Personal Accident Cover

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When we take the newspaper in the morning, we see at least two pieces on road accidents, everyday. Apart from the mental trauma, such incidents can lead to terrible financial trauma. Therefore, one should be prepared to compensate such losses, if they arise as medical and hospital costs are very high. And most individuals do not have a plan if faced with this trauma. A study suggested premiums from personal accident covers account for less than three per cent of the total market premiums of ~30,000 crore as on 2008-09. This, when it is a must for everyone and is available at affordable premium. One reason for individuals not buying this cover is that it neither offers any investment opportunities nor helps save taxes. Individuals mostly cover the risk of death by buying life insurance. However, the same is not true when it comes to covering the risk of an accident. Such individuals may face the risk of getting disabled and losing their capability to be actively employed. Not only would the recurring medical costs keep increasing, the loss of income earning opportunity would also loom high. To illustrate, a 35-year old individual, earning approximately ~15 lakh per annum, today on an average should have a life insurance cover worth anywhere between ~50 lakh to ~1 crore. And, it is also important to cover the risk of loss in income due to an accident. Considering a life expectancy of another 25 years after meeting with an accident at the said age, the individual would require approximately ~90 lakh to provide for a monthly expense of ~30,000. Further, considering increased medical expenditure of ~15,000 a month, the corpus required would add up to another ~45 lakh. No support would be received from the life insurance covers in such an eventuality and the gap will need to self-funded. What is covered? These policies cover the risk of death / disability arising due to an accident. Accident, for this purpose, means unforeseen and unexpected events caused by external, violent, visible means and that led to physical bodily injury. As a corollary, bodily injury or death arising solely and directly as a result of such events are settled under this policy. How much cover should be bought? In case of life insurance contracts, the underwriters determine the maximum insurance cover that can be granted to an individual. In case of personal accident policies, the extent of coverage is based on the current level of income of the policy proposer (one who has proposed to buy the policy). Across companies, the maximum coverage varies anywhere between 6-10 times of the annual income of an individual, as per the income tax returns records. Individuals, proposing to take a personal accident cover, should also note that this policy is an annual renewable policy. And at every renewal supporting income documents need to be submitted to justify the cover taken. If required, you could increase your cover as well at renewal, provided your income supports it and you can pay a higher premium. It is also preferable that individuals have a standalone cover for personal accident over and above a rider that he/she might have added to his/her life insurance policies. From the insurance company's perspective, as long as the bodily injury or the death is a direct result of an accident, fitting well as per the definition, the claim procedures are also quite simple. With added benefits, now possible, the traditional personal accident cover has come along way and definitely merits a place in one's insurance portfolio. Benefits under the policy Death due to an accident Permanent and/or total disability in an accident Loss of both limbs / one hand and one foot / loss of limbs and eyes / complete loss of eyesight, speech Any permanent but partial disability (subject to limits) Temporary and total disablement - Fixed sum will be paid (based on the sum assured), weekly for a fixed tenure Additional benefits: With a number of private players entering the insurance space, a lot of innovative benefits are now offered under this cover along with the traditional cover. Here are some of the extra benefits that are provided by many general insurers Education benefit: The policy will bear the education cost of maximum two dependent children, up to the age of 23, subject to limits. Employment benefits: The policy provides financial compensation up to a specified limit in the event of loss of employment of the insured following an accident resulting in loss of limbs/eyes or permanent total disability. Ambulance benefits: If the insured has used an ambulance to reach a hospital, the policy will pay the necessary charges up to a specified limit. Funeral expenses: In case of accidental death, funeral expenses can also be covered Hospital / Daily cash benefits: The policy provides payment of a fixed allowance on a daily basis on hospitalisation in India for accidental bodily injury, if the hospitalisation exceeds a specified number of days. The rate of allowance and the minimum period of hospitalisation qualifying for payment of this allowance would depend on the plan. Other benefits: The policy also covers expenses for transportation of dead body, reimbursement of medical expenses incurred for treatment following an accident, cost of supporting items used like crutches, wheelchair, artificial limbs are also reimbursed.

Move surplus to high growth options

The annual ceiling on investment in the Public Provident Fund (PPF) scheme has been increased to ~1 lakh from ~70,000. Also, the interest rate has been hiked to 8.6 per cent from the present 8 per cent. While a tax free 8.6 per cent annually is good news for investors, this rate is applicable only for the current financial year. In other words, the rate of interest on PPF is going to be aligned with the rate on government securities (G-Sec), of similar maturity, with a spread of 25 basis points (bps). Hundred basis point is equal to one per cent.   In other words, the rate of interest on PPF, is no longer fixed. It is now floating or market linked. It's going to change every year and the applicable rate will be notified in the beginning of each financial year.   Needless to say, the changes brought about are extremely significant for investors. So far, long term instruments like PPF were largely being used to build one's retirement corpus or to meet other long-term financial goals such as marriage and education of children. Till now, it was easier to plan with instruments like PPF, because there was an element of certainty involved - a specific amount growing at a specified interest rate for a specific number of years will compound to reach a specific goal. Now, the 'growth rate' will not be specified and hence investors will require some recalibration in the financial plan.   A case in point is the Mehta family. Mr Mehta and his wife, in their mid-thirties, are parents to a three-year old daughter. Their combined income is ~1 lakh a month. After catering to household and other expenses like home loan repayment, they save around ~26,000. One of their key goals is to provide for their daughter's education and marriage. For this, a PPF account in the child's name. As the child is only three, the need for spending on higher education would arise 18-20 years later.   Planning wise, upon the expiry of the initial 15 years, the Mehtas plan to extend contributions by another five years. At the rate of 8 per cent a year, till now the Mehtas were assured of a sum of ~32 lakh, 20 years hence. But now, as the interest rate will be reset each year, the maturity value of the PPF corpus 20 years from now could be lesser than ~32 lakh or could be more. It all depends upon the interest rate movement over the next 20 years or so.   Due uncertain interest rates on PPF, the Mehtas may need to contribute to some other high growth instrument, which may help them if returns on PPF fail. And given that education cost is sky rocketing, they will be better off with some extra contribution towards equity funds - diversified or index. With time in hand, they can easily fulfil their monetary needs 20 years later.   In case of 42-year old Mr Shah, PPF was a part of his retirement planning. Shah is a senior manager in a pharmaceutical company and his wife is a home maker. For his retirement corpus, Shah planned to augment his provident fund (PF) proceeds with PPF. He recently also started a PPF account in his wife's name where he contributes ~70,000 a year. His plan was to primarily use his PF proceeds during retirement and have the PPF balance as reserve.   As the PPF account can be extended beyond its initial term, Shah's plan would have converted his wife's PPF into what would really become a five year fixed deposit, the funds of which were accessible at any given time. Assuming that PPF account can be continued for 25 years, the Shahs would have had a sum of over ~51 lakh at their disposal (apart from the PF proceeds) during their retirement. To put it simply, the PPF money was meant as a retirement safety net.   Now since the structure of PPF hasn't been changed, the Shahs can still carry out their plan of keeping on extending the PPF account. However, they are faced with the same dilemma as the Mehtas. They are no longer sure as to how much they would manage to salt away come the time. Will it still be over half a crore? Or, could it be more? What if the money turns out to be much lesser? Will a smaller safety net provide the same kind of security? Well, there are no definite answers. Like they say, the only thing certain nowadays is uncertainty. And investors would do well to accept this uncertainty instead of fighting it. In other words, it is important to continue working along with the uncertainty, at the same time devising ways and means whenever possible of working around it.   For instance, just like in case of the Mehtas, Shahs could also look at diverting any surplus to equity diversified funds and/or index fund. Closer to the goal, both families can start moving the money to debt systematically.   An example of working along with the uncertainty is to continue your PPF investment. Just because the interest rate has become marketlinked doesn't mean that you should abandon the instrument altogether. At the same time, a way of working around the unpredictability of the instrument would be to review and relook at the calculations every couple of years and make the necessary adjustments accordingly. If necessary, by all means seek the help of a professional financial planner and re plan your strategy to fulfil future goals.   At the end of the day, one just has the feeling that regardless of the actual rate, on a pure riskreturn basis, PPF will continue with its significance and efficacy in any investor's portfolio. The writer is director, Wonderland Consultants   Being market-linked, the public provident fund corpus can no longer be predicted over the long term

 

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