Are you really helping the Little Guy, Mr Modi?

Last few weeks we have seen a cacophony of voices dubbing the Modi government pro corporate and Anti poor. Much of the commentary on this subject is political.  Frankly I find much of it hot air. However there is one new item that caught my Eye. It was Pradhan Mantri Jeevan Jyoti Bima Yojana. It is fact that most people in the country don’t have life Insurance and poor suffer the most. Families are often without any protection and have to face financial ruin in addition to the loss of an earning member. So when I first heard about the initiative I thought what a brilliant idea.

For those of you who don’t know, Pradhan Mantri Jeevan Jyoti Bima Yojana provides for life cover of Rs. 2 Lakhs for anyone between the ages of 18-50. The premium is Rs 330 per annum. In order to be eligible for this you need to have a bank account and your bank must have tied up with a Life Insurer willing to underwrite this cover. Overall it I think the concept is a good one and hasn't come a day late. One wonders why previous governments haven’t thought of it. 

I can also see what “Market driven” analyst must be thinking. Another populist scheme to bleed the tax payer. Is it really? Let’s see what the typical market rate for Life Insurance is.  The table below has the life Insurance premiums for a male aged 30 for 25 year.

Product	Sum Insured	Premium	Rate per Rs ‘000
Reliance Online Term	1,00,00,000	Rs. 7094	0.71
Aviva i-Life	1,00,00,000	Rs. 7292	0.73
ETlife My Life +	1,00,00,000	Rs. 6692	0.67
Max Life Online Term	1,00,00,000	Rs. 7865	0.786
Tata AIA I Raksha	1,00,00,000	Rs. 8314	0.786

If you work out the Math for Pradhan Mantri Jeevan Jyoti Bima Yojana, it comes to a rate per thousand of Rs 1.65 per thousand sum Insured. That is more than double of what a person buying on the open market pays.   The reinsurance rates for life insurance in India is around Rs. 0.67 per thousand. If you add service tax it comes to about 0.76 per thousand. The rate government is charging the poor is a 220 % premium on that.  That is plain language is predatory pricing.

Even if the government were to reinsure the entire amount they will pay no more than 0.76 per thousand rupees of Sum insured.   In all fairness, I should point out that there are no insurer who offer a cover of two lakhs and there are some transactional cost which are fixed and not dependent on sum insured. Even accounting for those a rate of 1.65 per thousand.

If you go by the thumb rule of required cover being 10 times the income. At 2L that is just adequate cover for someone earning less than Rs 2000 pm. That is well below the poverty line figure (going by the infamous Planning commission figures) for a family of 4. Rs. 330 is not a massive amount and for that price the cover would be easily doubled to Rs 4L. Additionally I think the Govt should allow people to top up on this cover. Most people would be happy to pay the market rate. All the government needs to do is to extend the access to this very important financial product to all at market rate. Hope Mr. Modi is listening. 

Four Myths about Critical Illness Policies

Myth 1: Critical illness Policy is same as a health policy:

A Health policy pays for the cost of hospitalization and defrays your expenses within allowed limits.  It doesn’t cover other incidental expenses that you may have as result of the hospitalization, for example unpaid leave, transportation and recuperation expenses etc. A critical illness plan is designed to provide you a lump sum amount in case you suffer from a critical condition irrespective of the amount you spend on treatment. This policy is useful in cases where the medical expense is likely to be large and the nature of expenses extend far beyond hospitalization. An example of this would be cancer which requires extended treatment, days out-of-of work, and travel outside town/country for treatment. Another example may be a stroke that leaves you paralyzed and unable to carry out normal activities.

Myth 2: Number of illnesses covered makes the policy better

One way insurance advisors and companies distinguish critical illness plans is by number of diseases covered.  The idea being more the illness covered the better it is. However the reality is that you are better off with a broad definition of the illness and not having to argue over definition during a claim. As critical illness policy is designed to cover truly catastrophic illness, having illness that don’t have catastrophic impact on your finances don’t make much sense. There are some illness, Cancer, Major Heart surgeries, Stroke, Major Organ Transplant, that should be part of any critical illness plan.

Myth 3: All Critical illness policies pay equally.

Where critical illness policies differ a lot is when they pay. There are some policies that pay upon diagnosis while others require the insured to survive a certain number of days (30-90 days) before paying. Any policy that requires a survival period beyond 30 days is probably worth avoiding.

Myth 4: Creating a corpus for critical illness is better than Insurance

There is an increasing belief and push by financial advisors that you are better off creating a corpus for critical illness rather than buy a policy. This in my opinion is a dangerous advice for most. If you are independently wealthy, and expense of tens of lakhs of rupees will not affect your financial situation, by all means avoid a Critical illness policy. Also beyond a certain age (above 65) you will not get such a policy and there you have no option but to rely on your savings. Critical illness does not wait for you to create a corpus before it strikes. It afflicts people of all ages and at all times. So don’t just rely on a corpus, get protection. 

How to insure a New Born Member of your family

Birth of a child is a joyous occasion for the family. It is also a time for lots of changes in your personal life. Life can be frantic in the first few days but you settle down to a new normal. Medical expenses are usually quite high in the first few years, but fret not. This is a guide to how you can add your new born child to your health policy.

Intimate the addition of new Member of your family to the Insurer.

First thing you need to do is to intimate the birth of the child to the Insurer. Do so within 7 days of the child birth. Most insurers will start coverage from 90 days after birth but there are cases where the child is covered from day 1.

Check if your policy already covers New Born:

There are a number of policies that provide new born cover from day 1. Before you do anything check if your policy is one of those. In most cases this cover kicks in after you have had the policy in force for a few years. If that is the case you probably have to do nothing for the first 90 days. Your existing policy will cover the child for the first 90 days. Also check if things like cost of vaccination is covered under your policy.

Check cover starting age:

From day 90, most insurers will cover your child as a member of your family floater plan or Individual plan upon payment of premium. Check with your insurer on what is the additional premium you need to pay. You will also need to submit the birth certificate of the child to the insurer. Ensure that you have all the documentation and submit it to the insurer.

Pay Premium

All that remain now is to pay the additional premium and your child is covered.  For most insurers you can have the child in your plan until the age of 21. This age varies from plan to plan and insurer to insurer. So check with your plan.

Important:

If you have forgotten to insure your child you can always insure him/her at the next renewal. It may also be worthwhile checking if the insurer would take the child on midway through the policy year.

Jan Dhan Yogana can be a game Changer

In his address to the nation on the 68 Independence Day Prime Minister, Narendra Modi, announced the launch of an ambitious financial inclusion program called the Jan Dhan Yogana. Under this plan every household in rural India will have access to bank account and Rupay debit card with Rs. 1 lakh personal accident insurance cover. About 60% of the Indian population doesn’t have access to any form of banking services. Also envisages under the plan is Rs. 5000 overdraft facility for each household. While the prime minister has set no deadlines, the talk in the knowledgeable circles is that the Government intends to complete this by 2016.

Challenging but not un-doable

While this is a challenging task it is by no means un-dobale. Mr. Modi gave the example of almost every household having a mobile but not a bank account. If we think back to pre-liberalization days the tele density in the country about 1%. Today it is over 80%. What financial institutions like banks and insurers need to do is to replicate the same in banking and Insurance, something that is more existential than a mobile.  All indications are that government is doing its part to help. There are strong indications that both the providers and distributors will have incentives to make this scheme a success. All of the direct cash transfers would be thru these accounts, thus creating demand for this service in the rural areas. Banks are to get a fixed percentage (about 2%) of the new deposits as commission.  It also being said that a monthly salary would be paid to the last mile distributor who enrols and services these accounts. In past retaining the banking correspondents in the rural areas have been a great challenge.

The rural population engaged mainly in manual labour is highly vulnerable to workplace accidents. Death, permanent or temporary disability to earning members can bring quite a lot of hardship to the family. By including a Personal accident cover the scheme will provide much needed protection to these families.

 Need to build on this.

While this is a good basic scheme, the providers like banks and Insurers need to go beyond what is stated in the scheme and build on it to create a robust financial network in the rural areas.  The providers would need products that cater to seasonal income patterns prevalent among the targeted people.  The government need to think about the safety aspects of moving cash in rural and remote areas.  Governments Health Insurance plans like RSBY should be linked to this initiative to avoid duplication and cost optimization.

While the potential is immense, only time will tell if this scheme would go the same way as its predecessors or it will bring a revolution like the one this country has seen in the telecom space. Let’s hope for the later.