7.2. Insurance and Investments

Personal Finance and Money Management (Basics of Savings, Loans, Insurance and Investments) ------------------------------------------------------------------------------------ Module 7 Topic-2 ------------------------------------------------------------------------------------ 7.2. Insurance and Investments MODULE 7 1

7.2 Introduction Saving is only one aspect of managing our finances. Other than setting aside some of our savings to meet emergencies, we save to fund our future goals. These could be in the form of dreams that we have for our children good education or a home or an expensive marriage celebration. We also save for ourselves this could be for gold or other assets that we would like to own or business ventures that we would like to start or expand. To achieve any goal we have as soon as possible, we must invest our savings. Investing our savings gives them the power to increase due to the return that they get. For instance, if we save Rs. 100 per month for 10 years, we can collect Rs. 12,000. But suppose we put this same money in a recurring deposit at the nearest post office, we could get over 18,700. The difference of Rs. 5,700 is not a small amount. It can help us achieve our goal faster. At the same time, any goal that we have must be protected by insurance. This means that we must purchase life insurance for ourselves, if we are earning and contributing to goals for the family. Then, in the case of our untimely demise, our family will receive an amount of money that will help them to achieve our goal. Now, how much money they will receive all depends on how much insurance you purchase... Similarly, when we purchase an asset whether it is a home or a vehicle or any other insurable asset we must insure it. If we do, we can be sure that even if it is damaged or destroyed due to an accident or a natural or man-made calamity, we will be able to bring it back to its original state with the money that we receive from the insurance company. Lastly, health insurance is very essential. With rising health care costs and an increase in the occurrence of illness and disease, falling sick can cost a lot of money. Due to an illness in the family, you may be forced to use money that you have saved over many years in hope of achieving a future goal. 7.2.1 Insurance (Health, crop, life, asset) for Farmers, women, students: There are around 47 life and non-life insurance companies in India. They provide a variety of insurance products, which include life insurance, health insurance, accident insurance, crop insurance, asset insurance and more. Basic Difference between Life Insurance and General Insurance Life insurance includes plans which are directly related with the person's life. On the other hand, general insurance deals with plans which are not related to the life of the person. General insurance plans seek to provide protection against loss to a person's assets or health and not to his/her life. Life insurance: Life insurance comes in various forms. In its most basic form, term insurance only pays out a pre-decided amount of money in the case of the death of the insured person. However, over the years, insurance products have developed to help us meet our long term goals. Moneyback plans, endowment plans and Unit Linked Insurance Plans work as long term financial products which help us to meet goals and they offer financial security in case of the death of an insured family member. Some life insurance companies offer products especially for women such as LIC s moneyback plan for women. MODULE 7 2

General Insurance Health and accident insurance: Insurance companies offer financial products which pay out money in case you meet with an accident or fall ill and have to be hospitalised. Here, the amount of money that you receive could be fixed or based on the expenses that you actually incur. Prescriptions by doctors, medical tests and bills must be maintained and submitted to make a claim. There are special health insurance policies for women. These cover the illnesses that are specific to women such as different types of cancers, etc. Health Insurance Cover for the Poor One of the biggest problems in the developing world, especially in India, is how to finance and provide health care for more than a billion persons. The people who need health care the most are the poor who belong to low income groups. Without insurance, the poor have to meet their costs of health care from their own pockets and that makes them poorer and drives them to debt. Rashtriya Swasthya Bima Yojana Rashtriya Swasthya Bima Yojana (RSBY) is targeted at unorganized sector workers below the poverty line (BPL) and their families. As the people covered under the scheme are usually poor, illiterate and live a migratory lifestyle (in search of employment), the scheme is cashless. This means that they do not have to first pay for their treatment and then claim reimbursement for what they have paid. The scheme is also broad based enough to cater to those families that migrate and some families in which some members migrate and others stay back. Benefits under the RSBY: Each BPL family is eligible for a total sum insured of Rs. 30,000 per annum on a family floater basis. This means that anyone in the family who needs it can use it; there is no limit per person but only an overall limit for the family. Pre-existing conditions are covered. Usually, insurance companies do not allow insured individuals to claim expenses on illnesses that they already had when they are first covered by a policy. Here, even though individuals may already be suffering from a particular illness, they will still be covered for it. Cashless coverage of all health services related to hospitalization, including maternity benefit and such services of a surgical nature which can be provided on a daycare basis. (Though OPD facilities are not covered under the scheme, OPD consultation is free) Provision for pre and post-hospitalization expenses for one day prior and 5 days after hospitalization. Provision for transport allowance. Student insurance: Student insurance is a type of health insurance that caters to the specific needs of students travelling abroad for further studies. While living abroad, standard medical facilities may be too expensive for a student to afford. In some cases, even minimal costs could take a toll on the student s finances. Student insurance covers risks of an accident, sudden sickness or loss of sponsorship. Along with medical coverage, student insurance also MODULE 7 3

provides bail bond to protect the student in case he/she is arrested or detained by the police while abroad. Crop insurance: Both private and public sector insurance companies in India offer crop insurance. The aim of this type of insurance is to provide financial support to farmers in the event of crop failure, as a result of drought, floods and other natural risks such as pests and crop disease. It also aims to ensure that farmers receive credit for the next crop season, after an event of crop failure. Some national level crop insurance programmes include: Rashtriya Krishi Bima Yojana (RKBY): On June 23,1999 the Prime Minister launched a new crop insurance scheme called RKBY, under the National Agricultural Insurance Scheme(NAIS). Participation in RKBY was compulsory for farmers growing notified crops and availing crop loans from formal credit institutions. In case of farmers who took these loans, the sum insured was equal to the amount of crop loan advanced. The objectives of the scheme are: o To provide insurance coverage and financial support to the farmers in the event of failure of crops as a result of natural calamities, pests and diseases. o To encourage farmers to adopt progressive farming practices, high value inputs and higher technology in agriculture. o To help stabilise farm incomes, particularly in disaster years. o To support and stimulate primarily production of food crops and oilseeds. Agriculture Insurance Company of India Limited is a public sector undertaking headquartered out of New Delhi, India. It currently offers area based and weather based crop programs in almost 500 districts of India. It covers almost 20 million farmers. Personal Accident Insurance Scheme under Kisan Credit Card: Through Kisan Credit Cards, the Government of India provides adequate and timely credit to farmers with flexible and simplified procedures. An additional benefit of the scheme is that it covers card holders in case of death or permanent disability resulting from accidents caused by external, violent and visible means. The bank that issues the KCC ensures that the name of the nominee for the insurance amount is in the card-cum-pass book issued to the farmer. The scheme has a simplified claim settlement procedure whereby an enquiry-cum-verification committee, comprising a branch manager of the implementing bank, lead bank officer and representatives of the insurance company certify the nature of the accident causing disability/death and recommend settlement of insurance claims. Home insurance: In most cases, home insurance offers the option to safeguard both the home structure and expensive items contained in the house as well. As in the case of any insurance policy, all you have to do is pay a small amount (called premium) at regular MODULE 7 4

interval (annually, quarterly or monthly) during the term of your policy. Then, in case any of the events covered by the policy take place during the policy and you face damage or loss to your home or property, you can file a claim. Asset insurance: Just like home insurance, general insurance companies provide protection to your valuable assets like a tractor or any other expensive equipment. Here again, all you have to do is pay a small amount (called premium) at regular interval (annually, quarterly or monthly) during the term of your policy. Then, in case any of the events covered by the policy take place during the policy and you face damage or loss to your home or property, you can file a claim. Loan protection for asset security: When you purchase a high value asset like a house, a tractor or truck, etc, and you plan to pay for it in instalments, there is always a chance that something may happen to you before you are able to completely repay your loan. In such a case, if your family cannot afford to continue paying back the loan, your asset will be taken away and resold to recover the value of the loan. But, you can prevent this by purchasing loan protection insurance. This insures that your asset stays with those for whom you meant to purchase it. Micro-insurance According to Micro-insurance Regulations, issued in 2005 by the Indian Insurance Regulatory and Development Authority (IRDA), micro refers to the small financial transaction that each insurance policy generates. It is insurance with low premiums and low caps / coverage. However, it plays a vital role in the economic development of the rural poor. Micro insurance in emerging economies and developing countries means where people are often most vulnerable to risks such as natural disasters, illness and disease and where there is little or no social security. Example: JANASHREE BIMA YOJANA - Life Insurance Corporation of India The objective of the scheme is to provide life insurance protection to the rural and urban poor persons below poverty line and marginally above the poverty line. A State Government Department, which is concerned with the welfare of any such vocation/occupation group, a Welfare Fund/ Society, Village Panchayat,NGO,Self-Help Group, etc. can be the nodal agency for this scheme. This means that it can be the medium through which the benefit s of the scheme can be passed on to those who need it. A person who is aged between 18 and 59 years can avail of this insurance if they are below or marginally above poverty line. The person must also be a member of any of the approved vocation/occupation groups. The nodal agency will have to collect a group of at least 25 such people under the scheme. Insurance through Micro Finance Institutions A number of micro finance institutions offer their own variants of insurance products. As in the case of loans from micro finance institutions, the types of insurance varies from institution to institution. For example: MODULE 7 5

Area Networking and Development Initiative (ANANDI) offers emergency loans for health care to state health services in India: Village self-help groups (SHGs) set up a fund that provides emergency loans for members to obtain health care services. Members obtain the funds at low or no interest on condition that they access services at a public facility staffed by trained medical practitioners, who charge little or nothing to treat poor people. These are usually government-run secondary and tertiary health care facilities, which may be from 50 to 300 kilometres from the village. The loans help members pay for the patient s and caregiver s transport costs, food, medicine and lodging. This example is only to give you an idea of the unique structure of insurance products developed by micro finance institution. However, you will need to approach the organisations in your area to find out what products are available to you. 7.2.2 Investment for Farmers, women, students: Where investment in financial products is concerned, there are ideally no boundaries. The best investment products are those which are simple and easy to use, give a good return and provide safety of investment. However, very often, we are required to invest in non-financial products. When we start up a business or invest in raw materials for a crop in the production season. Sometimes an investment can be in an education, which will pay good returns one it is applied in the workplace. Various Government aided projects, Self Help Groups and Micro finance institutions help us to make these types of investments. Banks, Self help groups and some government organisations also help us to invest in such a way that we receive a pension in our old age. They also have specific investment schemes to benefit farmers, women and students. Following are some schemes that have been structured for specific purposes (they may be available in only certain areas of the country). Abhaya Hastam Government of Andhra Pradesh (AP) is trying to reduce poverty in rural and urban areas through the Indira Kranthi Patham (IKP) programme. This programme seeks to empower women through the formation, development and strengthening of women SHGs and their federations. One scheme promoted by Indira Kranthi Patham (IKP) programme aims to provide income security to women in their old age. This scheme is called the Abhaya Hastham (IKP Pension and insurance Scheme). It covers women members of Self Help Groups (SHGs) in rural and urban areas. Towards this end, the Government has decided to introduce a co-contributory pension scheme for women who are part of Self Help Groups. This will give them a monthly pension when they reach a certain age. MODULE 7 6

Pension for Senior Citizens, Widows and Disabled people The National Social Assistance Programme (NSAP) is a programme that was introduced to ensure a minimum national standard of social assistance. This is in addition to the benefits that states are currently providing or might provide in future. The NSAP comprises of the Indira Gandhi National Old Age Pension Scheme (IGNOAPS), the Indira Gandhi National Widow Pension Scheme (IGNWPS), the Indira Gandhi National Disability Pension Scheme (IGNDPS), the National Family Benefit Scheme (NFBS) and Annapurna. Below are the main criteria for applicants to the schemes and the benefits. Indira Gandhi National Old Age Pension Scheme (NOAPS) Under this Scheme, Central Assistance is available for those who are 65 years or more. The applicant must be a 'destitute' in the sense of having little or no regular means of subsistence from his/her own sources of income or through financial support from family members or other sources. Such applicants receive an old age pension is Rs. 75 per month as Central Assistance. Indira Gandhi National Widow Pension Scheme (IGNWPS) The Indira Gandhi National Widow Pension Scheme (IGNWPS) is designed to benefit widows in the age group of 40-59 years. To claim benefits, such widows must belong to a household living below the poverty line according to the criteria prescribed by the Government of India. Under this scheme, they receive a pension of at least Rs..400 per month. This amount is partly contributed by the Central Government and partly by the State. Indira Gandhi National Disability Pension Scheme (IGNDPS) The Indira Gandhi National Disability Pension Scheme (IGNDPS) is applicable to individuals with severe or multiple disabilities in the age group of 18-59 years. The applicant should belong to a household living below the poverty line according to the criteria prescribed by the Government of India. Such individuals receive a pension of at least Rs..400 per month. This amount is partly contributed by the Central Government and partly by the State. 7.2 Summary Insurance helps us to secure our goals and our assets. It also secures our finances in the event of an accident or illness which requires hospitalisation. Various types of formal insurance available from public and private sector insurance companies include life insurance, health and accident insurance, student insurance, crop insurance, asset insurance, etc. Micro finance institutions also offer their own unique types of insurance based on local needs and financial situations. Sometimes, we wish to invest in non-financial products - business, raw materials for a crop or an education, which will pay good returns one it is applied in the work-place. Various Government aided projects, Self Help Groups and Micro finance institutions MODULE 7 7

help us to make these types of investments. They may even help us to plan our business strategy and cash flows. MODULE 7 8