Health insurance is expensive. The premium increases over time for two reasons —when your insurance company experiences significant claims from your cohort (group) and when you transition from one age band to another. Is it then optimal to create an investment portfolio to fund your medical expenses (self-insure) instead of buying a health insurance? In this article, we discuss why self-insurance may not be optimal either as a base or as an additional plan but is necessary as a third tier.

Beyond insurance

You need base health insurance to cover medical expenses — a group insurance plan from your employer or an individual plan if you are an independent professional. Why? Suppose you want to buy a house five years hence. You can invest to accumulate enough money to make down payment for the house. At the end of five years, you can liquidate the investment and buy the house. You can then start another goal.

But it is not how medical expenses work. You could incur a significant medical expense instantly after you set-up an investment account. And, even if you incur the first significant medical expense five years after you set-up the account, you could incur a significant expense a year later. That gives you limited time to rebuild the account to meet the expenses.

A base health cover will pay claims next year even if you filed a claim this year. An additional cover may be required when group insurance cover or individual base plan is inadequate. And, even then, your healthcare cover may not be complete! Why?

Healthcare inflation is typically much higher than general inflation. Importantly, this inflation rises each year even if general inflation is mild. Therefore, the cost of medical procedures could be higher next year compared with this year. Increasing your sum insured continually may not be optimal because of high premiums. So, what should you do?


Your primary healthcare need is covered by base plan and an additional cover. Self-insurance is helpful beyond the primary need. You can set aside money on a continual basis and invest in a large-cap ETF. The aim is to invest in a high expected-returns-generating asset (equity) to accumulate a significant amount over the years to meet rise in costs due to inflation. This investment can also help you meet expenses not fully covered by insurance policies.

(The author offers training programmes for individuals to manage their personal investments)