What is the moratorium period offered in health insurance?
Mota, co-founder & CEO at Finnovate, a Sebi-registered investment advisory firm.
The list of approved mutual funds is not available in the public domain. "The asset management companies concerned hold a letter from the charity commissioner mentioning the names of approved funds. Some of such schemes include HDFC Income Fund, ICICI Prudential Income Plan, ICICI Prudential Balanced Fund, ICICI Prudential FMCG Fund, Kotak Gilt Investment, Birla Sun Life Equity Fund, SBI Magnum Equity Fund, UTI Nifty Index Fund, among others," says Mota.
Other investments are also possible if the charity commissioner approves it by a special or a general order. "In my experience, people simply follow what has been practiced for ages.
I haven't seen people approaching the charity commissioner for special permissions. With more awareness, the push may come," says Kumar. The charity commissioner is bound to decide on the application for permission within three months or record reasons for not doing so.
The Indian Trusts Act, 1882, is more comprehensive. As per Section 20 of this Act (that was amended by a gazette notification in 2017) private trusts can invest in government securities, debt mutual funds, minimum AA-rated debt securities by a corporate, Basel III tier-I bonds, infrastructure debt instruments, listed companies having a market cap of not less than ₹5,000 crore as on the date of investment, mutual funds having at least 65% equity allocation and ETFs (exchange traded funds) and index funds.
“While the Act may have defined multiple avenues for investments, if the trust deed prohibits an investment, trustees are bound to follow it. The provisions of a private trust deed can be amended if it explicitly allows so. If it is irrevocable in nature, it cannot be altered without the consent of the beneficiaries or a court order,” says Kumar.
Organizations registered as a society under Societies Registration Act, 1860, can also invest in mutual funds and listed companies, etc, as the Act recognizes securities specified in Section 20 of the Indian Trusts Act, 1882, for investment. “A Section 8 company can invest in listed or other securities as defined under Companies Act, 2013, but it should be aligned with the nonprofit objectives of the company," says Kumar.
The common practice
Irrespective of options, most trusts have invested only in fixed deposits. “Trustees have a legal duty to act in the best interests of the beneficiaries. This often translates to a risk-averse investment approach, especially if the trust document doesn't explicitly mention equity investments,” says C.M. Grover, MD & CEO, IBSFINtech India.
Ajay Sharma, managing partner at Cycas Investment Advisors, cites the example of a Hyderabad-based sports club. "The club has around ₹75 crore liquid funds out of which ₹50 crore is parked in only one private bank, that too at a small local branch. The rates are not competitive either. They are negotiating better rates on our advice. Our distribution arm has managed to move some amount into bonds, but a lot is to be done to put systems in place. The decision-making is too slow," says Sharma. He highlights that the club can easily generate at least ₹1 crore additional funds from investments for its operating expenses.
It is time they understand that other avenues are not really risky but more efficient. Mota got a large charitable institution to reduce interest rate risk and move funds to government securities (G-secs). “We proposed that they get into G-secs with long term maturity so that high interest rates are locked in for a long period. It helped them navigate interest rate risk which they took every 3-5 years when the fixed deposits matured,” she says. Sudhir Naik, trustee of a Mumbai-based medical association, said his association on-boarded a financial advisor around the time of covid pandemic to deploy funds beyond fixed deposits. "While they suggested a conservative hybrid fund, we chose to stick to G-secs," says Naik, a gynaecologist.
Amit Bivalkar, the founder of Sapient Wealth and Sapient Finserv, said he recommended to the managing committee of a sports club that it deploy some funds in mutual funds. "Trusts prefer to keep money in fixed deposits but interest accrued on FDs is treated as income. Public trusts have to spend 85% of their income in a year. If they route the same amount in debt mutual funds (in state approved schemes), since capital gains will remain unrealized (not considered as income), they will not be bound to spend it. They can book gains as per their need," says Bivalkar. The interest income from FDs is not taxable for trusts.
What is moratorium period in health insurance? How is it different from the freelook period or waiting period?
Moratorium period is also referred to as the look-back period in insurance. This is a safeguard clause built-in for the policyholders. Once the moratorium period is over, insurers cannot reject a claim on the grounds of non-disclosure, or misrepresentation. Insurers have to establish a case of fraud to reject a claim.
For health insurance claims in personal policies, insurers often question disclosures made by the policyholders at the proposal stage. This is especially true for chronic ailments such as diabetes, blood pressure or arthritis.
Many policyholders do not necessarily maintain historical health records, so they disclose information on best available basis in the proposal form. At the time of claim, insurers scrutinize these disclosures. They tend to match these disclosures with any commentary made by the treating doctor in the discharge summary. Any variation in the disclosure leads to disputes in claim. Once the moratorium period is over, insurers lose the right to reject claims on such grounds. It also increases the onus of insurers to do a thorough underwriting at the proposal stage, before accepting premium payment.
The moratorium period used to be eight years earlier but was recently reduced to five years.
Free-look period is the initial period after receipt of the policy document. During this period, the policyholder can review the policy wordings and choose to cancel the policy. In such a case, the insurer is obliged to return the full premium. Insurers can only deduct risk premium for the period of coverage and administrative cost such as health underwriting.
Free look period is also a safeguard clause for the policyholders to curb mis-selling. If the policy terms are not in line with the understanding given at the proposal stage by the insurance agent or the company, then policyholder can cancel the policy.
The policyholder is not obligated to justify their decision. In health insurance, the freelook period is of 30 days from the date of receipt of the policy document.
Waiting period is the cooling-off period before which a claim becomes payable for the specific condition. For example, health insurance policies generally have a waiting period for pre-existing diseases. Claims can be filed in the policy for claims linked to pre-existing ailments only after the policy is continuously renewed for the duration of the waiting period. The actual waiting period for pre-existing diseases can vary across insurers and products. It used to range from one to four years. However, through a recent regulation, the maximum waiting period for preexisting diseases is now capped to three years. So, insurers are liable to pay claims for pre-existing ailments after this period, unless they have put in a clause for specific permanent exclusion.
The law is unrestrictive, but lack of awareness and risk aversion makes the enforcement weak