Creating A Medical Fun
Medical expenses tend to rise much faster than the average rate of inflation. Without adequate medical cover it is easy to see your financial plan derailing in the event of a sudden medical emergency. In addition to a regular medical insurance cover it is advisable to create a long term medical fund. The primary reasons for creation of such a fund are:
A) Inflation:
Unlike life insurance, medical insurance cannot be a stagnant figure for all time. It needs to be periodically revised to account for the increase in medical costs due to inflation. In life insurance inflation is already factored in at the time of calculating required cover by your financial advisor. However this is not the case with medical insurance. If an adequate cover at age 30 is say Rs. 5 lakhs then such a cover needs to be doubled in the next five to eight years to compensate for inflation and the additional risk due to increased age. A stagnant 5 lakh cover at the inflation rate of 10 % will be equal to a cover of Rs. 67000 after 20 years. This means after 20 years you will be able to cover only Rs.67000 worth of medical expenses in today’s rupee terms. Such is the destruction of value due to inflation.
B) Rising Medical Premiums:
Premiums charged by insurance companies increase every few years depending on the age bracket you fall in. Since medical insurance is an annually renewable policy, insurance companies can hike the cost of this cover as and when they require. Many individuals would have a seen an almost doubling of medical premiums in the last few years, primarily because medical costs and claims have risen to the same extent and insurance companies will pass on such increased costs by way of increased premiums. Also after a certain illness, the premiums may rise substantially to cover the increased risks due to that illness.
A simpler way to protect increased medical costs and higher premiums in later years is the creation of a medical fund. As usual the sooner you start the better. Let us explain with an example. We take the same 30 year old in our previous example. Currently his insurance cover is Rs.5 lakhs. He can double his cover on his 40th birthday and pay double the premium and continue this doubling every few years or he can start a medical fund by investing an amount of Rs. 40000 p.a. or Rs. 3400 per month into a equity scheme. By age 45 he will not need to double or increase his cover as his medical fund will cover him for any increase in medical expenses. (Inflation assumed at 10% while equity returns assumed at 15 %). He will have saved 50 % of his insurance premium costs assuming he takes a cover till age 60.
A medical fund can also be utilized for OPD, dental, pregnancy related expenses which most medical insurance products do not cover.
Medical insurance premium is a risk premium to cover unplanned medical expenses. Insurance companies will charge higher premiums as your age progresses and at some point the risk to reward does not favour the insured. Hence during your working life you must, in addition to the rest of your financial goals plan for a medical fund, to save on high premiums later. It is in no way a substitute for medical insurance. Rather it complements the same.
Credit Rating
What Does Credit Rating Mean?
Credit rating is an assessment of the credit worthiness of individuals and companies. A credit rating allows borrowers to understand the financial health of the debt issuing entity. In corporate finance, a credit rating is a “grade” assigned to a bond, bond issuer or other entity or security to indicate its riskiness.
What is the importance of credit rating?
Credit rating is important since individuals and companies with poor credit will not only find it difficult to borrow but also likely to pay higher interest on borrowings due to higher risk of default. It helps the investor determine the likelihood that the bond issuer will pay interest and principal (at the time of maturity) in time.
Which are the instruments rated?
Credit rating provides insight to lenders to various issuers (borrower) of fixed-income securities, such as debentures, bonds, commercial papers, certificate of deposits, fixed deposits, Pass Through Certificates (PTCs) etc.
On what basis rating is assigned to various debt issuances?
Companies are issued a rating based on their financial strength, future prospects and past history. Companies that have manageable levels of debt, good earnings potential and good debt-paying records will have good credit ratings.
Credit Rating Agencies in India
These agencies conduct extensive research on the bond issuer before assigning a credit rating to them. There are four credit rating agencies in India that offers a wide range of rating and grading services across sectors. Viz,
- Credit Rating Information Services of India Limited (CRISIL)
- Investment Information and Credit Rating Agency of India (ICRA)
- Credit Analysis & Research Limited (CARE)
- Fitch Ratings India Private Ltd.
Rating scales
The highest rating is usually AAA, and the lowest is D. Investors /Lenders use this information to decide whether to invest or lend depending upon rating assigned to an instrument. The following table shows various levels of ratings and its implications.
Investment Grade Bonds:
AAA —> Bonds of the highest safety
AA+, AA, AA- —> Bonds of the high safety
BBB+, BBB, BBB- —> Bonds of the medium safety
Non Investment Grade Bonds (Junk Bonds):
BB+, BB, BB- —> Bonds with moderate safety
B+, B, B- —> Bonds with low safety
C —> Bonds with lowest safety
D —> Bonds in default
A word of caution
Credit ratings agencies have been criticized many times for not reacting fast enough to downgrade an issuers rating.
Estate Planning
Will or Trust?
The asset of someone who dies without a Will or a Trust is disposed of by operation of law, which may not be according to the wishes of the deceased person. Estate planning is a process of arranging and planning your succession for management and distribution of your wealth in a systematic and pre-determined manner to your heirs and to other beneficiaries. The most common vehicles for this purpose are the drafting of Wills and setting up of Trusts. Estate may include any movable and or immovable property like equity shares, bonds, deposits, jewellery, cash, bank balance etc that then gets passed on to the next generation. In order to make the optimum use of wealth created over a period of time and to protect it for the near and dear one’s it becomes crucial to plan. Both wills and trusts are designed to do the same thing – to pass on assets at death. Both can be very effective, but they use different methods to do it. Wills and trusts are essentially two different tools that accomplish the same goals. Deciding which tool is better for you depends on personal situation. What is right for one person might be very wrong for another person. Therefore, you need to fully understand these differences in order to decide which method is better under your circumstances. Many assume that they only need a simple will to best take care of their affairs when they pass away, and that only the wealthy need to have a trust.
Estate planning through Trust involves much more than merely making a Will. Trust is effective not only during the lifetime but also after death. Estate Planning through a trust route is one of the most reliable ways to assure that your assets will be managed for your family and loves ones as you had intended. In Estate Planning through Trust route, the person who owns the estate sets up a Trust, appoints trustees to manage the trust, transfers his estate to the trustees and names the beneficiaries of the trust.
There are certain advantages on why one should opt for a Trust over Will:
The primary disadvantage of a Will over is that it can be disputed after the death of a person making the Will. Even the best-drafted Wills can be challenged. Also, mental soundness of a person making the Will can be challenged in the court of law. Disposition of assets through Trust ensures passing on assets without causing any untoward problems for your heirs.
Will is a legal declaration of your desire to distribute property during the lifetime of a person but intended to take effect after his death. Trust involves transfer of your estate to a trustee for the advantage of certain beneficiaries while you are alive. Trust leads to efficient management of your estate during and after your death.
- A trust is not subject to probate and can be kept confidential, whereas a Will becomes public document once probated.
- A Trust saves some Probate Court expenses.
Probate is a sometimes a big hassle for survivors. There are numerous filings and notices, and sometimes delays occasioned by the necessity of getting Court approval for so many things