Cover and corpus

MARKET-LINKED HEALTH plans have advantages, but can hurt during downturns. This one is for the indisciplined investor.

Two months before Devendra Vijay’s wedding, his mother was detected with cancer. Despite having a health cover, Vijay lost all the money saved since he started working six years earlier. The Rs 3 lakh insurance could only cover half of his mother’s medical expenses.

The first advice of any financial adviser would be to have a contingency fund to take care of emergency medical expenses. As in the case of Vijay, the rising cost of health can exhaust your cover if a critical illness strikes. In addition, a health cover never lasts for the entire life.

ICICI Prudential Life Insurance has launched a policy, Health Saver, to fill the two gaps. The product not only takes care of your insurance needs but also allows you to build a corpus to cater to your health needs beyond the mediclaim. This unit-linked insurance plan (Ulip) uses part of your money to give you a regular health cover and invests the rest to create an amount that the insured can use for any other medical expense, even for something as insignificant as common cold and fever, which is classified under the outpatient department (OPD).

On the face of it, investment advisers do appreciate the concept. "This product can work for the ones who cannot invest in a disciplined manner," said Suresh Sadagopan, a certified financial planner (CFP) and director of Ladder 7 Financial Advisors. But you end up paying high charges to create the corpus, as Ulips are an expensive investment vehicle.

Let’s look at the product in detail:

ENTRY/EXIT AGE
A person may buy this policy for the first time till age 55. But this is also among the very few policies from private insurance companies that allow renewal up to the age of 75. Public sector companies renew products till the person attains 90 years of age.

Cover
The sum insured available is Rs 2 lakh, Rs 3 lakh, Rs 5 lakh, Rs 7 lakh and Rs 10 lakh.

PREMIUM
This product also has an option of covering the family, too, excluding parents. An annual premium for an individual below 40 years is Rs 10,000 and Rs 15,000 for the age bracket of 40-55 years. For a family floater below Rs 5 lakh sum insured, the charges are Rs 15,000, if the eldest is below 40 years and Rs 25,000 for the rest. The premium for any cover above Rs 5 lakh under family floater is Rs 20,000 if the applicant is below 40 years and Rs 30,000 for others.

HOSPITALISATION BENEFITS
This is a comprehensive policy and compares with any other health insurance in terms of hospitalisation coverage. But it has a sub-limit on room charges, which is 1 per cent of the sum assured. There are additional caps for procedures like cataract (claim of up to Rs 20,000).

HEALTH FUND
For investment purposes, the customer has two choices. The first option is called life cycle-based portfolio strategy. Here, ICICI Pru will manage funds as the age of the insured increases. The initial allocation will be more towards equity in the initial years and debt in the later years.

In the second option, the customer may choose from seven different funds and the amount to be allocated to each. These funds range from all-equity to all-debt funds.

But not even a single paisa may be withdrawn from this investment for the first three years. In the fourth and fifth year, the policyholder can claim 20 per cent. From the sixth to the tenth year, 50 per cent is allowed to be withdrawn. Only from the 11th year onwards may the investor draw all the money.

But withdrawal from the corpus is allowed only for medical needs and the person will need to produce medical bills.

The selling point is the way the company has designed the product, according to insurance agents. "Though part of the money is being used for investments, the policyholder can still claim the deductions under Section 80D of the Income Tax Act. This is in addition to the Rs 1 lakh deduction allowed under Section 80C."

But this benefit is not available if the person opts for a family floater with a cover of more than Rs 5 lakh, as the premium is much more than Rs 15,000, which is the maximum that can be claimed as deduction under Section 80D.

Also, the costs associated with Ulip products eat into the corpus. Take an example of a person aged 35 years of age, who opts for an individual health cover and pays a premium of Rs 22,060. In the first year, the policy allocation charge is 20 per cent (Rs 4,412), annual health insurance will be charged at Rs 3,557, policy administration is charged at Rs 794 and fund management fees will be 179. The final amount that will be invested after all the deductions will be Rs 11,074.55.

Obviously, some major charges, such as premium allocation, will decrease in subsequent years. From the 11th year onwards, it will be nil. But at the same time, the premium charged to cover health will rise with age.

CONCLUSION
Investment advisers suggest it is always better not to mix insurance with investment. "The performance of the fund is linked to the market and would fluctuate as per market conditions. When someone buys insurance, it is to get a fixed coverage of an unforeseen event," notes Gaurav Mashruwala, CFP.

One could perhaps get more out of one’s money by buying a separate insurance product and invest in a good mutual fund. "You can easily get health covers that are 20-30 per cent cheaper than what is charged in this policy," says Rahul Aggarwal, CEO, Optima Insurance Brokers.