Tag: health insurance

Tips for buying a good health cover

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The Covid-19 pandemic has taught people the importance of insurance . If one falls sick and is in need of hospitalisation, not having an adequate health insurance plan can impact your finances . Also, the financial setback that comes with pre-hospitalisation costs, OPD expenses, medicines, diagnostic tests, etc. can be avoided if one has a comprehensive health insurance plan. Here’s a checklist on choosing a health insurance cover:

Extent of coverage

One should choose a policy that covers not just hospitalisation, but also related medical costs, together with outpatient treatments and check-ups. Besides, check for policies that boost sum insured for every claim-free year. Also, there are policies that increase the sum insured every year even if there is a claim. These features will help you be in tune with rise in future medical treatment and hospitalisation costs.

Be sure to check exclusions, specific waiting periods, conditions for pre-existing diseases as well as other things such as number of daycare procedures included or specific benefits like maternity, depending on one’s life stage.

Disease-wise sub-limits

Different plans will have specific limits on the benefits that can be claimed. These can vary from a limit on sum insured for specific diseases or limits on amounts payable towards certain medical expenses. This is termed as sub-limit. So, an insurance plan with a sub-limit will impact one’s out of pocket expenses, as a policy holder will have to bear the expenses. Thus, it is advisable to opt for a plan with no disease-wise sub-limits.

Take note that hospital charges are linked to the type of room or the room rent you have taken. It is important to check the room rent and ICU sub-limits of various health plans before finalising on one. Generally, sub-limits in the plan makes the insurance policy look cheaper.

Restoration benefits

You may claim for an illness and, God forbid, there could be multiple unrelated illnesses or injury that require you to get hospitalised.

Restoration cover restores the sum insured any number of times under the policy (for unrelated illness/injury) to additional 100 per cent in a policy year. This is provided the existing sum insured, including cumulative bonus, is insufficient to settle a claim.

Ease of claim process

Select insurers whose claims processing service is fast and accurate.

A simplified claim filing process can help you to conveniently access digitally and on phone for expeditious cashless and reimbursement claims settlement

Network of hospitals

Check the network of hospitals under the policy that offers cashless facility and the proximity to one’s neighbourhood. In case one travels frequently, check hospital network across the country so that a policyholder can continue to get treated from his/her preferred choice of hospital.

Critical illness cover

With non-communicable diseases, including cancer, cardiovascular diseases, stroke and diabetes on the rise, it is always prudent to choose a health policy that could help cover critical illnesses. However, this comes with a price and the decision needs to be made based on its affordability.

It’s also important to look for additional benefits and riders such as cumulative bonus booster and rewards for healthy lifestyle, among several other factors.

These tips can come in handy while investing in a health insurance plan that is comprehensive and best-suited for one’s family. After all, an economical and comprehensive health insurance plan is much better than inflated medical bills.

The writer is MD & CEO ManipalCigna Health Insurance Company Limited

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Will Saral Jeevan Bima be a good term insurance option for you?

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In a bid to make the process of purchasing health insurance simpler, the insurance regulator IRDAI introduced a standard health insurance product — Arogya Sanjeevani.

Following this, the regulator also recently provided guidelines for standardisation in the life insurance space, through a standard term life product — Saral Jeevan Bima. All insurers are to launch the product by January 1, 2021. The launch of Saral Jeevan Bima ensures purchase of a term plan is made simple and easy.

About the policy

Saral Jeevan Bima policy is a standard term life cover as per IRDAI requirements.

It is a pure-vanilla term cover which pays the sum assured (SA) in lump-sum to the nominee in case of death of the policyholder during the policy term.

This policy is offered only to individuals aged between 18 and 65 years for a minimum policy term of five years (maximum of 40 years). The plan offers a minimum SA of ₹50,000 and a maximum of ₹25 lakh, in multiples of ₹50,000. However, insurers have the option of offering a higher SA (over ₹25 lakh), too.

We recently covered the details of the product extensively in another article, ‘All you need to know about Saral Jeevan Bima’. Here, we highlight whether or not should you opt for this policy.

Take note

There are three important points to note before you go for Saral Jeevan Bima.

One, it is the most basic term plan which provides level term cover — the premium payment and the life cover you choose remain constant for the policy term.

On the other hand, most policies in the market offer different options for SA.

For instance, LIC’s Tech Term plan gives you the option to choose between a level SA and an increasing SA.

Two, this standard plan offers lump-sum pay-outs to the nominee only upon the death of the policyholder.

But most plans in the market offer staggered pay-out options with an increase in pay-out at a certain percentage every year.

Some policies offer return of premium paid if the policyholder survives maturity.

And lastly, most term plans in the market offer accidental death benefit, partial and permanent disability benefit, and terminal and critical illness riders, in addition to death benefit. Some policies have riders built into them. For instance, SBI Life’s eShield comes with terminal illness cover built into the policy, and offers accidental death and accidental total and permanent disability as riders.

In the case of a standard term plan, only two riders can be offered — accidental death benefit and permanent disability benefit. Even then, it is at the discretion of the insurers.

The ₹25-lakh cover may not be sufficient for everyone. When it comes to term plans, experts generally recommend having a term policy with a death benefit at least 10-20 times your gross yearly income.

You should also consider your personal financial position (your liabilities) to decide your SA, as it will help if your dependants can comfortably settle your outstanding liabilities, if any, in your absence.

While insurers have the option of offering higher SAs on this standard policy, we need to wait and watch as to how many will do so.

Otherwise, with Saral Jeevan Bima, since terms and conditions and pay-outs are the same across insurers, you can select the insurer based on the premium, services offered as well as their claim settlement track record.

To give you an idea, the premium for existing term plans for ₹25 lakh (30-year-old male for 70-year policy term) works out to ₹3,500-8,500 across insurers.

It would work to the benefit of the policyholders if this policy is available through digital platforms as online plans tend to be cheaper.

Currently, the minimum SA of many insurers are higher than that of Saral Jeevan Bima — ₹50 lakh for LIC’s online term plan Tech-Term, and ₹35 lakh for SBI Life’s eShield (if purshased online). If Saral Jeevan Bima is available online, it can come in handy for those looking for a cover for ₹5-25 lakh.

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All you need to know about health insurance waiting periods

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Insurance regulator IRDAI has mandated that the waiting period for pre-existing diseases should not go beyond four years (48 months) in any health policy, effective October 1. But this is not the only waiting period component in a health policy.

For instance, if you sign up for a new health policy, you will have to wait for a minimum period before your health cover starts.

Maternity covers and some other specified diseases also have a waiting period before claims can be entertained.

Waiting period ensures that insurers do not cover for claims that are certain and predictable. The clause helps prevent their losses. Waiting period is an important clause and every policyholder should be aware of its nuances to avoid unnecessary hassles at the time of claim.

Waiting period, which is applied from the date of policy commencement, varies depending on the ailments, and differs from one insurer to another.

Varying time-frames

If you buy a health plan, you have to mandatorily wait for a period of 30 days, known as initial waiting period, from the date of commencement of the policy. During this period, the insurance company will not admit claim for diseases or hospitalisation except for accidental injuries, provided the policy covers such accidental injuries.

Now, if an individual has an existing medical condition (known as pre-existing medical condition) before the commencement of health policy, he/she has to wait for a few years before the cover begins. However, excluding that particular medical condition, the policyholder will be covered for other illnesses/accidents, post initial waiting period.

The ‘pre-existing waiting period’ is usually 48 months among most insures but some insurers have only 24-36 months as pre-existing waiting period.

For instance, for Optima Restore policy from HDFC Ergo Health, the pre-existing waiting period is 36 months.

There is another type of waiting period for specific diseases or specified procedure and this, too, varies from one insurer to another. Insurers usually have a common list of specific diseases or a list of medical treatments for which this waiting period will apply.

For instance, ManipalCigna’s ProHealth policy has a disease/procedure-specific waiting period of 24 months (two years), after which the expenses for the same will be covered. The list of specific diseases/procedures includes cataract, knee replacement surgery (other than caused by accident), and varicose veins or ulcers.

But keep in mind that if these diseases exist at the time of taking the policy or it is subsequently found that they are pre-existing, the pre-existing diseases waiting period will apply.

Insurers usually have a waiting period of 90 days (from the date of commencement of policy) in case of critical illness or lifestyle-related diseases, including cancer, hypertension and cardiac conditions.

Health policies that offer maternity covers also have waiting period (for mothers and new-borns). Any treatment arising from pregnancy to childbirth including Caesarean sections will be covered under a policy only after the expiry of the waiting period. For instance, ProHealth policy from ManipalCigna covers maternity expenses only after expiry of 48 months. Similarly, Digit Insurance’s health policy, too, has a two-year waiting period for maternity cover.

Lastly, most insurers have personal waiting period which may be applied (from the date of policy commencement) to individuals depending on the declarations made by him/her at the time of taking the policy and the existing medical conditions. Factors including medical history, pre-existing medical conditions, medical test results and current health status will be taken into account by the insurer for applying this waiting period.

In Max Bupa’s ReAssure policy, for instance, personal waiting period is applicable for a maximum of 24 months, while in ProHealth policy (ManipalCigna), it is applicable for a period of 48 months. Personal waiting period will be specified in your policy document and will be applied only after you give your consent. If you decline, your application will be cancelled and premium, if any paid, will be refunded.

But most of the time, personal waiting periods are not applied by the insurers.

Points to note

There are a few points to keep in mind about the waiting period clause in health insurance.

One, you can reduce your waiting period. If you feel the pre-existing or disease-specific waiting period is too long, some insurers let you reduce the same.

But you might have to cough up additional premium.

For instance, in the case of ICICI Lombard’s Complete Health insurance policy, you can reduce the pre-existing waiting period if you opt for sum insured (SI) over ₹2 lakh.

The waiting period comes down to 24 months from 48 months. Similarly, in ProHealth policy (ManipalCigna), you can reduce your waiting period if you opt for a higher variant of the policy.

The pre-existing waiting period is reduced to 24 months in ‘Plus’ and ‘Accumulate’ variant while it is 36 months for the ‘Protect’ variant and 48 months in other variants.

Two, if you renew your health policy without any break in premium payment, the policy continues to cover you.

But if you renew your policy after a break, you may have to undergo another waiting period similar to what a new policy entails.

At the time of porting, too, if you continue the policy without any break, your waiting period will be as per the new policy or as per your health status at the time of porting.

However, if you enhance your SI (at the time of porting as well as in an existing policy), the waiting period shall apply afresh to the extent of increased SI.

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New health insurance guidelines and what they mean for you

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In the recent past, insurance regulator IRDAI came out with standardised, customer-friendly guidelines for health insurance policies. These changes are implemented from October 1, 2020 and are largely expected to benefit the policyholders. Here’s more :

 

Definition of pre-existing diseases

One of the important amendments is the change in the definition of pre-existing diseases (PED) in health policies. This is because the old version had ambiguity in terms of what constitutes a pre-existing disease. Also, all conditions for which the person had signs/symptoms in the 48 months before taking the policy were considered PED.

IRDAI has changed this definition and has offered more clarity. As per the new definition, pre-existing disease means any condition, ailment, injury or illness that has been diagnosed by a physician/doctor within 48 months prior to the effective date of the policy issued by the insurer or its reinstatement; Or for which medical advice or treatment was recommended by, or received from, a physician within 48 months prior to the effective date of the policy or its reinstatement.

Changes in proportionate deductions

Liability of a health insurer is limited to the extent specified in the policy, and these are termed as sub-limits. The sub-limits are applicable mostly in cases such as room rent for hospitalisation, ICU, OPD (out-patient department) and ambulance cover. So, if you exceed the limit prescribed, the extra amount has to be paid from your pocket. That is, based on the type of room you occupy at the hospital, the cost of associate medical expenses also changes.

Higher room cost would mean the cost of associate medical expenses will also be higher. For instance, due to an emergency, assume someone is hospitalised in a room with a rent of ₹6,000 per day (while it a ₹4,000 a day limit in his policy). This increase of ₹2,000 in room rent will be applicable proportionately on associate medical expenses as well, such as doctor’s fees and nursing charges (in the ratio of room rent eligible to actual room rent). So, if the proportionate increase in medical expenses works out to ₹80,000 and the total hospital bill works out to ₹3 lakh, then the insurer will settle ₹2.2 lakh.

So to standardise the claim settlement in health policies, the regulator has established that associate medical expenses – the cost of pharmacy, consumables, implants, medical devices and diagnostics – cannot be subject to the proportionate clause. Insurers are not allowed to apply proportional deductions on ICU charges as well.

On claims

Health policies, sometimes, get rejected on the grounds of non-disclosure of medical issues (by mistake) even though the policyholders would have paid the premium for an extended period. This is because, during the issuance of a policy, many are not aware of certain pre-existing conditions, on the grounds of which the insurers reject claims later. Therefore, the regulator has ruled that health insurers cannot contest claims, citing non-disclosure, by clients who have continued with their policies for eight years. That is, after the expiry of moratorium period (the period of eight years during which the policyholders have continuously renewed their policy) no health claim shall be contestable, except for proven fraud and permanent exclusions specified in the policy contract. Policies would, however, be subject to all limits, sub-limits, co-payments, and deductibles based on the policy contract.

Other major changes

Generally, people with serious illnesses such as Alzheimer’s and epilepsy were not given coverage at all under a health policy previously. Insurers now have to provide individuals with such diseases, coverage for at least other diseases (specifying pre-existing conditions such as Alzheimer’s and epilepsy as permanent exclusions).

Also, the scope of coverage of health insurance policy is widened to provide cover for various illness including behaviour and neuro development disorders, genetic diseases and disorders and cover for puberty and menopause-related disorder. This was previously not covered by all insurers. Modern treatments too will be covered by a health policy including deep brain simulation, oral chemotherapy, robotic surgeries and stem cell therapy.

Waiting period (time period an insured has to wait before the insurer provides coverages) related to a specific disease has been standardised as well. While the standard waiting period is for 30 days, the disease-specific waiting period varies with each insurer, usually 2-4 years; for older policies, it went to over four years as well. The regulator has said that disease-specific waiting period cannot exceed four years. Similarly, the waiting period for lifestyle-related illnesses such as hypertension, diabetes and cardiac conditions cannot exceed 90 days.

Now, policyholders can pay their health insurance premiums in instalment in addition to lump-sum payments. Another change is that insurers have been advised to allow claim settlement for telemedicine consultation.

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How wellness features make your health insurance better

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Insurance regulator IRDAI has issued guidelines on wellness and preventive features offered in a health insurance policy.

While many insurers already offer wellness benefits to policyholders, the guidelines not only widen the scope of such features but also standardise them.

The Insurance Regulatory and Development Authority of India (IRDAI) has allowed insurers to offer this feature as an optional or an add-on cover or as a rider.

Here is what you, as a policyholder, should know about wellness features and their benefits.

What’s on offer?

Many insurers, including ICICI Lombard, ManipalCigna, Bajaj Allianz and Max Bupa, offer health policies with wellness features that reward the policyholders for maintaining a healthy lifestyle.

Rewards are offered, provided policyholders undertake the wellness programme specified by insurers. The rewards are in the form of points which get accumulated on completion of a task, say walking 10,000 steps in a day or running 3 km a day.

So, if you have accomplished the goal, you can redeem your reward points against outpatient consultation (OPD), pharmaceutical expenses, diagnostic services and health check-ups through the network providers of the insurer (reimbursement allowed if cashless claim is not available).

Take ICICI Lombard’s iHealth Plus policy for example. You can earn 100 points if you quit smoking.

You can also earn up to 1,000 points if you undergo medical check-up. You can redeem these points against OPD, dental expenses etc.

Similarly, in the case of Aditya Birla health plan, you can earn health returns (reward points) through accumulation of ‘Active Dayz’. If you burn 300 calories in a day, you earn one Active day.

With Bajaj Allianz General, you can redeem the accumulated points for co-pay waiver at the time of claim or increase in sum insured in case of no claim.

Note that the rewards system varies with insurers. For instance, in the case of iHealth Plus policy, the maximum points an individual can get is 5,000 and each point is equivalent to 25 paise. It can be carried forward up to three years. In the case of ManipalCigna’s ProHealth policy, the maximum reward that can be earned is 20 per cent of the premium paid and each point is valued at ₹ 1.

The points are monitored by health insurance companies on real-time basis through mobile apps or wearables such as Fitbit that track your activity.

As per IRDAI’s guidelines, in addition to the existing wellness benefits, insurers can also include redeemable vouchers to obtain protein supplements and other consumable health boosters, or for membership in gym/yoga centres.

Sweetie Salve, Vertical Head, Claim Medical Management, Bajaj Allianz General Insurance, says: “Redeemable vouchers, could typically have two approaches — where insurers proactively give these vouchers to policyholders on a complimentary basis, where it is offered to initiate a healthy lifestyle and create a sense of responsibility for maintaining good health, or policyholders may have to earn them based on certain wellness criteria.”

The regulator has also allowed insurers to offer discounts on premium and/or increase in sum insured based on the wellness regime.

As insurers are yet to file revised versions/new products with the regulator, it may take a while before the products are updated for the additional benefits. Despite the improved benefits, policyholders may not see a significant increase in premium.

Win-win

Amit Chhabra, Head, Health Insurance, Policybazaar.com, says: “While there could be some costs involved in offering wellness services, it would subsidise the claim cost for insurers as healthy customers would claim less.”

However, Priya Deshmukh-Gilbile, Chief Operating Officer, ManipalCigna Health Insurance, says: “The recent guidelines on wellness benefits have put in motion reward-linked wellness features for healthy living, and industry products incorporating discount and reward options might see some impact on premium.”

To enrol in wellness programmes, policyholders should purchase products that offer such benefits. All wellness benefits are offered through digital mode, through respective insurers’ mobile app. For instance, Max Bupa’s Health is an app that manages policyholders’ fitness data and health score.

Once downloaded and registered, you can sync your wearables such as Google Fit, Apple Watch or Fitbit with the mobile app; alternatively, the said app itself will track your fitness activity.

On the other hand, if you have enrolled yourself in a gym or yoga centre, where your fitness activities are done, you will still earn reward points for that as well.

iHealth Plus policy offers 2,500 points for a gym/yoga membership per year.

But do keep in mind that your policy selection should be based oncoverageand not just on wellness programmes and their benefits.

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How ‘restoration benefit’ in health insurance works

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Most health insurance policies in the market offer built-in back-up plans for policyholders in the form of ‘restoration’ benefit. In this feature, the insurer fully reinstates the original sum insured (SI) once it is exhausted. This means, in a floater policy, if any other family member gets hospitalised even after the entire sum insured (SI) is used up in a policy year, there will still be a cover available to the extent of the full SI. This reinstatement of health cover is welcome, especially if your original cover is small. Restoration feature is also termed as refill, reset or reload depending on the insurer.

However, restoration benefits come with caveats and limitations. Here is what you should know.

The basics

While health insurers offer to reinstate your original SI, the restoration process varies with insurers. Some policies such as Manipal Cigna’s ProHealth policy, Activ Assure Diamond policy from Aditya Birla Health, ICICI Lombard’s iHealth Plus restore your original SI only after the existing cover is exhausted.

Let’s understand this concept with an example. Joe has ₹5 lakh as health cover and, on his first claim, this amount gets utilised. A few months later, he gets hospitalised for another illness, and his second claim is for ₹2 lakh. Given that his original SI is exhausted, his restored SI will be ₹5 lakh and the insurer will settle his claim (of ₹2 lakh).

Now, let’s take another case. Joe’s first claim is for ₹4 lakh; the balance SI will be ₹1 lakh. He makes a second claim for ₹2 lakh. The insurer will cover only ₹1 lakh and Joe will have to settle the balance from his pocket. The ‘restore’ benefit will not be triggered as Joe has not exhausted his SI completely. However, if Joe makes a third claim in a year, he will have ₹5 lakh as his SI.

There are health covers in the market such as Optima Restore from HDFC Ergo Health, Max Bupa’s Go Active policy and Lifeline by Royal Sundaram General Insurance that offer to reinstate the original SI even when the SI is partially exhausted.

For instance, let’s assume Joe has a health policy of ₹5 lakh and he makes a claim for ₹3 lakh (first claim). The insurer settles the claim and Joe’s SI balance is ₹2 lakh. His ‘restore’ benefit is triggered (available only for subsequent claims) and his SI balance for the year will be ₹7 lakh (existing balance of ₹2 lakh and SI restored is ₹5 lakh). What must be kept in mind is that a single claim in a policy year cannot exceed base SI. Which means, if Joe makes a second claim for ₹6 lakh, the insurer will pay ₹5 lakh only and the balance ₹2 lakh SI will be available for subsequent claims.

Note that, while most policies come with ‘restore’ benefit, it may be not available across all variants of a particular policy. For instance, in ICICI Lombard’s iHealth Plus, the ‘reset’ benefit is available from SI of ₹3 lakh and above only. Similarly, in Digit Insurance’s health plan, the ‘restore’ benefit is available for comfort variant of the plan only.

What’s the catch?

Since most insurers offer ‘restore’ or ‘refill’ benefit as an in-built feature in the policies, there are certain points that you as a policyholder should keep in mind.

One, ‘restore’ benefit is usually available only once during a policy year when insurers refill 100 per cent of the base SI. But there are policies in the market such as Pro Health policy (Manipal Cigna), Max Bupa’s ReAssure plan and Star Health’s Family Health Optima plan (SI is restored three times a year), that offer ‘restore’ benefit multiple times. Insurers also offer unlimited ‘restore’ benefits as a rider, like in Religare Health insurance’s Care plan and Activ Assure Diamond plan (Aditya Birla Health).

Two, as a norm, the ‘restored’ SI will be available only for subsequent claims made by the policyholder. That is, the ‘restore’ benefit will not be applicable on the first claim in the policy year. Also, most policies do not offer the ‘reinstated’ SI for the same illness for which you had made the claim in a policy year. However, some policies in the market such as ReAssure (Max Bupa) do cover for the same illness subsequently.

Three, your ‘restoration’ SI will not be considered for no claim bonus (a reward that policyholders receive from the insurer for staying healthy and not making any claim on the policy in a year) calculation.

Lastly, the SI reinstated during the policy year, if unutilised, will expire and cannot be carried forward to next year or at the time of renewal of policy.

Remember that your reinstated SI can be utilised only sequentially, that is, after exhausting the original SI, accumulated no-claim bonus (NCB) SI, additional or super NCB (if any opted), and additional SI through booster benefit (if any opted).

Our take

SI restoration benefit is offered by most health insurers as part of the basic cover. While this benefit can compensate if you are under-insured, relying on reinstated SI to make up for the gap is not advisable. Also, you need to understand the workings and applicability of this feature and choose a SI, accordingly, based on your need.

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Financial Planning – How a single parent can meet her goals

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Nirmala, aged 37, single parent to two daughters aged 9 and 7, wanted to plan for her financial goals. Her monthly income was ₹1.4 lakh and expenses were ₹60,000 including travel and medical needs. She owns an apartment in South Chennai valued at ₹80 lakh. Nirmala began working since the last two years and has limited financial resources. Her goals were the usual ones, and she wanted to reach these comfortably without exposing the capital to risks in the long term. That said, she was willing to invest in large-cap equities for long-term goals such as retirement and wealth creation.

Goals, assets, risk profile

Nirmala

wanted to prioritise the following goals. She first wanted to set up an emergency fund of ₹7.2 lakh and also get health insurance for herself and daughters. Next, she intended to build a fund of ₹10 lakh each, at current cost, to be gifted to her daughters when they would turn 24. Nirmala also wanted to purchase gold worth ₹50,000 every year till her retirement. An annual retreat trip for ₹60,000 per annum was on her wish-list too. For the long-term, Nirmala wanted to set up a fund to provide for her retired life from 60 years of age, at a current cost of ₹30,000 per month, and also wanted to create a surplus fund at current cost of ₹50 lakh at her retirement in addition to the retirement corpus.

Nirmala’s asset position was as follows. Her EPF balance was ₹3 lakh with annual contribution of ₹1.6 lakh, and her PPF balance was ₹1.5 lakh with annual contribution of ₹1.5 lakh. She had cash in hand of ₹10 lakh, gold worth ₹20 lakh, a house valued at ₹80 lakh and a car worth ₹6 lakh.

Nirmala was focused on safety of capital but understood the importance of allocating a portion of investments to equity towards her long-term goals. But she was very particular about keeping the balance money in avenues that would avoid capital erosion despite opportunities for better returns.

Review and recommendations

We advised Nirmala to keep ₹7.2 lakh in fixed deposits (from her cash balance of ₹10 lakh) towards emergency funds. She could reserve the balance ₹2.8 lakh for her career growth needs that was imperative under the present conditions. We recommended that she take medical insurance with sum insured of ₹10 lakh for herself and her daughters, in addition to the employer-provided health cover. Nirmala is a divorcee and both her daughters are staying with her. Their education and other expenses are to be managed by the father and hence, Nirmala need not opt for life insurance.

To provide for the fund gift to her daughters when they turned 24, we advised Nirmala to invest in large-cap funds. She needed to invest ₹7,800 per month for 15 years towards the gift to the first daughter and ₹7,200 per month for 17 years towards the gift to the second daughter. At an expected annualised return of 9 per cent, Nirmala should be able to build a corpus of ₹27.6 lakh and ₹31.60 lakh respectively.

Taking into account her provident fund contributions, Nirmala had to invest ₹34,000 per month towards her retirement. She needed to accumulate ₹4.48 crore to retire at the age of 60, assuming a life expectancy of 90 years. It was assumed that her expenses till retirement would increase at 7 per cent annually. After retirement, with intended moderation in lifestyle, it was assumed that her expenses would increase at 6 per cent per annum. With Nirmala particular about avoiding capital erosion, it was suggested to set an expected return of 7 per cent per annum. Though this is achievable in the current environment, an exposure of 10 per cent to equity-related investments was advised to ensure adequate returns.

We advised Nirmala to use voluntary PF contribution and NPS to manage her fixed income allocation towards retirement, and large-caps and mid-caps for equity investments. The retirement corpus with 50:50 equity and debt allocation was planned with these products. Based on her cash flow with allocated investments towards her multiple goals, it may be difficult for Nirmala to start building her surplus fund, if some money has to be kept aside for unexpected expenses. But she could increase her savings in subsequent years to build a surplus fund at current cost of ₹50 lakh that would translate to ₹2.37 crore at her retirement. The PPF, not mapped to any of her goals, could also be used towards building the surplus.

Cash flow (₹)

Monthly

Income

1,40,000

Expenses

60,000

Surplus

80,000

Annual surplus

9,60,000

Funding needs & goals:

Annual retreat trip

60,000

Gold purchase

50,000

PPF

1,50,000

Gift to Daughter 1

93,600

Gift to Daughter 2

86,400

Retirement

4,08,000

Total

8,48,000

Balance

1,12,000

After funding the goals, the balance money could be used towards building long-term surplus fund or to have a better lifestyle. The choice was Nirmala’s to decide about how to deploy the money.

Planning for the future within three years of employment, especially for a late entrant on to the employment scene, was a wise thing for Nirmala to do. By adhering to the plan, she could avoid costly errors. We advised her to seek professional help to draft a will at the earliest.

It would take four to five years for Nirmala to reach the planned asset allocation of 40:60 in equity:debt in the pre-retirement phase. We advised her to maintain a ‘behaviour journal’ during this time to study her emotions on the volatility induced by equity-oriented investments. This would help her gauge her risk tolerance better and adjust asset allocation accordingly to equity, debt and other investments.

Asset allocation is the key to a successful financial plan. “History shows you don’t know what the future brings” is a quote to be recalled while thinking of asset allocation.

The writer is a SEBI-registered investment advisor at Chamomile Investment Consultants

Mind it!

A behaviour journal can help study emotions, gauge risk tolerance, and adjust asset allocation accordingly

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