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Economy

You Will Not Believe The Real Cost of the Subsidized Insurance and Pension Schemes In The Budget

There were three new “social” schemes in the budget. These sounded like big government expenditure and the devil is obviously in the details. We have some details from the FinMin.

Accidental Death Insurance for Everyone at Rs. 12 per year

How does this work?

People between 18 and 70 years old, who have a bank account linked to their Aadhaar, give a form to their bank to auto-debit their accounts each year. The insurance will be offered by public insurers and optionally by private insurers too.

Death or full disability is covered with Rs. 200,000 and partial disability is Rs. 100,000.

Cost: At Rs. 12 a year, a premium is hugely subsidized by the government. But how much? I did a quick calculation for a similar policy with Oriental Insurance (a public sector insurer), and the premium came to Rs. 90 per year. The subsidy then comes to Rs. 78 per year. Who pays this? Apparently ministries have to find it in their unused funds, or something like that – there’s no clarity yet. Another source is the “public welfare fund” created out of unclaimed provident fund money, created in this budget.

The subsidy can be quite a bit lower since this is effectively a big group policy. The underwriting is by the insurance companies. And at Rs. 90 a year it effectively means that there will be one accidental death for every 2,200 people and the insurer takes the risk.

Note: The good folks on twitter write in that Rs. 90 is too much. If you have volumes or if you take a group policy the premium can be much lower. I agree. I will demonstrate that even with Rs. 90 it’s not a big deal.

Impact: This policy is very cheap. Everyone should get it, but if everyone does, will the costs go through the roof? Even if 10 crore people buy the product, that would be a subsidy of Rs. 780 cr. per year, which in the overall scale of things is miniscule. (Remember, total subsidy costs for the government are over 240,000 cr. per year). With volumes, the subsidy will be even lower.

The “Cheap” Life Insurance Cover

Known as the Pradhan Mantri Jeevan Jyoti Bima Yojana, this is also partially subsidized.

For people between 18 and 50 who have a bank account. Rs. 330 per annum is auto-debited by the bank, for a cover of Rs. 200,000 in case the insured dies.

Cost: Costs vary by age, and Rs. 160 per year per lakh for someone less than 30 years old is easily available with most insurers. (Translates to Rs. 16,000 per crore of term insurance).

Impact: We don’t foresee a big impact to the government budget. But if you’re 35 or above, it makes complete sense to buy this policy as a backup term policy. It is also useful for people who can’t get cheap term policies from any insurer. What you should do is if you have full time household help or drivers, get them this policy.

The Atal Pension Plan

If you don’t pay tax, and don’t have a PPF, PF, or other pension account, and you are between 18 and 40 years old: you can pay a monthly amount to get a pension after the age of 60, of Rs. 1000 to Rs. 5000 per month. The government pays into your account 50% of what you pay, limited to Rs. 1000 per year. The government guarantees the pension, though the administration would be through the New Pension Scheme.

This is how the cookie crumbles:

image

So for a contribution of Rs. 116 per month, for a person of age 30, for 30 years, they get a pension of Rs. 1000 per month, and after they die, their nominees get Rs. 1.7 lakh.

Cost: We think the cost is based on returns. At 8% average return, the government needn’t pay anything at all. At 8% per year, the money in the account grows to Rs. 1.7 lakh just by itself. (Check out Rs. 116 per month for 30 years at 8%).

If you have 1.7 lakh per year, you can pay out Rs. 1,000 per month easily if you were getting 8% a year.

The breakeven rate for the government, if it pays 50% into each account for five years, is Rs. 7.1%. That means if the NPS is able to give returns of 7.1%, the government has no pension liability. Till recently, the average return has been over 10%, though we can’t expect that to last forever.

Impact: Since this is for non taxpayers who have no other form of security, the scheme is for the unorganized sector. A similar scheme – Swavalamban of the NPS – where the earlier government also decided to pay Rs. 1000 per year into each account, saw little or no interest. That scheme, even till now, has only 35 lakh subscribers!

Assuming they can take that to 1 crore subscribers and pay the full Rs. 1000 per year for every one (which is nearly impossible, many will pay less) the bill would be Rs. 1000 cr. per year. That is peanuts for the kind of pension income and security that can be generated. (Remember, these people would need the support, with low income levels)

If interest rates in India fall to zero like they have in the US, the debt on the government can be huge. But even then, I would rather that the government by paying out small pensions to more underprivileged people, than to fatten rich farmers and fertilizer companies.

Our Take

While it sounded scary in the budget, the details tells us:

  • The total cost of all these schemes is probably less than 2,000 cr. per year. That’s less than 1% of the total subsidy bill of the year on food/fuel/fertilizers.
  • This is peanuts.
  • And I say this while I criticise the government on other things, so don’t call me a fanboy.
  • The government will do this with other institutions (insurers, NPS) so there is a layer of professionalism in the delivery.
  • You are probably too rich for these schemes, but do take the 12 rupees per year accident insurance, even if you’re young. If you don’t die, you will benefit the cause by spreading risk.
  • If you aren’t very cynical, please considering buying these products for the people around you who aren’t as privileged: The security guards in your building, your household help, the driver of your children’s school bus and so on.

Edited: The Pension program is only paid for five years, so the break even rate changed to 7.1%. We also had a typo (90 yrs instead of the correct 70 for the first program). The error is regretted. Thanks to Manoj Nagpal and Debashis Basu for edits.

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  • Harsha K says:

    I think you are missing the actuarial calculation involved in getting a large set of people. If a majority of 120crore people are to be insured, and chances of accidental death is minimal, the insurance premium indeed comes down drastically.

  • Ravishankar says:

    very nice explanation. What I realized is there is a moral hazard here – for Rs 12, there is incentive (if you are poor) to get into an accident or suicide. sad but a possibility.

  • Pankaj Kalra says:

    Deepak,
    Have you changed anything on the email feed settings. Of late, my outlook crashes when I open the daily feeds. It displays a message “Contacting:\\feeds.feedburner.com\~r\CapitalMind\~4
    And this happens everytime I open a Capital Mind feed email. Has anyone else also written with similar problem?
    Pankaj Kalra

  • foo says:

    “The total cost of all these schemes is probably less than 2,000 cr. per year.”
    And this is the expected subsidy bill for water/power in Delhi alone this year, thanks to AAP. So yes, a very miniscule amount.

    • It’s huge for Delhi, but not for the central government 🙂
      Not that difficult to fathom – for instance I cannot afford to spend Rs. 2000 cr. per year, but the central government can. I could beg them but there’s hardly any reason they should fund me because then every populist leader will want similar help. And they will be right to ask me – boss, didn’t you realize it was unaffordable before launching such a stupid idea?
      And we can’t ask that of the central government because these schemes are hardly unaffordable. I will of course question fert subsidies which they can’t 🙂

  • kumar says:

    you will also need to look at the rules that they use for payouts. I have seen some policies where there is no payout for the first x years, suicide ruled out completely. Otherwise, there is a segment of population, specifically some farming communities, that is going to insure, and then ‘go away’, so that their family can live in peace upon the payment.
    don’t jan dhan accounts provide insurance already? i hear the government is going to encourage opening of demat accounts, the same way they did for jan dhan. attractive numbers, only time will tell if these efforts are profitable.
    i also see a trend with cashless insurance cards. the hospitals are saying ‘pay our bills in cash, and you deal with the insurance company’. this is not supposed to be the case, i am currently aware of someone who has been a victim of this, and is still working through the insurance company’s demands for documentation, three months after the health mishap. i am sure this is going to make patients sick again, all this run-around.
    the budget, is also leading us to a far-away promised land, provided we survive the journey. no point allowing me to save a crap load of money, when my today is in jeopardy.

    • AM almost certain suicide willb e disallowed forever.
      This *is* the Jan Dhan Insurance AFAIK 🙂
      Cashless Insurance _ this is a major scam. Hospitals overbill on cashless, so insurers do triple checks and prescribe maximums and hold up payments while checking up if the procedure mentioned was actually performed. And this cheeses off hospitals. So they drop the cashless, the insurers then lose business, they bend over backwards, hospitals say okay to cashless again, then they fudge again, and so on. The cycle happens every five years 🙂
      Nice last statement!

  • DJ says:

    I ain’t buying no yojana. I don’t need no yojanas. I don’t have to participate in any stinking yojanas.
    https://www.youtube.com/watch?v=nsdZKCh6RsU

  • Ashish says:

    “If you aren’t very cynical, please considering buying these products for the people around you who aren’t as privileged: The security guards in your building, your household help, the driver of your children’s school bus and so on.”
    That’s a great idea! Was just thinking of a small pension for these guys!

  • Manish_1101 says:

    Govt has announced an increase in NPS subscription limits within 80CCD from 1 lakh to 1.5 lakh rupees and also indicated that they would like people to gradually choose NPS over the EPF scheme.
    Given that only 10% of basic +DA can be contributed in an year into NPS, the additional limit would only help those who have earnings in excess of 10 lakhs per year. Needs your confirmation.
    Kindly also pls confirm that 80CCD limits are over and above the 80C limit of 1.5 lakh.

    • Over and above, according to revenue secretary…
      THe thing is, your 80C can be taken by other things – kkids school fees, home loan principal, insurance payments, ELSS etc. Then you can put additional 50K into this.

      • Manish_1101 says:

        So as I understand now, one can theoritically have total 1.5 lakh of 80C and 1.5 lakh of 80CCD deductions as per the recent budget proposals. Out of this 1L in 80CCD was already available and people with income within 10-15 L range can invest avail of the extended facility. For others there is no change.