have to take at a higher age. Also, every new policy has a waiting period for pre-existing diseases. This means that the Insurance service provider will not sanction any claim arising out of any pre-existing disease during the tenure of the waiting period. In most cases, this period ranges between 2-4 years. The older you are, the longer it is.

Lesser Dependents

Many companies today offer health insurance for not only you but also your spouse, children, parents and (occasionally) your in-laws. But, not all companies offer the same protection. If you change your company, your new employer may only support you, your spouse and your children. Having your dependants not covered in future can lead to a considerable risk of an unforeseen medical expense.

But, what should you do if your corporate health cover seems to be adequate?

Well, it is certainly possible that your company adequately covers you and your family and also provides you with the features that you prefer to have. You can choose to adopt any of the following routes:

  1. Secure your cover for post-retirement: You can take a small cover separately so that you do not have to shell out a huge premium for taking a new policy post-retirement. A new policy at retirement will also subject you to the long waiting periods for pre-existing diseases which of course defeat the purpose of the policy at that age.
  2. Secure the possibility of a massive medical emergency: Corporate covers are at best, generally adequate for normal medical situations. In case of a massive unforeseen emergency, the chances of incurring a huge expense are quite likely. Therefore, you might want to secure that eventuality and take a large health cover separately to take care of the same.

Want to know more about health insurance? Contact us on +91 97693 56440 to know more about the suitable plan for you.

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This Independence Day, check if you are financially independent

Independence Day and Financial independence

A few months ago, I was out taking an evening walk when I happened to run across my old school friend, Gaurav. We both were elated to see each other after more than a decade and decided to grab some coffee and dinner. We walked into a nearby café and started marvelling over how the past 10 years seem to have flown by.

After graduation, Gaurav got his pilot’s license and started working for a well-reputed airline. He was making a comfortable 30 lacs p.a. with no dependents. I was pretty impressed with how well his career had panned out so far.

We both finished our meal and decided to leave. He offered to pay the bill with his credit card and drop me home in his car. I obliged.

While on our way to my house, I saw him being very callous about his spending. He had unnecessary add-ons in his car, designer seats, expensive smartphones, etc. He was also too generous with his tipping to the Barista and the Petrol Pump Attendant. I asked him how he could afford all of this. He replied with a grin, ‘EMIs’.

I was shocked. On further enquiry, I found out he had EMIs for everything – Cars, Mobile, Laptops, and even his clothes! I asked him if he saved anything at the end of the month and he simply replied with a small ‘No’.

Worried, I asked him if he was investing any money in assets.

He replied, ‘Of course! Look at this expensive phone, my car, my house, these are all my assets!’

I frowned as I went on to explain to him how assets are those that generate income or appreciate in monetary value.

Being a finance graduate myself, I decided to help my friend organize his finances. We met over the weekend and decided to plan his journey towards financial independence.

Step 1. Budget and Analyze

We listed down some of his EMIs:

Expense Loan Amount Interest Tenure Monthly Cost
Home Loan INR 10 lacs 9.00% 20 years INR   90,000
Car Loan INR   8 lacs 10.00% 10 years INR   10,572
Laptop INR   70K 12.00% 3 years INR     2,325
Phones INR 65K 12.00% 3 years INR     2,159
Designer Suits INR 50K 12.00% 3 years INR     1,661
Home Renovation INR 2 lacs 14.00% 5 years INR     4,654

And his other monthly expenses:

Expense Monthly Cost
Restaurants  INR 35K
Movies  INR 4.2K
Electricity  INR 2K
Water  INR 600
Fuel  INR 4K
Mobile Bill  INR 1.5K
Maintenance  INR 5K
Misc.  INR 15K

His total monthly expenses came to INR 178,671. His income being around INR 180,000.

We now decided to split his expenses into three categories:

A: Important and Unavoidable expenses. (Example: Rent, EMIs, Insurance, Investments)

B: Expenses that can be postponed. (Example: New clothes, new furniture)

C: Unnecessary expenses. (Example: Luxury Items, High-end dining)

I asked him to only spend money in categories A and B for a month and indulge in minimal wants (category C).

Gaurav managed to save INR 20,000 in just this one month!

Step 2. Emergency Fund

Many of us often end up taking personal loans to cover for unexpected expenses such as medical emergencies, car repair, home repair, etc. These increase our monthly expenses and leave us with lesser money to grow our assets. This problem can be solved by having an emergency fund. This money can be used during times of such unexpected emergencies and will not cost you any additional interest. Therefore, we decided to keep INR 5000 per month, in a Liquid Debt Scheme as an emergency fund.

Step 3. Insurance

With the rising costs of health care and other expenses, buying insurance is unavoidable. Gaurav had no insurance since he stopped being covered under his parents’ insurance. Insurances, although are being unwanted goods, are necessary for everyone to save you on rainy days. I asked him to get health insurance and car insurance that can help him out in times of crisis. It cost him INR 10,000 for both.

Step 4. Investing

The final part of handling personal finances is investing. Money saved will depreciate in value over time. Money invested, will grow and earn for you forever (thanks to the magic of compounding). We decided to start a small SIP of INR 2,000 and build from there. The leftover money was deposited in his Savings Account.

Soon, he started understanding the unnecessary expenses and callous attitude that was costing him all his money. He gradually increased his investments and savings to pay off his massive EMIs.

As of today, his investments have already reached INR 30,000 and continue to grow. Just the past few months, gave him enough incentive to save for his future, thus becoming completely financially independent in the coming 15 years.

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Is SIP in tax saving funds useful?

sip vs lumpsum

At CAGRfunds, January to March quarter is perhaps the busiest for us. No special reason why it should be so, but it is. Why? Because, many of our investors wake up to the need for tax saving investments just then. And then they end up investing a lumpsum amount in tax saving funds (ELSS).

What is wrong with that?

Well, nothing. Except that a lumpsum investment in any equity oriented fund forces us to lock a single price. What most investors miss are the problems they would face when they invest lumpsum instead of SIP.

Let us see an example of a SIP and a Lumpsum investment in an ELSS fund. We have two comparisons:

  1. SIP of 12,500 every month since 15th Dec 2008 until 15th July 2018, and
  2. Lumpsum of 1,50,000 every year on 15th December

Scenario 1: ABSL Tax Relief’96 (since 2008)

Scenario 2: Axis Long Term Equity Fund (since 2010)

Scenario 3: Franklin India Tax Shield (since 2006)

As we can see, an annual lumpsum investment in any of the above ELSS funds would have given significantly lower returns than SIP over the same period. This is because SIP enables the investor to invest every month at different prices. SIP thus averages out the cost of purchase. On the other hand, with a lumpsum investment, money gets locked in at one price and that can give lower returns if the pricing, unfortunately, is at a high level. This happened with a lot of our investors who had to compulsorily invest a lumpsum amount in ELSS in January 2018 since they were restricted by the last date of submitting tax proofs.

So if you have not yet planned your taxes and are still waiting for the last date to knock your doors, you need to think again. Feel free to post a comment if you have any questions!

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Should you go for the NPS (National Pension Scheme)?

National Pension Scheme

If a genie popped in front of me today and granted me three wishes, the child inside me would probably want to get an endless supply of money, a surreal supply of cake and to live forever to enjoy all of those things. But everything in life has an expiry date, including our wealth and us.

Therefore, the adult in me would wish for enough money to enable me to have a comfortable working life & a delightful retirement, a healthy & fit life and maybe a large cup of Cappuccino.

The fear of not having enough money to sustain ourselves post-retirement is real and that’s why the government launched the National Pension Scheme, so that we could garner enough to continue with our current lifestyle, even after our primary source of income is gone.

We, at CAGRfunds, have recently started enabling our clients to subscribe to NPS. Let’s try and understand what NPS can do for you!

National Pension Scheme or NPS, is a defined voluntary contribution pension system. It was initially started for Government Employees in 2004 but was later expanded to all citizens of India in 2009.

Investors can invest in both equity and debt which enables them to make good returns on equity while having the safe assurance of debt!

To understand better how and when to invest in NPS, let us have a look at Ramesh, Suresh and Mukesh and how their choices could affect them at the age of retirement.

Ramesh started investing in NPS at the age of 20 while Suresh and Mukesh started investing at the age of 30 and 40 respectively. Let us see how their investments will perform when they reach the age of 60 (Retirement Age).

Ramesh has done very well with his corpus standing at an astonishing 46 lakhs. At the same time, even though Suresh and Mukesh have invested 2.4 lakhs more than him, their investments are only 36 lakhs and 20 lakhs. This difference has arisen because of the power of compounding! You can read our article on the miracles of compounding here!

To help you out further, here is a small description of the types of NPS accounts:

Tier 1 (Investment Account)

It is an investment account wherein you can deposit money via SIP or Lumpsum. Investors can invest from the age of 18 years up until 65 years of age. Money once deposited in this account, can only be removed before maturity in a few circumstances. This often sends people away but we feel that its focused approach towards retirement prevents the customers from making mistakes during market volatility.

Note:

  1. You can withdraw up to 25% of your initial investment amount after three years of investing.
  2. Investors can withdraw 20% of corpus as lumpsum after ten years of investing.

There are two stages of investing. The first is the Accumulation Phase wherein you invest your money at regular intervals into NPS. The second is the Distribution Phase wherein the money comes back to you. Once you reach the age of 60, you have an option of withdrawing 60% of your corpus as lump-sum and you can buy a pension scheme (annuity) with the remaining 40%.

Note: It is compulsory to invest a minimum of 40% in annuity.

Government employees can mostly invest in corporate or government bonds. However, other investors can choose from various ‘Pension Fund Managers’ ranging from SBI and LIC to HDFC and ICICI. Investors can invest in two ways:

Active Choice

Investor gets to choose their investments. However, they have the following limits:

  1. Equity: Max 50%
  2. Bonds: No limit
  3. Alternative Funds: Max 5%

Auto Choice

In this option, investments are automatically adjusted based on the individual choice of plan. The exposure to equity will gradually reduce after the age of 35 in all three plans.

  1. Conservative Plan: Max 25% Equity
  2. Moderate Plan: Max 50% Equity
  3. Aggressive Plan: Max 75% Equity

Note: Investors can change their investment options twice a year and their PFMs once a year.

Tier 2 (Savings Account)

Tier 2 is a savings account. You can put and remove money as and when you wish as there is no exit load in this account. You can choose to invest in a Tier 2 account only if you have a Tier 1 account. It is possible to go back from a Tier 2 account to a Tier 1 account but once changed, you cannot change your account to Tier 2 again. In our view, one should only consider investing in Tier 1 account.

Tax Deductions

Investments

Investments in Tier 1 are tax exempt up to 1.5 lakhs every year under section 80C of the Income Tax Act. An additional 50,000 is also tax-exempt under section 80CCD (1b).

Investments in Tier 2 are not tax exempt and will be charged at slab rates (and hence, we feel that only Tier 1 is the relevant part in NPS).

Withdrawals

Withdrawals in Tier 1 have the following taxation:

  1. Premature withdrawal of up to 25% is tax exempt
  2. Withdrawal of 40% of investment at maturity is tax exempt. If you withdraw more than 40% (upper cap of 60%), then differential is chargeable at slab rate
  3. Returns earned on the part of corpus that is used to buy annuity (minimum 40%) are also tax-exempt
  4. Income from annuity will be charged at slab rate

Withdrawals from Tier 2 are not tax exempt.

In conclusion, as scary as the idea of growing old and having to let go of your lifestyle on your way to retirement seems, by investing in NPS now, you will save much more than enough to continue living your life the way you like it.

For further advise on investing in NPS, feel free to contact us at contact@cagrfunds.com or call / Whatsapp us on +91 9769356440.