Health insurance needs PROPER DIAGNOSIS

IN ORDER TO ENSURE UNIVERSAL access to quality healthcare, the government has been making efforts for increasing health insurance penetration. The Insurance Regulatory and Development Authority (IRDA) recently relaxed norms for health insurance companies and reduced the reserve requirements. The IRDA has already licensed many third party administrators (TPAs) for faster and easier claim settlements and for providing cashless hospitalisation facility. Further, the FDI cap in the insurance sector is also set to be increased from 26% to 49% through the second insurance bill.

Insurers are looking forward to tap the vast and fast-growing Indian healthcare market. In fact, many insurance companies have begun to offer health insurance. However, the path ahead is not so smooth for health insurers in a country like India. The health insurance industry in India at present is a loss-making one. Though the private sector health insurance is growing at 40% annually, the level of coverage is still very low and has not penetrated rural and semi-urban areas significantly.

One of the biggest challenges — and an opportunity too — for insurance companies is to convert the huge out-of-pocket health spending (72% of the total health expenditure and 98% of the total private health expenditure) into a formal risk pooling mechanism which people have never been exposed to before. Such a conversion process is constrained due to several factors, among them the absence of reliable morbidity and health expenditure data. Also important, from a demand-side perspective, is the low level of insurance awareness, poor trust in insurance companies over reimbursement, and absence of regular and adequate income to make regular premium payment.

The process also involves tackling two important forms of market failures that are making insurers reluctant to sell health insurance — overutilisation of healthcare due to insurance coverage, and mostly the relatively unhealthy people buying insurance. One may wonder if these are not the common problems faced by insurers all over the world. However, the magnitude of these problems may be severe in India.

Perhaps, both the insured clients and healthcare providers have an incentive for over-utilisation and overprovision of healthcare, adding to the bill of insurance company. Further, at present, the healthcare insurance schemes in India are mainly limited to hospitalisation, forcing the insured persons to be admitted to hospitals even for those illness requiring only out-patient care. One solution can be including the out-patient treatment as well in the insurance package, but the resulting premium will not be affordable for majority of the Indians.

On the supply side, there are hardly any pricing criteria for healthcare services and no benchmark as to how much care is required by patients for each category of illness. Further, healthcare cost inflation is sure to rise further, All these will force insurance company to increase the premium, thus making health insurance a costlier proposition.

One possible way of controlling the over-utilisation of healthcare due to insurance coverage could be the use of co-insurance and deductibles so that insured clients also have to bear a part of his total incurred health expenditure. But this will be very hard to introduce as already the present insurance schemes cover only a part of the health expenditure and, therefore, any attempt to increase the out-of-pocket healthcare burden of insured clients would make health insurance a less attractive health-financing strategy.

In India, a majority of those buying insurance do it for investment purposes and not as an insurance product. But the health insurance schemes are without the saving component (being purely of risk pooling). This could dissuade many from getting insured. In such a situation, it is obvious that only those likely to require healthcare are interested in buying health insurance.

It is time insurance companies applied appropriate and innovative marketing strategies to overcome all these hurdles by taking the Indian reality into account.

SUKUMAR VELLAKKAL, is fellow at ICRIER, New Delhi

Investing wisely under 80C will help save taxes

FOR many, Section 80C of the Income Tax Act forms the cornerstone of their tax saving strategy. The section incorporates tax breaks for so many varied activities that our lawmakers wish to encourage that it has a different connotation for different age groups or different income levels. The tax breaks for long-term investments range from zero risk investments like PPF to risky options like equity-linked savings scheme (ELSS). The section encourages spending for insurance protection and it also provides relief for those spending on their dependents. Therefore, there is no ‘one-size-fitsall’ formula for this Section. The only way to go about planning taxes is to define your age and income group and choose the appropriate options.

AGE: 25 YEARS
Gross taxable income: Rs 3,00,000

If an individual, who earns a taxable annual income of Rs 3 lakh with the mandatory provident fund deduction of Rs 20,000 per year, does not take any tax-saving measures except paying a life insurance premium of Rs 10,000, he might have to shell out Rs 12,360 in taxes. But, if he invests Rs 1 lakh under section 80C and buys a health cover, entailing a premium of Rs 10,000, he can bring down his tax payable to Rs 4,120. In the case of women, the tax liability will be merely Rs 1,030, since the threshold exemption limit for women is Rs 1,80,000. This apart, if she is repaying an education loan, the tax liability might be nil as the entire interest amount paid on the loan is exempt under section 80E. Also, if the individual does not have any dependents, it would be prudent to reconsider the need for life insurance. While many financial planners recommend ELSS for people in this age group, others contend that even public provident fund (PPF) is an attractive avenue. “Our recommendation for this category is that they should invest 50% in ELSS and 50% in PPF,” said financial planner Amar Pandit.

AGE: 30 YEARS
Gross taxable income: Rs 5,00,000

If an individual’s taxable income is around Rs 5 lakh per annum, he will fall in the next bracket — the one attracting a tax rate of 20% (Assumptions: PF contribution of Rs 36,000 and life insurance premium of Rs 10,000). However, proper tax planning could result in considerable savings. Against paying a tax of Rs 47,174 before investing in instruments under 80C and paying a health insurance premium of Rs 15,000, he will end up paying just Rs 32,960. Since most individuals may not have to shoulder any major responsibilities at this age, again, a combination of ELSS and PPF could be a good bet. “A point to be borne in mind here is that all investment decisions need to be taken after evaluating individual needs and risk profile, and not merely on the basis of age and income level,” pointed out financial planner Kartik Jhaveri.

AGE: 35 YEARS
Gross taxable income: Rs 7,00,000

Here, if an individual (married with kids) has availed of a home loan this year, the opportunities for maximising the tax breaks are immense. If he is servicing a home loan of Rs 40 lakh, he can claim deductions on interest and principal repaid. In fact, the amount of principal repaid itself will help in exhausting the entire Rs 1 lakh limit. Besides, the deduction of Rs 1,50,000 for interest paid on home loan will lower his tax liability further. The combined impact of all deductions will be huge: from paying a tax of Rs 96,820 — prior to availing of these exemptions, the tax payable will come down to Rs 43,260. In case he has not opted for a home loan, he can claim deductions under section 80C for tuition fee paid for his children’s education.

AGE: 40 YEARS
Gross taxable income: Rs 10,00,000

At these income levels, the tax-saving options are almost similar to the Rs 7,00,000 bracket. A home loan repayment would circumvent the need for making any investments under section 80C. Exemptions claimed under various sections (80C, 80D and 24) would result in the tax payable decreasing from Rs 1,83,340 to Rs 1,29,265. If the individual has started making contribution to PPF since the age 25, the mandatory 15-year lock-in tenure would have come to an end. Under these circumstances, if he is not repaying his home loan and consequently, is scouting for avenues to invest under section 80C, he can consider extending the PPF tenure for another five years. For senior citizens, the income up to Rs 2,25,000 per annum is exempt from tax. For this category of assessees, experts recommend avoiding instruments entailing a prolonged lock-in period. However, the 9% senior citizens scheme and post office time deposits (investments under which are deductible under section 80C) are recommended.

How much insurance should I buy?

Towards the end of every financial year, tax payers look at ways to reduce their income tax liability. Many end up spreading their investments across various tax saving schemes and end up buying some life insurance as well. While buying the focus is more often than not on how much money to allocated towards the premium rather than the sum assured.

But a life insurance policy can be relevant over a long-period of time only if there is a scientific approach in determining the sum insured. Fortunately for buyers, this approach can be distilled into simple to follow thumb rules while deciding on the extent of cover.

INCOME MULTIPLE RULE

You should buy life insurance cover for a sum which is equal to a certain multiple of your annual net income. The multiples are given in the table. Income here refers to net income, which means, the residue of your salary after paying for your personal expenditures. This method is one of the simplest methods of ascertaining your need for life insurance.

For example — Rajan, a 30 year old shopkeeper who earns Rs
25,000 per month and spends Rs 2,500 towards personal expenditure per month, should buy life insurance worth ( (25000-2500)*12) *12 = Rs 32,40,000 on the lower side.

PREMIUM AS % OF INCOME

For those who have to prioritise their spending, another way to budget for insurance is to use the benchmark allocating 6% of gross income towards buying life protection. To this 6% an additional 1% should be added for each dependants. A point to be noted is that life protection here refers to pure term insurance – policies which provide only death cover without any savings element. There are ULIPs and other investment plans with high premium but only the money going toward premium should be taken into account.

In the above example, if we assume that Rajan has two dependants on him, then the premium payable towards life insurance is [ (6% * 25000) + (2 * 1% * 25000)] *12 = Rs 24000. How much insurance cover Rajan gets would depend on the cost of insurance. Companies often buy group insurance cover for employees using this yardstick.
   The above two methods are easy to use as there are no complex computations and they bring forth a decent estimate of your need. Those who want to be precise can use methods such as human life value (HLV), capital retention or capital estimation to ascertain their insurance needs. The biggest flaw with the simpler methods is they do not take into situations specific to individuals and variables such as inflation.

Human life value is a better method than the rules of thumb. An individual’s HLV is equal to a sum which can generate his annual income after subtracting the expenses incurred by him for personal consumption over his working life at an expected rate of interest. One can also include variables such as inflation and increase in income to reach a precise value. Many life insurance companies and financial planning websites offer calculators to that effect. Whatever be the tool, there is a need to clearly understand the need of insurance and ascertain the quantum. Go for an amount that would fetch you peace of mind and more important you can afford it, not just in first year, but for the entire term of the policy.