Employees Provident Fund: A Detailed Description

   

What is an Employees Provident Fund?

Among various schemes out there, the Employees Provident Fund is one that enables people to save a corpus for their retirement. This plan was introduced with the Employee Provident Funds Act in 1952. And today, it is managed and monitored by the Employee Provident Fund Organization (EPFO).

Wondering how this corpus for retirement is developed? 

Around 12% ( of the basic salary) is the rate at which the employee has to contribute to the Employee Provident Fund. With an equal contribution, the employer also contributes that same amount. When a person retires, he or she receives a total amount which includes his/her personal as well as the employer's contribution. 

The fetching thing in this is that the employee receives the lump sum amount with interest. Therefore, it works in favour of the employee from all dimensions. Also, EPF is managed and overseen by the Government of India, which assures the fixed rate of return; hence it is regarded as a low-risk investment. 

It is mandatory for the companies that have a minimum of 20 employees to maintain the Employee Provident Fund accounts. Some companies with fewer than 20 employees also opt for the EPF scheme. 

Another requirement from the side of an employer is that if they have staff who receives salaries less than Rs. 15,000, then the Employee Provident Fund comes in as an obligation for them. However, most companies provide the facility to all employees regardless of their salary. 

Now the question that comes hand in hand with the EPF system is, what if the employee changes his/her job? If you change your jobs frequently and are concerned about how your EPF will be fixed, the Universal Account Number is something that comes as a solution to this. 

Universal Account Number  

What if the employee leaves his/her job in between? What will happen to the EPF of that Employee? Will they be able to claim their amount? 

The answer to all these questions is just a 12-digit number, the Universal Account Number (UAN). A UAN is allotted by the Employees Provident Fund Organization to every employee that has an EPF account. This number remains constant throughout the life of an employee and is portable too.

The benefit of this number comes in when an individual plans to change his/her job. You do not need to withdraw your EPF when you change your job. You can transfer your EPF from one employer to another, and hence you can continue building your EPF corpus without a break. 

Employees Provident Fund Monthly Contribution: A Deeper Understanding

It has already been mentioned above that both the employer and the employee have to contribute equally to the EPF accounts every month. But the system is not that easy as it seems to be. 

The final amount of Employees Provident Fund is generated on the basis of basic salary, but in calculations, Dearness Allowance and Retaining Allowance are also considered. 

Dearness Allowance is a calculation on inflation and Allowance paid to government employees, public sector employees and pensioners in India. It is calculated as a percentage of Indian citizen's basic salary, to mitigate the impact of inflation on people. 

Retaining Allowance is given to an employee for retaining their services till the time their establishment is not working. This Allowance is payable to the employee of any factory, organisation or establishment.

Now you must be thinking, is 12% the only EPF rate? 

Well, this is not the case. There are certain circumstances where the EPF rate is lower than 12%. In such cases, the EPF rate is 10%. If the company is meeting the following requirements, then it is allowed to give a 10% rate on EPF:

• The employee count must be less than 20. 
• The losses faced by the company are more than the net worth. 
• The company must be belonging to the Beedi, Jute, coin or brick industry. 

Another case where the EPF is less than 12% is when there are women employees in the company. Women employees are allowed to contribute only 8% towards their EPF account for the first three years of their employment. There are two reasons for such deduction; firstly to encourage companies to hire more women. Secondly, for women to get a higher take-home pay. 

Above mentioned cases were the ones where the Employee Provident Fund rate is lower than the actual rate, 12%. 

Now, what if you want to contribute more than 12% towards your EPF? It is the point where the Voluntary Provident Fund (VPF) comes in to help.

What Is Voluntary Provident Fund (VPF)? 

The Voluntary Provident Fund (VPF) is the one in which the contribution from an employee's side is made voluntarily. The contribution is more than the general 12% contribution that an employee makes towards their EPF. 

The maximum contribution from an employee's side in the Employees Provident Fund is 100% of basic salary plus Dearness Allowance. In that case, the employee will be getting the interest as per that particular amount. Isn't that great? 

Well, if you are an employer, then don't worry as you are not obliged to match this voluntary contribution. So, the concept of Employee Provident Fund is justifiable for both employees as well as employers.

Now maybe you can see your desired vehicle dreams coming true. Whether it is BMW or Mercedes Benz, it can be yours anytime. You are just a decision away! 

EPF: Rate of Interest, Tax Benefit, Withdrawal

Let us now understand some of the basic concepts that are important to understand the current, existing EPF system in India.

Rate of Interest

Currently, the prevailing rate on EPF deposits is 8.65%, which is the same for VPF. These rates of interest are reviewed every year. Last year also it was 8.65%. 

EPF Tax Benefits

Exempt, Exempt, Exempt is the category under which the Employees Provident Fund comes with regards to tax. As the contributions are deductible from income, it enjoys the EEE status. 

Here, the great thing is that you won't be obliged to pay taxes on the money you invest in EPClF, the interest you have earned, or the amount withdrawn at the time of retirement. But these facilities are not available if you plan to withdraw EPF before the completion of 5 years. Tax benefits are the same as in the case of VPF. 

Withdrawal 

As the main aim behind the Employees Provident Fund is financial security even after retirement, no individual can withdraw the amount before the age of 54 years. At the age of 58 years, you can extract 100% of your EPF corpus.

Under What Circumstances EPF Can Be Withdrawn? 

So one of the best things about EPF is that it can be withdrawn either completely or partially. But in both cases, there are certain circumstances under which it can be withdrawn. Let's just have a quick look at these circumstances. 

EPF can be withdrawn completely in the following situations: 

• At the time of retirement
• If the individual remains unemployed for more than two months. 

EPF can be withdrawn partially in the following situations: 

• At the time of marriage
• At the time of higher education.
• At the time of repayment of home loan.
• At the time of renovation of a housing property.

What Is The Process Of EPF Withdrawal?

The employees can withdraw EPF either offline or through the online portal. They just have to submit the withdrawal application. 

For the offline submission of application: 

• The individuals are required to fill a 'new composite claim form' or 'composite claim form'. And this form is required to be submitted to EPFO office, under their jurisdiction. 
• This composite claim form must be attested by the employer as well. 

For the online submission of application: 

• Universal Account Number (UAN) of the individual is a must for online submission. 
• The mobile number which has been used to activate the UAN should also be active. 
• Other requirements say UAN should be linked to Aadhar. The bank details, PAN and IFSC code should also be there. 
• After confirming that all the conditions are met, the individuals are required to login into the online portal. 
• After verifying their KYC details, the individuals can proceed with further instructions. 

Summing Up 

With the system of Employees Provident Fund, one can plan their life after retirement with the same standards and lifestyle with which they live today. All your desires of having a car, owning a house, a trip/trips abroad, etc., could be a reality if you make wise decisions regarding your EPF. 

Even if you are a person who has faced various job insecurities and have moved between jobs quite often, the EPF is something which can save you from wandering away from your desires and lets you enjoy your old age by helping you live with the same charisma, enthusiasm, and fun and that too without depending upon anyone else.

What is SGX Nifty and how it impacts Indian Stock Market?

   

What exactly is Nifty?

Nifty is a small sample of 50 companies of the index market from different economic sectors, introduced by the National Stock Exchange (NSE - an Indian platform for stock exchange). 

This platform gives an idea to the investors on how a particular company performs in a day. Since companies are judged according to their performance in the market, Nifty lists them all based on which companies are doing better than the other, resembling a ranking system.  

To make it simple, let’s take an example of a voting system: During the time of elections, the only source the public has, to see the live telecast of votes is through the new channels on the television, which constantly broadcast polls of the votes of each party and how they are performing. By just the numbers, one can guess which party is going to win the elections. But how are these numbers collected? 

This occurs through the conduction of small surveys where voters are asked to vote for a party they think has the potential to make some positive changes. After these surveys are done, and data is collected, they provide an estimation number or a hint as to which party will perform well. Almost 50% to 60% of surveys are always right, and the same analogy can be applied to nifty. 

Nifty conducts a similar survey of the top listed companies in the country according to their performance and gives a hint to investors that this company has the potential to do good even in the future. 

Now, you must have understood what the term Nifty means. But there is another term called SGX Nifty. And now before there is any further confusion, read on to differentiate between these terms. 

What is ‘SGX Nifty’?

SGX is a derivative product of Nifty futures trades (where this trade reduces the future risk of any investment by setting the predetermined price of a share beforehand) at the Singapore Stock Exchange (SGX). 

In simpler words, like a simple Nifty described above, SGX is a future trade nifty in Singapore where, regardless of the fluctuations in the prices of a share, an investor and buyer need to abide by the predetermined price of a share. 

This means as the polls help in predicting the result in an election, SGX Nifty helps predict and observe the behaviour of the Indian nifty quite well. 

Differentiating Between Indian Nifty and SGX Nifty

1. SGX Nifty is a Nifty futures trade which is a platform in the Singapore Stock Exchange and India, whereas the Indian Nifty contract trades on the NSE platform only. 
2. The contract size of SGX Nifty is different compared to the Indian Nifty. In India, we have 75 shares in every Nifty contract lot, whereas the SGX nifty does not have a contract with shares in it. For example, to put it into simpler words, in the Indian stock exchange market platform a contract (between buyers and investors) must have a minimum requirement of 75 shares whereas this requirement is not at all necessary on the SGX platform. 
3. SGX Nifty is denominated in terms of US dollars. Say, if Nifty is trading at 9000, then the contract size of SGX Nifty will be 9000*(2 USD), i.e., 18000 USD. The example of doubling the amount can be simplified in this way; Suppose you go to a local shop to buy an item, you will receive it at a lower price than if you go to a big-brand store to purchase the same item. 
4. SGX is the most active trading contract in Singapore (as this is the only platform where trading occurs for more than sixteen hours a day). This high traffic on this platform results in high volumes of customers and trading activities, and since this same activity does not occur on the national exchange platform, SGX is much more profitable and more in need for many markets. 

Who can Trade-in SGX Nifty?

For those investors who are not able to trade in the Indian Nifty and for those who want an exposure before entering the Indian nifty, SGX Nifty is a good alternative. 

However, Indians are not allowed to trade in SGX Nifty contracts or any other derivatives in other countries.

SGX Trading Hours and the Importance of these Trading Hours 

Indian Nifty starts at 9:15 am and operate till 3:30 pm, which means it trades for only six hours a day. According to the Indian time, SGX Nifty functions from 6:30 am to 11:00 pm, which means it trades 16 hours a day. 

Due to this long period of trading and since the time difference between the two regions is only two hours and thirty minutes, professional traders and investors find it extremely useful for their hedging requirements. That is why all investors much love SGX Nifty.

To commoners, this time gap isn’t a very notable feature; but consider this example, when in an exam one is given a choice to start the paper forty minutes before the other students, one does get an advantage in that situation and can answer questions properly. 

The same logic applies to these two markets since SGX nifty trades for a longer period. This is why it becomes a learning and practising market for beginners and other newcomers, whose lessons can later be implemented on the Indian Nifty by international/ Indian traders.

How do settlements work in SGX Nifty?

The settlement is a cash settlement, and the final settlement price is the official closing price of the S&P CNX Nifty Index, rounded to the nearest two decimal places. 

This official price is derived based on the weighted average prices of the individual component stocks of the index during the last 30 minutes of trading.

How SGX Nifty Effects the Indian Market?

We know that there is a time difference between Indian Nifty and the SGX Nifty, in which the market opens 2 hours 30 minutes before the Indian market. From there, investors keep their eyes on SGX Nifty to get the idea of how the market is going to open; investors observe the market walk (fluctuations) whether it is going up or down. From there, they get an idea of whether the Indian Nifty market will open up with positive or negative points. 

However, all the information they get is not certain because of the economic factors that persist in both countries. Economic and global factors of a country decide the behaviour of a market, and India and Singapore have a different economic structure which affects the country’s market prominently. 

No market has not been affected by the pandemic and to assume that financial markets have not been affected would be a lie. Since the shut down of Indian Nifty, traders and analysts only have the SGX Nifty to see the international changes (price movement changes) in the financial market. 

Due to the massive downfall of economic growth and within the Indian economy, Indian Nifty has started to provide premiums and discounts on opening prices within this platform for traders to make it much easier for them to invest and trade.  

Conclusion

Overall, both the platforms are of equal importance as they help understand the behaviour of each other whenever the markets open. For investors, or for anyone who wants to trade or wishes to pursue the career of trading, knowing about these two platforms can be quite beneficial. 

If you have heard the phrase ‘Money never sleeps’ from the popular movie ‘Wolf of Wall Street’, you know that the rustle within those offices occurs for a reason. All employees screaming either on the phone or to a screen is not just acting. It is the actual representation of what happens on platforms like Nifty and SGX on a daily basis.

Dealing with money is a gamble and having a whole market dedicated to those who are good gamblers within the financial market is exciting and scary all at the same time. So, it will only be beneficial to know the market before you step into it. 

And what other better way to understand a market than to know the market of your region (in this case the Indian Nifty) and one of the biggest international trade platforms out there (SGX Nifty)!

5 Things You Should Do Before Investing Money

  

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“If you do not find a way to make money while you sleep, you will work until you die.” 

– Warren Buffet. 

Now, the easiest way to make your money while you sleep is by investing. However, if the investments are not done in a planned manner with a proper objective in mind, it can even jeopardize your financial future.

So to help you invest in the right manner, in this blog, we will talk about the things that you need to be mindful of before you start investing.

Here are the 5 things that you need to consider before investing

#Number 1: Know your investment goal: 

There are many things that we want to buy or do in our lifetime. For example, we want to buy a house, a car, travel the world, gift our parents an expensive watch or a piece of jewelry. Now, most of these dreams can be achieved by turning them into investment goals; and then figuring out how to attain them in a timely manner.

There are many goals that are common to all like saving for retirement, saving for one’s child education, etc. And then, there are goals that are specific to each individual, like buying a Rolex for your father, watching the Wimbledon Finals etc. 

So, the first thing that you need to determine is what you are investing for. And then, exactly what is the amount of money that you would need to achieve that goal. For example, you need Rs 20 lakh for making a downpayment of a house or Rs 4 lakh for watching the Wimbledon Finals.

#Number 2: Know your investment timeframe:

Once you are clear about your investment goal, for example, saving for your child’s school admission. Then you get an idea about by when you need to achieve that goal. Say your son/daughter is 2-years-old, then you know you would need to save that money within one year. And knowing the timeframe of the goal will help you understand whether it is a short term goal, a midterm goal, or a long term goal. 

For example, a goal that needs to be achieved within 3 years can be categorized as a short term goal. So if you are planning a cross-country trip across eastern-Europe in one year, and you are saving up with that goal in mind then it is a short term goal. Then, a goal that is 3 to 5 years away, like saving for the downpayment of a house, can be classified as a midterm goal. And long term goals are those which are more than 5 years away, like saving for your children’s higher education, their marriage, etc. 

Once you are aware of the timeframe, it will help you determine where you should invest your money and how much you should invest to achieve that goal. This will also help you to stay focused on the goal. Since you know being irregular with your investments can result in a shortage of funds, you will remain disciplined with your investments. 

#Number 3: Know your risk tolerance: 

Every investor needs to find out his/her own risk tolerance. Some products can give higher returns than others, but there might be more risk involved. For example, mutual funds usually provide higher returns than FDs but being market-linked they are riskier. Decide whether you have the stomach to tolerate that risk. Taking more risk than you can tolerate can give you sleepless nights which can eventually make you stop the investment before achieving your goal. 

For example, say you invest in a mutual fund with a 5-year goal in mind. Now in the 3rd year, the markets fall and so does the value of your mutual fund. The losses that we see during such times are paper losses, i.e. the price of the investment is currently lower than what the price was when you bought it. And it would again go up. However, you unnecessarily stress over it and redeem your mutual fund units. And the moment you do that, the paper loss turns into a real loss. And due to this loss, you might not be able to achieve your goal in a timely manner.

So never invest in something which you feel is riskier than your risk tolerance level and you might stop investing in it midway. 

#Number 4: Know your asset allocation:

Different asset classes perform well at different times and hence if you have different asset classes in your portfolio it will ensure that investments are well-cushioned all the time. 

For example, the return from gold remained low for a long time before going up since last year. Meanwhile, equities were delivering amazing returns before they crashed during the pandemic; however, during that time gold continued delivering great returns. Now, as an investor, if you have different asset classes in your portfolio, if one asset is not performing well during a phase, the other well-performing asset at that time would cover the loss. 

But how much you want to allocate for each asset class will depend on your risk appetite and not how much return it is generating at the moment. 

#Number 5: Know which product to invest in:

Finally, you have to zero in on the product you want to invest in as per your investment goal. There are two things that you need to be cautious about while selecting an investment product – first, it should be as per your risk appetite and second, it should be as per investment tenure. 

For example, say your son/daughter is two years old and you need Rs 2 lakh in a year’s time for his/her pre-school admission. This is a goal that can’t wait and you need the exact amount at the time of his/her admission. Here the focus is capital preservation and accordingly you will have to choose your investment tool. For example, for this goal, you can invest in FDs on ETMONEY and earn up to 7.35% p.a.. Since it comes with the assurance of a guaranteed return, you know exactly how much money you will receive at maturity. 

Meanwhile, you also want to start investing for your child’s college education, a goal that is 16 to 17 years away. Here the focus should be earning inflation-beating returns, and accordingly, you should zero in on a financial instrument. To save for a goal like this, you can invest in Mutual Funds through SIPs. 

The objective for each investment is different, so should be your investment tool.

4 Reasons Why You Should Invest In ELSS Funds

   

Here are the 4 reasons why you should invest in ELSS funds.

Number 1: You can save tax and create wealth at the same time

First of all, ELSS funds are equity mutual funds. They are essentially multi-cap funds, i.e. they invest in companies of all sizes – large, mid and small – across all sectors. And being an equity mutual fund, it has the potential to create wealth over the long term through equities. 

But, the other big benefit you get for investing in ELSS funds is the fact that you can claim up to Rs 1.5 lakh tax deduction under Section 80C. No other mutual fund provides you this benefit.  So, if you are in the highest income tax bracket of 30%, you can save Rs 46,800, including 4% cess in income tax.

So you can simply say, investing in ELSS gives you the opportunity to create wealth over time like all other equity mutual funds. Plus, you get tax benefits for investing in ELSS that no other mutual fund gives you. 

Number 2: They have a shorter lock-in period as compared to other tax-saving investments

If you compare the lock-in period for ELSS with other tax saving investment options, then ELSS scores an extra point. 

The lock-in period for some of the popular tax-saving investment products are – PPF- 15 years, ULIP – 5 years, tax-saving FDs – 5 years, NSC – 5 years or 10 years. But compared to that, the lock-in period for ELSS is only 3 years. 

Lock-in period for tax-saving investments
Investment Option	Lock-in period
ELSS	3 years
PPF	15 years
Tax-saving FD	5 years
NSC	5 years and 10 years
ULIP	5 years

Number 3: You can start by investing small through SIPs

Like all other mutual funds, it is easy to invest in ELSS through an SIP. You can start an SIP for an ELSS mutual fund for as low as Rs 500. And like other mutual funds, as and when your income increases you can increase your investment amount through SIP top-up. 

And if you want to get the full tax deduction for investing in these funds, you have the convenience of investing Rs 12,500 every month instead of putting Rs 1.5 lakh in one go. 

Most other tax-saving investment products do not provide a systematic way of investing money on a monthly basis. 

Number 4: Mutual funds taxation help you save more

ELSS funds have a minimum lock-in period for three years. And after three years, the long term capital gains (LTCG) of up to Rs 1 lakh a year from ELSS mutual funds are exempt from income tax. However, the LTCG above Rs 1 lakh is taxed at 10%. 

Now, in terms of the taxation policy, if you compare ELSS with PPF (which fall under Exempt Exempt Exempt and hence, the maturity amount is not taxed) you might feel that the benefit for investing in ELSS is less. However, a point that needs to be mentioned here is that PPF has a very long-term lock-in period, and such investments are not fit for fulfilling short-term or mid-term goals.

So, if you compare it with a 5-year FD, then investing in ELSS is much more beneficial in terms of their taxation policy. The returns from FDs are taxed as per one’s tax bracket. And if you fall under the 30% tax bracket, then your FD returns will be taxed at 30%.

Meanwhile, for ELSS or any other mutual funds, the LTCG above Rs 1 lakh is taxed at 10%. That is, your returns are taxed at 10%.

Is your money safe with a Mutual Fund Company?

   

People have a general perception that their money is completely safe in bank accounts and fixed deposits. This originates from the fact that banks are regulated by the government, and RBI keeping a watch on all banks adds more strength to this belief.

But, when you ask the same question about mutual fund companies, most people are bound to answer in negative. This apprehension is not surprising, as most of us don’t really understand how mutual fund companies work and manage our money.

What if we told you that mutual fund companies are also regulated under stringent norms and that they work under certain set guidelines, similar to banks. Would you believe us?

Well, read on to understand this better:

Mutual fund companies are well regulated

All mutual fund houses operate under stringent regulations to protect every investor’s interests. These regulations are put in place by SEBI (Securities and Exchange Board of India), a government agency responsible for the supervision and functioning of the capital markets.

SEBI makes policies to regulate the industry. Apart from this, SEBI issues certain guidelines from time to time for all fund houses and keeps their operations under its check. In case of discrepancies, there are various penal provisions which are applied on the fund houses.

AMFI (Association of Mutual Funds in India), on the other hand is a statutory body that addresses the grievances of mutual fund investors. Together, they strive to keep the functioning of the industry transparent and ethical.

Rules and Regulations over mutual fund companies

Every mutual fund company is required to abide by a set of regulations imposed by SEBI.

It also conducts regular audits on these fund houses to make sure there is a discrepancy in the functioning of these funds.

Let us look at some of the major regulations imposed by SEBI to ensure investor’s protection:

Minimum number of investors per scheme: SEBI requires each scheme to have a minimum number of investors because funds work on the principle of pooling resources and spreading or sharing risks across a large number of investors. Thus, a minimum number ensures that a fund works as a collective investment vehicle rather than an individually tailored asset.

Minimum portfolio diversification rules: A mutual fund scheme must diversify across assets and securities in the same asset class. This is essential to reduce the internal or unsystematic risks associated with investments.

Other restrictions: Mutual funds are not allowed to take any loans. Moreover, they are also restricted to hold cash only in scheduled banks, not in any other bank. And to ensure that the sponsors do not use investors funds to strengthen their other group companies, SEBI restricts a mutual fund to invest in a securities listed by an associate or group company of the sponsor.

A structure that safeguards the investor’s interest at each level

Another thing that makes mutual funds safe for your investment is the structure in which a fund is built. This structure of a mutual fund company, as determined by SEBI, requires a fund to designed in the form of a trust. It will be helpful if we look at this structure and understand how it adds safety to your investment.

Sponsor: Firstly, there is a sponsor who is a person or a body which establishes the fund. They are required to contribute at least 40% to the net worth of a mutual fund. It is important to note that a license to start a mutual fund is only given to a sponsor after diligent background checks and ascertaining their financial capabilities.

Board of Trustees: A mutual fund company is set up as a trust, wherein two-thirds of the trustees have to be independent persons not associated with the sponsor in any manner. They are responsible for protecting the investor’s interests and make sure that the decisions at the fund are taken after mutual consent of all stakeholders.

Asset Management Company: They are the professional fund managers hired by the trust to look after the investment. They invest the money in various securities and make sure there investments are profitable and provide healthy returns to the investors. They also look after the administrative functions of a fund.

Custodian: By law, all mutual funds are required to protect their portfolio securities by placing them with a custodian. All investments made by AMC’s are done through qualified custodians, like banks. These custodians too are registered with SEBI and answerable to them. This allows complete transparency in terms of transactions and holding of all fund houses.

So, as we saw, a defined structure along with stringent guidelines to abide by, have helped the mutual fund industry evolve a lot over the years. This has given investors an opportunity to make most of this investment avenue.

So, by looking at the structure and regulations which a mutual fund company has to abide by, we can say with 100% surity that your investment in a mutual fund is safe and no fund will run away with your money. And as you would have heard that mutual fund investments are subjected to market risks, so the only risk you take on your investment is the risk of fluctuations in money market. There is no risk of scams or fake schemes in mutual funds which will make you lose your money.

Individual Health Policy or Floater Health Insurance: What Should I Buy?

   

With ever-increasing healthcare costs, hospital bills can burn a huge hole in your pocket. So, having health insurance is a must for all members of a family as they cover all your hospital expenses.

But, when you have to buy policies for more than one member of your family, should you buy separate health plans for each of them or a floater health insurance policy that covers the entire family? Which plan is more beneficial under what circumstances? What are their merits and demerits? In this blog, we will talk about everything related to individual health plans and floater health plans.

First, let’s understand what are individual health insurance policies and what are floater health insurance policies. 

Individual health insurance policy

When a health insurance policy covers only one person it is an individual health plan. And the yearly premium amount depends on the person’s age and the coverage amount. 

For example, you are 30-years-old and you buy an individual health insurance policy for yourself and another individual health insurance policy for your 56-year-old mother. The coverage amount for both the policies is Rs 5 lakh. Now, the annual premium amount for your policy would be Rs 15,000, and the yearly premium for your mother’s policy would be Rs 30,000.

Floater health insurance policy

A floater health insurance plan covers more than one member of a family. That is, if you buy a floater health insurance plan it will provide cover to you, your spouse, children, and parents – depending on whose name you want to include in the plan. The premium amount of the plan will depend on the age of the eldest person covered under the floater health plan and the coverage amount that you seek. 

Under a floater plan, the sum insured can be availed by any member of the family for a particular year. Say, you have a Rs 10 lakh family floater health insurance policy that includes you, your spouse, and two children. Now let’s suppose, on being hospitalized, the bill amount incurred by you was Rs 2 lakh which was covered by your floater health insurance policy. Now, the remaining Rs 8 lakh can be availed by you or any other member named in the policy during that year.

Now that we know the difference between an individual health insurance policy and a floater health insurance policy, let’s look at the advantages and disadvantages of buying a floater policy over an individual health insurance policy.   

Here are the 2 advantages of buying a floater policy over buying individual health plans 

Number 1: Saves you from the hassle of maintaining too many policies

In case you buy individual policies for each member of your family that means you have to maintain each policy separately, read and understand the terms and conditions for each of them, remember different due dates for their premium, then accordingly calculate the combined premium amount for all the policies to keep a tab on your expenses. 

On the other hand, if you buy a floater health insurance policy, your entire family can be covered under a single policy. It saves you from the hassle of maintaining too many policies. 

Number 2: Floater plans are cost-effective in case the insured are in a similar age group 

In case the insured are in a similar age group, floater health insurance plans are much cheaper as compared to individual health insurance plans. For example, for a young couple in their early 30s, the yearly premium amount for a floater health insurance plan (Rs 10 lakh coverage) would be Rs 14,000. But if they want to do it separately, i.e. Rs 5 lakh individual policies each, then the premium amount would be Rs 10,000 per year for each policy or Rs 20,000 yearly combined premium. 

Now that we know about the advantages, let’s look at the disadvantages of floater health insurance policies against individual health plans.

Here are the 3 disadvantages of floater health insurance plans against individual health plans

Number 1: The sum insured is not fixed for each member 

For individual health plans, each member has a separate sum insured. Say, you have a Rs 5 lakh individual health insurance policy.  On being hospitalized the bill amount was Rs 2 lakh which was covered by your health insurance. And, the rest of the Rs 3 lakh sum insured can be availed by you again in case you are hospitalized for the second time in the same year. 

But for a floater health insurance policy, the entire sum insured is meant for all the members covered under the same policy. A particular amount is not fixed for each member. So if one family member makes a claim, the cover reduces on the rest by that much. It is not fixed like Rs 2 lakh each if five members are covered under a floater health insurance policy of Rs 10 lakh. Let’s understand with an example.

Say you have a Rs 10 lakh floater health insurance policy that covers you, your spouse, and your two children. Now, you were hospitalized for certain treatment and the bill amount was Rs 5 lakh. Now, this entire amount will be covered by the floater health insurance policy. But for that year, the cover amount for your spouse and children will be reduced to Rs 5 lakh. 

Number 2: No-claim bonus is nullified if one member makes a claim on a particular year

For every claim-free year, your health insurance company rewards you by increasing your coverage amount or decreasing your yearly premium amount. This benefit is called a no-claim bonus (NCB). This benefit can be availed for both individual and floater health insurance policies. 

Now, if one member covered under a floater health insurance policy makes a claim in a particular year, then the entire NCB would be nullified for the year. But if each member had separate individual health policies, then the NCB (for the individual health insurance policy) would be nullified for the person who was hospitalized, while others would be able to avail NCB for their own health policies.  

Number 3: Children cannot be included in a floater health policy after a certain age

In a floater health insurance policy, once a child covered under the policy reaches a specified age – ranges between 18 to 25 (it differs from policy to policy), they are treated as adults and have to be removed from the floater health insurance plan for the plan to continue. 

In that case, along with the floater health insurance plan, you will also have to buy a separate health insurance policy for your son or your daughter.

Now that we have looked at the merits and demerits of both – individual health insurance policy and floater health insurance policy, let’s understand which one is more suitable under what circumstances.

When is buying a floater plan a better option than an individual health plan and vice-versa?

The premium amount for a floater health insurance policy is determined on the basis of the age of the oldest member covered under the policy. So whether you should buy a floater policy or an individual health plan should be determined according to the age gap between the oldest person covered under the policy and the other members in it. 

So, it makes sense to buy an individual health insurance policy if you are single and your parents already have their own health plans. Meanwhile, if you are a young couple or you have a family including young children, then buying a floater health insurance policy is beneficial.