Meeting medical emergencies

While buying life insurance is important to protect your family’s standard of living, is medical insurance also vital, especially if your employer offers you basic medical protection? Here, we will discuss whether or not you should buy medical insurance. We will also look into self-insurance — a process in which you create a healthcare fund by investing the premium that you would otherwise pay on your medical insurance.

Why insure?

Insurance companies sell millions of medical insurance policies. And not all buyers of medical insurance policies are likely to submit claims every year. Insurance companies are, hence, able to pool the risk and offer competitive premiums. You may, for instance, pay only Rs 4,700 for a Rs 3 lakh medical insurance cover in a year if you are aged between 36 and 40.

Could you instead create a healthcare fund to self-insure? Yes, you can. To do this, the amount you would otherwise pay on your medical insurance - Rs 4,700 - has to accumulate to Rs 3 lakh. You need approximately 30 years to do so, assuming a compounded return of 15 per cent per annum. And that is not all. Once you spend the amount on medical emergency, you have to recreate the healthcare fund. Besides, what if you require the money immediately after starting the fund? Self-insurance, therefore, does not help.

Now, what if your employer provides basic medical protection? You should still consider buying a separate medical protection for yourself and your family. For one, you could lose your job. What if you face a medical emergency during the time you are looking for a new job? For another, there are benefits in taking a policy when you are young. The premiums are low and you are unlikely to suffer any illness. So, an insurance company will not deny your claims in the later years on the grounds of pre-existing illness.

How to insure?

You should typically buy a basic cover and a top-up plan. A top-up plan offers you protection above a certain limit. If you buy a basic cover for Rs 3 lakh, you can buy a top-up plan to cover medical costs above Rs 3 lakh. Top-up plans are cheaper because of higher deductibles.

You should preferably buy an individual policy for yourself and for each of your family members, including your parents. It is somewhat difficult to arrive at an appropriate medical cover. Why? One, physical health can deteriorate suddenly because symptoms are not always visible. So, how would you know how much medical cover is sufficient if you do not have an illness today? Two, healthcare inflation is higher than normal inflation. This means the cover that you have today may be inadequate in 10 years because of the increase in healthcare costs. And three, a heart surgery in Mumbai will be costlier than in Hyderabad. Do you know where you will reside, say, 10 years hence?

That said, you can buy a basic cover of Rs 3 lakh each for yourself and your spouse and, perhaps, Rs 1.5 lakh for your child. You should thereafter increase the sum insured periodically; for whoever turns older first, at 45. Then, increase the sum insured again at 50 and if possible, at 60 and 70. This is to adjust your insurance cover against aging and healthcare inflation.

Besides insurance, you need an emergency fund to meet unexpected loss of an income or a medical emergency, in cases where you are required to pay first and then reimburse your medical expenses with the insurer. Finally, remember to take adequate insurance cover. And do not buy insurance plans that combine investments, such as the unit-linked health plans.

Insurance is to indemnify losses or costs. Investment is to accumulate wealth. The two should be separate.

(The author is the founder of Navera Consulting, a firm that offers wealthmapping and investor-learning solutions. Feedback may be sent to >knowledge@thehindu.co.in )

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