health and safety: INSURE YOUR AGING PARENTS

Saturday, July 4, 2009

INSURE YOUR AGING PARENTS

Financial planner Gaurav Mashruwala warns against rising health costs

Year 2007 will be remembered by Manoj Nirbhavane for the rest of his life. His mother Padma fell critically ill. The doctors had given her only 10% chance of survival. The family did not have health insurance. The cost of the ICU and more than three months of hospitalization ran into lakhs. All the savings had to be eroded, and some money borrowed, to cover the treatment.
    She is fine now, and so is the family. But had society not stood by them and helped financially, the Nirbhavanes' story could have turned out quite different. Maintaining good relations in society is the biggest wealth anyone can ever have.
    Manoj, 30, holds an MBA from Mumbai University. He works with a private life insurance company. His wife Shilpa is also employed. Manoj's father retired from the Brihanmumbai Municipality Corporation. He has two elder brothers. All of them live separately.
WHAT ARE THEY SAVING FOR?
"I want to support my children the way my father supported me," says Manoj. (1) They want a corpus of Rs 30 lakh for education, Rs 5 lakh for marriage and Rs 40 lakh to establish children in their profession etc. (2) Further, they need Rs 50 lakh for their retirement after 30 years (3) Lastly, they need Rs 5 lakh to send both Manoj and Shilpa's parents abroad for a vacation. They consider all this their responsibility. Costs are at today's rate of inflation. Further they dream of foreign travel, a holiday home and, most importantly, a corpus to support the needy.
WHERE ARE THEY TODAY?
Cash flow: Total monthly inflow from all sources is in the range of Rs 40,000. Total outflow is Rs 36,000, going towards their insurance premium, household expenses, taxes, entertainment and savings. About Rs 17,500 is saved every month.
Net worth: The value of total assets apart from the house is Rs 7.10 lakh. Against this, the outstanding liability is Rs 50,000, or about 7% of the assets.
Contingency fund: Against mandatory monthly expense of Rs 16,000, funds in form of cash at home and savings bank linked FD is Rs 70,000. This is about 4.5 months' reserve.
Health & life insurance: They have a family floater health care policy totalling Rs 3 lakh, which covers the spouse and
dependents parents. Sum assured for life is Rs 20.65 lakhs. This is in the form of term plans and endowment policies. Savings & investment: Cash at home is Rs 20,000. Rs 50,000 is kept in the bank. The value of direct equity is Rs 15,000 and of the equity mutual fund is Rs 3 lakh, Bonds/FD total Rs 80,000. Balance in EPF/PPF is Rs 2 lakh and post office schemes, Rs 45,000. Debt:Equity ratio is 55:45
FISCAL ANALYSIS: They are living well within their means. Excess funds are lying in cash/near cash assets. We recommend independent health insurance policies for each family member, and also a larger sum assured. Life insurance is insufficient. Borrowing is well within limits. Debt:equity ratio is well balanced.
WAY AHEAD:
Contingency fund: Keep aside Rs 35,000 in a savings bank linked to an FD and Rs 15,000 in cash at home. Any surplus funds should be utilized to buy additional health cover for family.
Health & life insurance: As far as possible, opt for independent health cover for each family member. Also, when parents are nearing 60 years, try and get maximum health cover for them. Bearing in mind future financial responsibilities, incremental life insurance cover of Manoj should be Rs 80 lakhs—through term plans only.
PLANNING FOR FINANCIAL GOALS: Children: Funds required more than a decade from now. Systematically invest in an index fund and a gold fund. Allocation should be about 90% equity and 10% gold
Retirement: Retirement is more than three decades away. Therefore, start another systematic investment in an S&P 500 index fund. This kind of fund is more risky compared to Sensex/Nifty fund, but since retirement is more than three decades away it is worth the risk.
Parents' vacation: Use existing investment into equity, mutual fund, bonds and post office schemes to fund parents' vacation. Slowly start transferring existing mutual funds as well as maturity proceeds of bonds and post office schemes in the next two years into a a mutual fund with 80% debt and 20% equity.
    Further, the couple should create a corpus for funding parents' illnesses if any. Park the amount in a debt-based mutual fund.
PLANNER'S EYE
Nothing in life is more frustrating than facing a situation where funds are not available to treat illnesses of our near and dear ones, especially when it comes to the parents who lovingly brought us up. Opt for maximum possible health cover for them. People often compromise on the sum assured, thinking the amount is too large. Never gauge this from the current levels of treatment costs. Coverage of Rs 5 lakhs at today's rate might be high in some cities, but ten years later it may not be sufficient. By then, your parents would be old and insurance companies may not be willing to enhance sum assured. No expense in life is more important than health cover for parents and our dear ones.