Tax Saving on Health Insurance (Section 80D) – Detailed Guide for FY 2018-19 AY 2019-20

Health insurance is like an umbrella – something that you don’t need every day; but once in a while when it rains, it really saves the day for you. On all other days, you won’t miss it. But when it rains and if you don’t have it, you will feel its need.

A good health insurance policy helps to protect your financial savings and makes you better prepared for medical emergencies and expenses.

And besides the obvious medical coverage, health insurance plans also provide tax benefits to you.

Luckily, under Section 80D of the Income Tax Act, you get tax benefits for expenses towards health insurance premiums, preventive health checkup and other medical expenses.

Since most of you will not be hospitalized ever (I hope so!), you would be more interested in the tax benefits on the medical insurance premiums. And yes, indeed the premium paid towards health insurance is tax deductible under section 80D of the Income Tax Act, 1961.

Let’s move on and understand the tax benefits on health insurance in a bit more detail.

What is Section 80D that gives Tax Benefits on Health & Medical Insurance?

Even if tax benefits weren’t there, even then buying health insurance is a sensible decision.

Why would you want to pay big hospital bills when you can buy medical insurance by paying a small premium to cover that risk.

Imagine not buying health insurance and saving Rs 10,000 for 3-4 years and then getting hospitalized with a big bill of Rs 5 lakh. All small savings you made by ‘not buying’ health insurance is screwed up with a medical bill several times larger.

Unfortunately, most Indians still don’t see it like that.

They feel its an unnecessary expense and waste of money. Luckily, our governments have offered additional freebies in form of tax benefits to push people to buy health insurance.

And this benefit is offered via the Section 80D of the Income Tax Act, 1961 which relates to the tax deductions on medical insurance.

Section 80D specifically provides deduction in taxable income to the extent of the premiums paid on the purchase of health insurance or medical insurance or mediclaim products.

It even includes the premiums paid for the health insurance of your parents, children and spouse (wife/ husband).

And it doesn’t matter whether you purchase health insurance through a person or go for an online health insurance cover which are gaining popularity these days. You will get tax benefits in either case.

Also, the tax benefits under Section 80D are over and above the benefits under other sections like Section 80C.

Who is eligible for Tax Benefits under Section 80D?

If you are paying premiums for health or medical insurance purchased for the following, you will get tax benefits under section 80D:

  • Yourself
  • Your spouse
  • Dependent children
  • Parents

What about other family members?

Like, let’s say your brothers, sisters, father-in-law, mother-in-law, uncles, aunts, cousins, etc.?

Health insurance premium paid for any other person is not eligible for tax deduction. But you can ofcourse include other family members in the health insurance coverage if you wish to. It is just that the premium paid for them cannot be considered for tax benefits.

Maximum Deduction Limit under Section 80D for FY 2018-19 (AY 2019-20)

There are several different types of deductions that you can be claimed for tax benefits under Section 80D:

  • Tax deduction on health insurance premiums paid for yourself, spouse & children
  • Tax deduction on health insurance premiums paid for parents
  • Tax deduction on medical expenses of super senior citizens
  • Tax deduction on preventive health check-up expenses

Let’s have a look at each of these in detail:

Tax Deduction on Health Insurance Premiums Paid for Self, Spouse & Children (Family):

  • If you pay the premium for health insurance taken for you, spouse and children, then you can claim a total deduction of up to Rs 25,000 for FY 2018-19 (AY 2019-20).
  • If you or spouse is a senior citizen, then you can claim a higher total deduction of up to Rs 50,000 for FY 2018-19 (AY 2019-20). This limit for senior citizen was revised upwards in the past years. Earlier (in FY 2017-18 AY 2018-19), if you or spouse were a senior citizen, then the maximum deduction that could be claimed was up to Rs 30,000. This has now been revised to Rs 50,000.

In addition to the above deduction, you can also get tax deductions for premiums paid for parents.

Tax Deduction on Health Insurance Premium Paid for Parents: 

If you pay the premium for medical or health insurance of your parents’, then you can claim deductions as follows:

  • If both parents are not senior citizens (< 60 years), then you can claim a deduction of up to Rs 25,000 for FY 2018-19 (AY 2019-20)
  • If even one parent is a senior citizen (>=60 years), then you can claim a deduction of up to Rs 50,000 for FY 2018-19 (AY 2019-20). This limit for senior citizen was revised in the past year. Earlier (in FY 2017-18 AY 2018-19), if your parents were senior citizens, then the maximum deduction that could be claimed was up to Rs 30,000. This has now been revised to Rs 50,000.

It is worth noting that while claiming deductions under Section 80D, you cannot include premiums paid for children who are earning. But you can still claim the benefit for earning spouse and parents.

Tax Deduction on Preventive Health Checkup Expenses:

If you spend money on getting health checkups done during the financial year, then you can also claim a deduction of up to Rs 5000 for preventive health checkup for self, spouse and children under Section 80D.

But this is not an additional benefit but is inclusive within the overall limits discussed above. That is, the total tax benefit for health insurance premium and preventive health checkup is limited to Rs 25,000 (or Rs 50,000), as the case may be. Remember that the limit of Rs 5000 is the maximum total deduction allowed for preventive health check-ups.

Also, this deduction cannot be claimed on a per person basis but as an aggregate option available – so the total deduction allowed cannot be more than Rs 5000.

For example – Suppose you pay a health insurance premium of Rs 21,000 for self, wife and children. In addition, you also get yourself a preventive health checkup that costs Rs 6000. Now, how much tax deduction are you eligible for? You are allowed a maximum deduction of Rs 25,000 under Section 80D. So you get a deduction of Rs 21,000 towards insurance premiums paid; and Rs 4000 for expenses towards preventive health check-up. The deduction towards preventive health check-up has been restricted to Rs 4000 (against your actual expense of Rs 6000) as the overall deduction cannot exceed Rs 25,000 in this case (i.e. Rs 21,000 + Rs 4000).

Side Note – As you cross 35-40, it actually makes sense to get yourself evaluated medically atleast once a year so that any condition/disease in its early stages can be better handled and addressed appropriately. So this tax deduction on preventive health check-up expenses under section 80D also has positive health side effects!

Tax Deduction on Medical Expenses for Uninsured Senior Citizens (>= 60 years) (Section 80D) – You or Parents

If you or any of your parents are a senior citizen, i.e. above 60 years, and have not purchased any health or medical insurance, then you can avail a deduction for any medical expenditure incurred up to Rs 50,000 in FY 2018-19 (AY 2019-20).

Remember, to claim this deduction for actual medical expense, the concerned person must be a senior citizen (you, spouse or parents) and also uninsured (i.e. no premium should have been paid for any health insurance).

Before FY2018-19 and till FY2017-18, this rule was applicable for uninsured ‘very senior’ citizen (above 80 years) and the limit was set at Rs 30,000 per financial year. Now, this benefit is available to younger(!) senior citizens (who are above 60 years) too.

So let me summarize the Income Tax deduction of Health Insurance Premiums in India.

Tax Deductions under Section 80D for Health Insurance (Financial Year 2018-19 or Assessment Year 2019-20)

The table below lists the tax deduction limits applicable to health insurance premiums (for the financial year 2018-2019 or assessment year 2019-2020):

Health Insurance tax benefits Sec 80D 2019 2020

So what will be combined limits on tax deductions for a family with self, spouse, children and parents?

  • If you, spouse, children and parents are all below 60 years of age, then the total limit is Rs 25,000 + Rs 25,000 = Rs 50,000 under Section 80D
  • If you, spouse, children are below 60 years; and if even one of your parents is above 60 years of age, then the total limit is Rs 25,000 + Rs 50,000 = Rs 75,000 under Section 80D
  • If any of you or spouse is above age 60; and if even one of your parents is also above 60 years of age, then the total limit is Rs 50,000 + Rs 50,000 = Rs 1,00,000 Rs 1 lakh under Section 80D

But please do remember that these are maximum limits specified under Section 80D. If the actual premium paid is less than the limits, then the benefit will be limited to the actual premiums paid only.

To further aid the understanding, allow me to share a few examples.

Examples of Medical Insurance Premiums & Section 80D Tax Benefits

Case 1: You (28), Spouse (27), Child (2), Father (58), Mother (56)

You are eligible for Rs 25,000 towards health insurance premium and checkup for self, spouse and child. In addition, you are also eligible for Rs 25,000 towards health insurance premium and checkup for parents. Since no one in the family has attained 60 years of age, the total deduction eligible under Section 80D is Rs 50,000 for the financial year.

Case 2: You (31), Spouse (29), Child (4), Father (63), Mother (58)

You are eligible for Rs 25,000 towards health insurance premium and checkup for self, spouse and child. In addition, you are also eligible for Rs 50,000 towards health insurance premium and checkup for parents (as one of the parent is above 60). Since one of the parents has attained the age of 60, the total deduction eligible under Section 80D is Rs 75,000 for the financial year.

Case 3: You (61), Spouse (55), Father (82), Mother (79)

You are eligible for Rs 50,000 towards health insurance premium and checkup for self and spouse as you are in senior citizen category yourself. In addition, you are also eligible for Rs 50,000 towards health insurance premium and checkup for parents (as one or both the parent are above 60). Since both you and your parents have crossed the age of 60, the total deduction eligible under Section 80D is Rs 1,00,000 or Rs 1 lakh for the financial year.

Sample Calculation of Tax Deductions under Section 80D

Suppose you are aged 38, your wife is 35, son is 8 and daughter is 5 years old.

You have taken a health insurance plan for all for of you that has an annual premium of Rs 23,000. In addition, you had to pay Rs 8000 for preventive health checkup during the financial year.

In addition, your parents aged 66 and 59 are also dependent on you. For insuring their health, you have taken a health cover for them separately for which the premium is Rs 57,000.

So what all tax deductions can be claimed by you for the financial year under Section 80D?

  • For Self (+ spouse + children) – All of you are under the age of 60. You are eligible for Rs 25,000 towards health insurance premium and checkup for self, spouse and child. Since the premium + health checkup costs exceed the limit (Rs 23,000 + Rs 8000 = Rs 31,000), the benefit available will be limited to Rs 25,000 only.
  • For Parents – One of the parents is above 60 and hence, senior citizen. Since you are paying medical insurance premium for them, you are eligible for Rs 50,000 towards health insurance premium. Since the premium exceeds the limit (Rs 57,000), the benefit available will be limited to Rs 50,000 only.
  • Therefore, the total deduction available in this case will be Rs 25,000 + Rs 50,000 = Rs 75,000 only.

I hope this fully explains everything there is about the tax savings that you can do with your health insurance under Section 80D.

So let’s move on…

Tax benefit on Multi-year Health Insurance policy under Section 80D

Many people pay health insurance premiums for several years in one go as there are discounts on offer for multi-year health insurance policies.

If that’s the case, then the tax deduction is allowed proportionately over the years for which the benefit of health insurance is available, subject obviously to the overall limit for each financial year).

So let’s say you are 35 years old (i.e. less than 60 years) and your health insurance policy for 1 year has a premium of Rs 15,000 and that for 2 years us Rs 27,000.

So if you go for the 2-year health insurance plan and pay the premium for two years in one financial year itself, then what will be the tax deductions eligible?

Since current rules state that an individual is allowed to claim a deduction of up to Rs 25,000 in a financial year, you will be allowed to claim the total premium paid, but proportionately, over the 2-year period. This means that you will get a tax deduction of Rs 13,500 each (Rs 27,000 divided by 2) in both the financial years.

More things to know about Section 80D tax benefits

  • It is not necessary to claim deduction using just one policy. You can claim deductions under multiple policies subject to overall limits of Rs 25,000 or Rs 50,000 as explained earlier.
  • The group health insurance premium paid by your employer is not eligible for deduction under Section 80D. However, if you pay an additional premium to increase the coverage of the existing group cover, then you can claim the deduction against this additional contribution.
  • The premiums paid for Critical Illness policies are also eligible for tax benefits under Section 80D.
  • The premiums paid for Top-Up or Super Top-Up health insurance plans are also eligible for tax benefits under Section 80D.
  • The premiums of term life insurance plans are not included in Section 80D. But in any case, term insurance premiums are eligible for tax benefits under Section 80C instead. (Related: How much life insurance to buy?)
  • If you have taken a Critical Illness rider as part of the life insurance policy, then the premium paid for the specific rider is eligible for tax deduction under Section 80D.
  • Whether you are paying a health insurance premium for the first time or you are paying the renewal premium for continuing your existing health insurance, you can claim deductions in either case.
  • As mentioned earlier, you cannot get benefits on health premiums paid for your brother or sister. You can also not claim benefits for premiums of your father-in-law and mother-in-law. But your spouse, if paying the premiums from her own taxable income, then the benefits can be claimed by your spouse.

A lot of people get confused between Section 80D and very popular Section 80C of the Income Tax Act. Let’s briefly see what is the major difference between the two.

Difference between Section 80D and Section 80C

Section 80C of the Income Tax Act provides deductions of up to Rs 1.5 lakh per year on money spent on various options like life insurance premiums, EPF (& VPF) contributions, PPF savings, NPS, NSC, tax saving ELSS mutual funds, school fee of children, home loan repayment, etc.

(Read more here on how to save tax using Section 80C.)

On the other hand, Section 80D is, in addition, to limit of Section 80C and is meant exclusively for health insurance premiums paid and preventive health checkup, etc. The tax benefit available under Section 80D varies from Rs 25,000 to Rs 1 lakh subject to certain conditions.

I am sure that by now, you would have a clear idea about how to save taxes using health insurance in India.

But let me remind you that whether you get tax benefits or not, health insurance is extremely important.

It’s a must-have for everyone!

Why would anyone want to be penny-wise-pound-foolish and try their lucks? The medical costs are rising and just one visit to a hospital and hospital bill can set you back by a lot of money which will be much higher than the money you can save by avoiding health insurance.

If you are unlucky and end up in a hospital without health insurance, it can erode your hard-earned savings and plunge you in a financial crisis. So do not test your luck for saving just a few thousands.

Luckily in India, you are getting tax benefits on the health insurance premiums you pay.

So you have an added incentive there. You can maximize your tax savings by using health insurance for yourself, family and parents by paying the premiums.

The Section 80D of the Income Tax Act offers one of the best tax-saving benefits in India of up to Rs 1 lakh deduction specifically for premiums paid on the purchase of health insurance or medical insurance or mediclaim products. Do not ignore this tax benefit for your own good.

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Insurance requirements change with Age & Tax Benefits on Life Insurance

You already know why life insurance is important. Atleast for common people like us who still aren’t rich enough to ignore it. After all, being underinsured and dying can be tragic for the dependents.

But one of the major problems that many insurance buyers face is finding out how much life insurance to buy.

There is a simple and methodical way to easily calculate how much life insurance to buy. But most people aren’t interested in putting in the required effort. They want easier answers. They just want someone to come and tell them what to do.

If that wasn’t enough, there are tons of insurance products ranging from term plans, endowment plans, moneyback plans, Ulips and what not. So people don’t know how to actually choose the right insurance product. Among the various options to save taxes, life insurance is also one of the most popular tax saving investments options in India. But still people don’t see insurance in the right perspective.

So let’s try to change the perspective a bit – let’s see how people’s life insurance requirements change with age.

This approach will hopefully provide a different and more relatable perspective on how to decide what the right life insurance cover is.

And no, picking a random figure like Rs 1 crore life insurance is not the right way to buy life insurance. J

So let’s move on… and begin when our hypothetical insurance buyer is a young man beginning his career.

Aged 20 to 25 – Unmarried

Assuming parents aren’t financially dependent on him, there aren’t any financial liabilities or responsibilities as such on the person. It’s possible that there might be an education loan. Insurance is needed only if there is a loan or possibility of parents becoming financially dependent in near future.

How much life insurance is needed?

Buying a small insurance plan (even if it isn’t needed immediately) can be a good idea as the premiums at a young age are very low. If the income is good enough, taking a larger cover is fine too as sooner or later (after marriage), responsibilities will increase and there would be a need to increase the cover anyhow.

Aged 25 to 30 – Married

Since the person is now married, there is a need to protect spouse’s financial interests. And if still not bought, this is the right and urgent time to take life insurance. The dependency logic of parents discussed above still stands. If a car or a home loan are also there, then that should also be accounted for when purchasing insurance.

How much life insurance is needed?

A term plan of up to atleast 10-15 times of annual income + outstanding loans might be a good idea if spouse working too. Being somewhat over-insured at this stage is fine too.

Aged 30 to mid 40s – Married with Kids

Life moves on and now with spouse and kids, there is a real need to protect their financial futures. An insurance cover should be such that it takes care of outstanding loans, regular expenses of the family for atleast 15-20 years, children’s higher education costs, etc. If there is an existing life cover, then it should be topped up or additional life insurance policy should be purchased. 

How much life insurance is needed?

No shortcuts here. To correctly find out how much life cover is needed now, best to do it methodically using the method discussed here.

Aged late 40s to mid 50s: Earning Well + Kids in college

By now, the asset base would have grown substantially. Children would also be more or less on their way to become independent in a few years. Depending on how much existing savings are, it’s possible that there may not even be a need for insurance coverage as the existing assets will be more than sufficient to take care of just one risk – regular expenses of spouse in case of death of the insured person.

But since the insurance premiums won’t be too large when compared to the then income, it might make sense to continue with the existing cover for some more time. If there are any loans, then atleast that amount should be covered. It might also be a good idea to include a buffer amount for future medical expenses (for spouse) in insurance calculations too.

Aged 60 & Beyond

Mostly, the insurance need would not be there as the savings corpus would be much larger than what might be required to fund regular family (spouse’s) expenses in remaining years. Children it is assumed will be independent and not require any financial security.

So ideally, life insurance won’t be required anymore unless there is a need to leave a legacy behind.

As you can see, the life insurance needs of a person vary across different life stages.

Initially, it increases with increase in responsibilities and liabilities. But then eventually, it goes down and reaches a stage where it is not required at all.

Mostly, life insurance is not needed much beyond retirement. This is assuming enough money is saved up.

To summarize, the insurance amount should be big enough, at any given moment, to take care of the present and future financial needs of the dependents. That ways, a big insurance claim would help sort out the financial life of the dependents.

And since it’s possible to purchase a large life insurance cover at a very low premium using term plans, it also makes sense to purchase a large cover (even if it doesn’t seem to be required) early on as premiums would be low. Ofcourse there is the angle of insurance premium affordability. But if income is decent, taking a slightly larger cover is fine too.

Now there are several types of insurance products – or let’s say financial products that provide various levels of insurances. For example – term plans, endowment plans, moneyback plans, Ulips, etc.

And once you have decided the right life insurance cover amount, you have to choose a product that provides insurance. When it comes to high coverage and low premium, nothing beats a term plan. But still, a lot of people feel that they are better served by traditional insurance plans like moneyback, endowment plans, etc.

I have already written about how these products are structured and provide a mix of insurance and investment. You cannot expect to get a very big life cover at a very low premium.

Nevertheless, for a section of the savers’ community, who are conservative and aren’t too clear about the idea of ‘not mixing insurance and investments’, these products have been extremely popular.

Apart from these traditional insurance plans, the unit-linked insurance plans or Ulips are also available. Here again, one single product provides insurance with investments. So naturally, getting a very big cover without paying a large premium is next to impossible.

In Ulips, the sum assured is generally a multiple of annual premium paid and more importantly, you pay much more for the same life cover as compared to a Term plan. For example, a term plan of Rs 1 crore would cost you a few thousands every year, whereas a Ulip providing a cover of Rs 1 crore would cost you several lakhs! Yes…several lakhs!

So if you wish to go with the Ulips but cannot afford very high premiums, chances are that you will end up being under-insured. Which is extremely risky and can be disastrous for the family if you die in between.

Unfortunately, most Indians still buy life insurance to save taxes!

They are normally not concerned about ‘how much sum assured is actually needed’ and instead focus on premiums and taxes they can save.

How much income tax benefit can I get on life insurance premiums? – is the main question for many insurance buyers! J

The premiums that are paid for life insurance policy qualify for a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income tax Act.

But if the sum assured of the policy is less than 10 times the annual premium, then the buyer will get a deduction on the premium of only up to 10% of the sum assured.

So if let’s say you buy an insurance policy of sum assured Rs 5 lakh at an annual premium of Rs 63,000, then only the 10% of the sum assured, i.e. Rs 50,000 will be tax deductible and not full Rs 63,000. So any premium that is in excess of the limit of 10% of Sum Assured) won’t qualify for the tax deduction under section 80C.

This is important because a lot of traditional plans like endowment, moneyback policies or Ulips have high premiums in comparison to sum assured. So one must be careful in this regard.

This was about tax saving while paying the premiums. But what about taxes on maturity or amount paid on death?

This is an important aspect that people forget about as they are blinded by their short-term thinking and the need to immediately gratify their urge to save some quick taxes.

Most people feel that the money they (or nominees) get in later years, on maturity or death from insurance policies is tax-free. This is true to an extent. But there is a small possibility that it might not be tax-free. Yes. It’s possible.

The death benefit, i.e. money paid to the nominee on death of policyholder is exempt from taxes.

But in case of survival of the policy holder, the maturity amount may not necessarily be tax-free. As per Section 10(10D) of the Income tax Act, if the premium paid is greater than 10% of the Sum Assured, then the maturity amount is taxable. So if the premium you pay is not more than 10% of the sum assured, then you are safe. Else the amount will be taxed on maturity.

This is why when you are buying life insurance, make sure you understand and more importantly, don’t ignore the taxation of the policy on maturity (as per exemption condition stated in Section 10(10D) of the IT Act.

The actual income tax benefit available to you under Section 80C or Section 10(10D) will vary for different policies. So it makes sense to spend some time to understand the income tax benefits on insurance plans, income tax benefits on term plans, income tax benefits on endowment plans, income tax benefits on single premium plans, income tax benefits on money back policies before you sign on the dotted line.

If you wish to really know how to buy the right life insurance policy, then first you need to clear your head about what life insurance’s real purpose is.

It is not there for tax saving. It is there to provide sufficient money to dependents to live their life comfortably and achieve their real life goals in your absence.

And there are several varieties of life insurance products that people can choose from ranging from simple term plans to endowment policies to Ulips. The ideal life insurance strategy for a person will depend on what stage they are in life, their financial goals, outstanding liabilities and responsibilities.

So make sure that you don’t pick random numbers to find the life insurance amount you need and chose the right insurance policy as soon as possible.

Remember, planning your insurance portfolio (both life and health) properly is very important if you don’t want to be at the mercy of luck in your life.

Yes. Buying Health Insurance protects Your Wealth, not Health.

For the past few weeks, I have been doing quite a lot of research on finding the Perfect Health Insurance Policy. And my research has led me to one simple conclusion.

That there is no such thing as the Perfect health insurance policy. Ofcourse there are good policies. And then, there are few great policies too. But there is no Perfect policy out there.

So should I (or for that matter anyone) avoid buying one, just because I am not able to find the perfect policy?

The answer is a big No!

It is the same as the idea that one should invest, even if you cannot beat the stock markets.

 
Health Insurance Protects Wealth
 
Now what exactly is the ‘Perfect’ in this Perfect Health Insurance Policy?

Atleast for me, a perfect policy would cover all the diseases (including critical ones), should offer unlimited renewals, have hassle-free claims procedure, no co-pay clauses, no hidden clauses which I might easily overlook, no caps on room rent, fees or anything, no disease-level or category-level caps, provide lump-sum amounts in case of critical diseases, etc. And ofcourse, it should not be very costly.

Though I can easily get into my preaching-mode and say that health insurance is not an investment, the fact is that I will still love to buy a policy that is cheap and offers me the world. The money I can save because of the low cost of the so-called perfect policy can be redirected towards investing for the long term.

By the way just to put it on record, I do believe that health insurance should not be treated as an investment or a tax saving instrument. Period. You might still get tax benefits for buying health insurance in India, but that should not be the primary reason to purchase it.

Now you might have already found a policy that meets all the above-mentioned criteria of a perfect policy. But I am yet to find my perfect policy. Or maybe it exists and my definition of ‘not-very-costly’ is different from other people. In any case, I have moved on and purchased a policy which might not be perfect, but is still good enough.

The point that I am trying to make is that even if a policy passes on 7 of the 10 parameters you set, then you should buy it. Don’t wait for too long and try your luck.

This brings me to the topic of the post.

How can health insurance protect your wealth? I mean, isn’t health insurance something which one buys for health?

Yes it is.

Before we move forward with our discussion, please think and answer the following 3 questions:

Q1: Will buying a health insurance help you stay healthy?

Q2: Will not buying a health insurance, result in your poor health?

Q3: If not for health, then why am I even bothered about this whole concept of health insurance?

Got it?

I am sure you have the right answers. But for the sake of making this post look complete, I will tell you the answers to first two questions.

And the answer is NO for both.

Buying a health insurance will not help you stay healthy.

Not buying a health insurance, will not make you unhealthy.

Wasn’t that obvious?

And now when you think of it again, it might seem strange that you never buy health insurance for good health. And to be brutally honest, majority of people buy it for tax benefits!!

But I am telling you…. One visit to a hospital without health insurance and you are sure to realize the importance of health insurance! I have seen it happening and it can be ugly. Really ugly.

So…

What exactly is this Health Insurance?

Simply speaking, it is an insurance coverage that covers the cost of an insured person’s medical and surgical expenses. So when you buy a health insurance policy, you are paying a small premium now, so that you don’t have to pay large hospital bills (if any) in future.

That’s it.

Health Insurance is neither a tax-saving product nor an investment. It is just a contractual promise by the health insurer, to pay a part or all of your hospital bills in case there is a need. Though there are many clauses and terms and conditions that govern this contract, we can ignore them for the sake of keeping this discussion simple.

So the whole point is that you don’t want to pay the large hospital bills. And rightly so. Who wants to pay them? No one.

But let us suppose that for some reasons, you don’t buy health insurance. And unfortunately, you get hospitalized and the bill to be paid is Rs 10 lacs. Now your health is not insured. So there is no one to pay the bill, except you. So you end up paying the bill by liquidating fixed deposits, selling shares, gold, etc.

The result is that you lose a major part of your wealth that you had accumulated.

Had you had a health insurance policy, you could have easily saved your wealth from being used up in paying medical bills!

Now think…

 

Doesn’t buying Health Insurance help protect your wealth?

It does. No doubt about that.

Let’s take another example to drill down this concept.

Now once again, you get hospitalized and the bill is Rs 10 lacs. But in this scenario, you had a health plan with a coverage of Rs 3 lacs. So you end up paying the remaining Rs 7 lacs.

Better than the first scenario. But it still makes a dent in your wealth.

Now even after getting it right, i.e. having bought a health insurance policy, you end up getting screwed. And that is because you had low health coverage. The reason can be a lack of adequate funds on your part, or intentional decision to save some money by taking low premium plans offering lower coverage.

Whatever the case may be, you end up getting screwed.

I really hope that you understand the importance of having health insurance in protecting your get-rich-plans.

 

In reality, it’s all linked. You. Your Health. Your Wealth. Everything.

You save and invest to get rich. But you try to cut corners by saving a few thousands and don’t buy health insurance. Bad luck strikes. You get hospitalized. You pay the bills by selling your assets. All your savings are gone. Your get rich plan is screwed. You start saving and investing again. You buy health insurance this time. But you have lost out on the benefits of compounding, because you sold all your original assets. You can never be as rich as you could have been in first place. And that is just because you saved a few thousands by not buying a health insurance in first place.

There are quite a lot of points which come to my mind about health insurance and various scenarios linked to it. For example, what should you do if your health is already covered by your employer’s health plan, whether your policy can help you beat inflation in medical costs or not, how to buy health insurance if you don’t have a lot of surplus funds, etc. But I guess its best to dedicate individual posts to atleast a few of these thoughts and scenarios, instead of clubbing all of them in just one post. So I will be doing such posts soon.



Tell me Your Financial Problems, Questions & Concerns. I want to write more about Your problems & Help You with solutions.

In recent times, I have been making conscious efforts to write more on topics which are useful for readers and not just for me. And I get numerous mails from readers asking me to help them out with following issues:
  • How (& why) to switch from safe FDs to Mutual funds?
  • How to get rid of complex insurance products and what to do next?
  • What is the best combination of safe savings (FDs, NSCs) and risky investments (Stocks, MFs)?
  • Should I buy a house or continue staying on rent?
  • Should I invest in MF when my time horizon is less than 5 years or even 3 years?
  • I have just started earning. How should I manage my cashflows?
  • Should I pay my loans and invest simultaneously?
  • Why do I end up with no money at the end of every month?
  • How to rationalize my portfolio of 30+ mutual fund schemes!
And that’s not all. I even get questions like these:

Now its really tough to reply to each one of these mails individually. There are just too many and each and every one requires, a lot more information about the individual’s finances, before anything can be said.
So I have decided to do something, which is better for all of us.
I am floating a small survey, where you can share your financial problems / questions / confusions. I will then collate all these points and start writing about as many of them as possible.
This will serve two purposes:
  • I will do the research and try to come up with a solution to the problem. I will do a post about the issue. It will help me, as well as you in getting a different perspective (if not the final solution).
  • Once the post is published, the approach can be questioned / debated and streamlined basis feedbacks and comments received from other readers.
So go ahead and click the button below. Don’t worry…it’s a short 2-5 minute survey. And it will also help you in gauging your financial fitness.

Note – You can choose not to disclose your identity if you feel like.
If the survey does not open on clicking the button above, please click here.

I plan to write on all the topics which I can gather from the requests I receive. So please share as many queries and questions as possible.
 



4 Common Mistakes to Avoid while Buying Your Term Insurance Plan

I have always been of the view that it’s wiser to keep investments separate from insurance. And that means sticking only to plain-vanilla term insurance plans instead of moneyback endowment policies.

Buying term insurance is very important to fulfil your and your family’s protection needs. Such a plan provides coverage for a specified period, thus giving you financial security and proving to be extremely useful in cases of emergency. But even when you have decided to buy a term plan, it is essential to choose the correct insurance plan for them. Some of the most common mistakes that people make and you should avoid are:

1 – Selecting the cheapest policy

Several potential policyholders think that the cheapest policy will save their money while giving them the required financial security. They browse through a lot of policies and choose the one that carries minimum charges.

Opting for the cheapest term insurance plan is not always the smartest idea. It is important to know that when you select such a policy, you might lose out on some vital features. Factors like flexibility, length of guarantee period, convertibility rights, available riders and the company’s financial standing are crucial points of consideration when selecting a policy.

Choose a policy with more worth than one with lower cost alone. You can easily compare term insurance policies over the Internet. You will soon realize that by paying just a little more, you may get a range of useful features.

2 – Failing to get proper coverage

Review your family’s needs taking into consideration the age, lifestyle and requirements of each member. Also review your annual income including tax payments. These should give you a fair idea of how much term insurance cover you need.

3 – Ignoring the tenure

Determining the period for which you require the coverage is very important. The term of the plan should be sufficient enough for your needs. Choose the tenure according to your age. For instance, if you are in your 20s then you might require a longer tenure than someone who is in his 60s.

4 – Taking a break between policies

Many policyholders realise they made a mistake after choosing a policy. In such a situation, they drop the current policy and later opt for a new plan or a new insurance provider. This could prove dangerous – what if they encountered an emergency in between policies Always choose a new term plan first and then drop the earlier one. This will ensure that you don’t lose coverage at any time.

If you make any of these mistakes while choosing a term insurance, your plan would prove futile to give you protection and may rather act as a financial burden to you. To avoid facing such problems, stay wary of these common mistakes. Choose the perfect term insurance plan and protect your family well.



My 7 Resolutions for 2015 – No I Don’t Only Want to Save & Invest. I Want to Spend & Read too!

In few days, we will enter a new year. And I am sure that most of you would be making resolutions for 2015 right now. A study says that 93% of new-year resolutions die by 23rd February. And if these are financial resolutions, then 96% die by 3rd February.

No. Don’t worry. There is no such study. I just made that up. 🙂

I know I am really bad at keeping my new year resolutions. So I won’t be harsh on myself if I am not able to keep them. But still, these are my 7 resolutions for 2015:


  • I will once again try to surrender an endowment-insurance policy, which an uncle of somebody sold me and I can’t surrender it, because of my family’s connection with that somebody’s uncle. 🙂


  • I will increase my Emergency Fund to cover 6 months worth of my family’s expenses. Currently its at a risky 4 months. 🙁


  • I will save atleast 5% of my take-home salary in my Travel-Fund. I will push my wife to do it too. 🙂 We love travelling and that requires planning and money. Apart from investing, I also rant (at times) about my travels on TripAdvisor. You can read a few here.




  • I will use my Market Crash Fund (with courage)… if markets go down by 15%-20% this year.


That’s all. I wish you all a very happy and prosperous New Year.



I personally want markets to correct in 2015…and that is because like previous few years, I will continue to be a net buyer of stocks even this year. But if you need some of the money (you invested earlier) in 2015, then I will pray for it to be a bullish year for you. I will wait and buy shares in 2016 🙂

Once again, have a happy and prosperous new year. Will say Hi to all of you in 2015 now.



292 Words to Change Your Financial Life…Today!!

This post is inspired by Rohit’s brilliant poston how to manage your money. I am borrowing few of his ideas & adding a few myself.

  • Never depend on just one source of income.
  • Save atleast 20% of what you earn from all sources.
  • Buy a plain Term Life Insurance of Sum Assured amount equal to atleast 30 times your annual expenses.
  • Buy a health insurance for yourself and those who depend on you.
  • Create an Emergency Fund equal to 6 months worth of your expenses. Till the time you have not created such a fund, don’t think about investing or buying luxury items.
  • Start Monthly Recurring Deposits of 6 months. At the end of 6 months, use the maturity amount to create a FD for 1 year. Repeat every 6 months. To start with, use 20% of your savings (in step 2) to start Recurring Deposits.
  • Use the remaining 50% of your monthly savings to invest in Stock Markets via SIP in Index Funds or well-established, diversified mutual funds. Do not go for sector specific funds.
  • Use remaining 30% of your monthly funds to create a Market Crash Fund (use another RD). Keep saving money in it till the market crashes. When it does, buy quality stocks at low prices. To know which are quality stocks worth buying in market crashes…

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  • Gold, silver and precious stones are good for social or religious requirements. These are not investments. These are insurances against bad times. (To understand this point, just think for a moment that will you sell gold or silver in case prices go up? The answer would be a No. You sell these only when everything else is lost. Period.)
  • And always remember :

          Investment & Insurance are different things.
          Investment & Savings are different things
          Do not consider Insurance as Investment or Saving.

Above might work for most of us and does not require any complex rocket science to be implemented.

So go on….say good bye to your brokers and financial advisors. 🙂

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The Perfect Business

The perfect business. Is there such a thing at all?

Do you know of a business which might qualify as a perfect business?


Oil? FMCG? Trading?

No… these may be good businesses, but there is one which is much better.

And that business is…. Insurance.

insurance business
The Best Business to be in??


You might not subscribe to our views and say that an insurer has to pay ‘Sum Assured’ to everyone when they die. And it is right to assume that everyone does die. 🙂 You are right. But there is another thing which forms the basis of life insurnce industry. Everyone does not die together (unless and until there is an extinction-level natural calamity or something similar).

But why is it that we consider insurance to be a really good business?

Assuming that an insurance company has 1000 customers (In reality, an insurer like LIC has crores of customers). Now suppose that every year, each of the customer pays a premium of 10,000 rupees. Now these customer (generally) don’t expect to recieve anything in return, till the time they are alive.

Now, if you think rationally, what insurance company is getting here is interest free loan from its customers!! Agreed that this money has to be returned when the customer dies. But as already said, everyone does not plan to die together. So most of the people will remain alive for most of their policy tenure. The insurance company keeps getting this money every year, for decades. In between, a few people might die here or there. The dependents of these people would be paid their dues and life would move on. But, most people prefer not to buy plain term insurances and go for seemingly more customer friendly policies like moneyback and endowment ones. But, if you do a simple back of the envelope calculation, you would understand that such customer friendly poloicies are only friendly for agents and insurance companies. These are the policies which effectively give returns between 4-6% in case you survive the policy tenure. But we will take this issue in another post.

So if we had to put it plainly, an insurance business keeps collecting premiums from its customers, who in return get a promise that their family would be taken care of in case they are not there. But insurance company uses this money to earn hadnsome returns (even if you consider 8.5%, it is handsome when compared to above mentioned 4-6%). Now, these premiums are interest free deposits which the company gets. Customers wont ask for it till the time they are alive. You just need to have some liquidity to pay of for few customer deaths. That anyways can be funded by new money being collected from new polcies. There is no need to liquidate the existing investments. Also, the insurance company has an enormous and ever-growing pool of funds which can be use for purchasing more money making assets.

Now tell us, which other business is so perfect? 🙂

Very little capital expenditure. People hand you over their money. You dont have to pay interest on it. You can keep and invest that money for decades. When there is a need to return the money, new funds coming in continously, can be diverted to fulfill such requirements. No need to liquidate you older money-making assets. Perfect. 🙂

And if you have had a little interest in Warren Buffett’s life, you would know how he used this insurance business to become one of the richest person on earth. He once remarked –
“Berkshire Hathaway’s insurance operations deliver costless capital that funds myriad other opportunities. This business produces ‘float’ – money that doesn’t belong to us, but that we get to invest. The float comes into being because insurers get to collect premiums long before claims have to be paid. Its a liability without due dates attached to it.”
Perfect. Isn’t it?
Do you know of other such near-perfect businesses??


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