Medical insurance has become popular as a risk-mitigating tool for salaried people. But you are better off creating a meticulously planned contingency fund rather than relying on insurance companies to come to your rescue in times of emergency
A MAJOR part of a salaried person's life is devoted to securing the financial future of the family and dependents. One of the oldest and most popular riskmitigating tools is insurance, which provides the family with a financial protection, however small, in unforeseen circumstances. While in the past, life insurance was the only insurance product in one's portfolio, in the last few years, medical insurance has made a strong entry into the financial planning portfolio of urbanites and salaried professionals.
But does medical insurance work when you need it the most? This is important given the upward trajectory in insurance premiums and the various hidden and non-monetary costs involved in its administration and management. And the emphatic answer is a qualified no. You are better off creating a contingency fund rather than relying on insurance companies to come to your rescue in times of emergency.
To appreciate this, consider a practical situation where you need to buy protection for a six-member family -two young adults, two kids and two elder parents. Now suppose you plan to buy a cover worth Rs 300,000 per annum. Such a plan will cost you anywhere around Rs 30,000-35,000 per annum (assuming a family discount of around 10-15%) at the going rate charged by various insurance companies. The amount includes a 10% service tax. For this story we studied the rate cards of three leading insurance providers -The New India Assurance Co (NIC), ICICI Lombard and Star Health and Allied Insurance -as available on their respective web sites. The exact amount may differ by a few percentage points here and there, but won't affect the outcome.
So if you begin subscribing to the policy, say, at the age of 25, by the time you turn 40, you would have spent Rs 4.5 lakh on covering your family against medical emergency. But what if you had set aside a similar amount every year to create a contingency fund (fund) and invested it in a mix of low-yielding but safe assets such as post office and bank deposits and high return but risky assets such as equities? Post office and bank deposits usually give returns of 6-8% per annum, while equities can easily provide predictable returns of 12-15% per annum, if we restrict exposure to blue-chip counters in sectors such as FMCG, pharmaceuticals, IT services and utilities. The blended return for such a portfolio would easily be around 12% with some annual fluctuations.
As this rate, the annual recurring investment of Rs 30,000 per annum would grow to a corpus of around Rs 2.5 lakh by the fifth year; Rs 6.2 lakh by the end of 10th year and nearly Rs 13 lakh by the end of 15th year. And even if you start topping up this fund by the end of 10th year, the corpus would still grow to over Rs 1 crore by the time you attain 60 years of age.
But what if you dip into the corpus every few years for meeting emergency expenses? Of course, this will affect the size of the fund, but will not crimp it as long as you maintain the discipline. Consider a situation where you withdraw around Rs 10 lakh from the corpus in various instalments by the time you hit 50. You will then be still left with a sum of Rs 15 lakh in the 51st year, if you had stopped topping it after the first 10 years of contribution. Alternatively, if you continue to top it till you retire at the age of 60, but make additional withdrawals of around 18 lakhs in the last ten years of your working life, the corpus would grow to nearly 45 lakhs by the time you hang your working boots.
As the above example shows, a meticulously planned and executed fund can more than meet the emergency needs of a family and may still leave you with a surplus. What's more, while the corpus will grow every year even if you don't raise the contribution; in case of medical insurance you need to raise your contribution every five years as premium rises with age. For instance, NIC charges three times more premium from a 60-year old policyholder than a 30-year old customer.
Another drawback with over reliance on medical insurance is that it reduces your flexibility in case of a non-medical emergency. While you can use the contingency fund to meet any eventuality, your insurance premium can only meet medical emergencies and may, in fact, become a huge financial burden in certain situations. This is not an optimal situation in today's world of economic uncertainty and a volatile job market.
While doing the cost-benefit analysis of medical insurance, we should also consider the hidden costs and the paper work and loss of liquidity (even if temporary) involved in claiming the amount. While insurance companies tout cashless facility, in real life, hospitals ask you to deposit a minimum caution amount of Rs 10,000 (in Mumbai for instance) for a routine hospital admission. The amount would be higher in case you are going for specialised treatment and surgery. After which it may take two days for the cashless claim to be verified and cleared by the third party administrators (TPAs). Secondly, many insurance companies now refuse to refund the nursing service charge levied by hospitals, which represents 20% of the bill amount. Now, if you can pay caution money and take care of 20% of the billed amount, you can very well plan for the entire amount. At least, you will not have to go through the painful and annoying paperwork involved in insurance claim.
But why is medical insurance so expensive? The answer lies in its administration and the way industry affects the behaviour of the medical fraternity. According to a research in US, nearly a third of the insurance premium goes towards meeting the industry's overheads, especially the fees of third party administrators (TPAs), which act as mediators between the insurance company, the hospital and the policyholder. Secondly, insurance induces hospitals and doctors to jack up their rates, fully aware that an insured patient would hardly protest. In contrast, a cash-paying patient can bargain down the price and shop around for better rates especially for specialised surgeries and procedures.
