Company health insurance plans - Are they good enough?

Is there or was there ever a place called Utopia? I don’t know, but I do know that signifies unrealistic dreams. If you thought (still thinks) that your company health insurance is good for your health protection, then you are in Utopia. Want to know why, read on!!
Most good (with a capital G) companies offer health policy for employees and their families and in some cases parents. Now the key word here is “employees”. Your policy is good enough as long as you are an employee of the company. Now what on the earth makes an otherwise sensible individual like you think that you will remain an employee forever?
Several things can change – you might be asked to go (as painful as it is), you might take a new job, you might decide to start something on your own. The best-case scenario among these, that of you taking a new job, still might leave you unprotected for a certain time period (between your relieving date and joining dates). Again, I must ask what makes an otherwise sensible person like you to think that you will not have a health issue during that period.

Now onto more serious things – Assuming you are the cream of the cream in your current company, you don’t see yourself switching or getting kicked out – may I ask (again) - what makes you, an otherwise sensible person, think that you will not need health insurance after you retire (60 the last time I checked). What makes you think that any insurance company would offer you a cheap policy at that age? And let us face the reality – Probability of health issues goes up with age. (In case you have wondered, that is why life insurance premium increase with age).

Now everything goes well (Murphy does not like that. mind you), you work for the some company until you are sixty, you will buy a new policy at that age. If that is what you think, here are three reasons (among many others) as to why it makes sense to do it now.

1. Most insurance companies do not insist on a health check up if you enroll before the age of 45. Pre-existing diseases are covered, in most cases, after first 4 years.
2. The sweetener – Income Tax deduction for health insurance premium payment to 15000 for your health polices. i.e. you pay 10050 for a 15000 policy if you are in the highest tax bracket.
3. Your job and hence the employer coverage is not guaranteed (remember that the employee is covered and not you as in individual)

Time to read your decision meter – If you ask me, it is not worth your life or health to bet on inflation or deflation or counting on you being healthy at 60 and continuing to be in your current employment until you are sixty. That would certainly, at least for me, make Utopia a nice palm laced island in the middle of the Pacific. You need to make a call – that better be the right call. Happy Health!!

Insurance Rate of Return Calculation

As promised, here is how to calculate annualized returns for insurance policies ( in fact for any investment)
Pre-conditions - You need to have Microsoft Excel or an equivalent spreadsheet tool (unless you are a financial/ mathematics wizard).

1. Open a new work sheet
2. In Column A, list your date of payments (or date of reciepts)
3. In Column B, list your payments (or reciepts). Mark receipts in negative. Example -20000 for payments recieved.
4. Focus on an empty cell and select "Insert" > "Functions" > Financial - XIRR
5. Select all columns containing payments and receipts under Values (Tip - You could click the small button at the end of the "Values" box and multi select all payments/receipts columns)
6. Repeat 5 , this time for all columns containing dates
7. Click OK. Multiply the resulting value by 100 and you have your annualized return (or true return)
8. An example is given below

Happy return calculating..

Guaranteed Return Plans - Are they worth it?

400% guaranteed returns - WOW, amazing returns for an insurance policy - even in India - the emerging market favorite. Several Indian Life Insurance companies have come out with guaranteed return policies/plans in the recent past. Return numbers like 100, 200 are very attractive - and the aim is exactly that - attract investors.

The million-dollar question is "do you really know what is guaranteed and what the actual returns are?” If you do not know or if you are not sure, read on before you buy one of these guaranteed return polices.

Let us take LIC Jeevan Nischay, a single premium policy, for example. For an investment amount of INR 25,000 for a 35-year-old healthy person for a term of 10 years, it offers you a guaranteed return of INR 44674. The annualized rate of return of this so called "guaranteed returns" is 5.98%. Now compare this against some schemes that give guaranteed returns backed by the Indian Government.

PPF - 8% - Yes it is locked for 15 years, big deal when you are anyway looking at 10 years - and no tax payment on investment and returns.
NSC - 8% - No tax payment on investment. Returns are taxable, but annual returns are deemed to be reinvested and are eligible for tax rebate under section 80C.

At 8%, my final returns for an investment of 25000 after a term of 10 years stand at INR 55491. Before you say it offers insurance cover too, buy a term plan for about 2500 (one time premium, term 10 years and sum assured of 1,00,000) and invest the rest in the govt schemes and you still end up with a guaranteed return of INR 49941 (annualized return of 7.16%).

In summary, guaranteed is a relative term in practice and is misleading at times. Depending upon your tax and financial status, these policies may be good for you. The point is simple - know your options and more importantly know what guaranteed really mean before you take the plunge. The real measure of investment returns is annualized returns. How do you find it out without over working your brains? Look for my next post.