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Why a personal medical fund is essential in addition to health insurance?

Updated: Feb 28

In today’s stressful times, cardiovascular diseases and diabetes have become common ailments. Ironically, people are living longer due to advanced medical science, but less healthy. As per a World Health Organisation (WHO) report involving a survey of 162 countries, India figures in the high danger zone of risk of cardiovascular diseases in the world.

It is thus very essential to have health insurance which funds medical costs during tough times. The average health cover usually bought by an individual is about Rs.2-5 lakhs. This is however a paltry sum and needs to be upgraded periodically with the rise in age.

There are health insurance plans available in the market like top-up plans and critical illness policies to enhance coverage. Top-up plans cover hospitalisation costs but only after a regular limit called deductible is crossed. Deductible is the portion of money which the insured has to pay before the policy comes into effect. For e.g., you have a basic health insurance plan of Rs.3 lakh and a top-up insurance of Rs.8 lakh with a deductible of Rs.3 lakh. Suppose you run a hospital bill of Rs.10 lakh, Rs.3 lakh will be covered by your base plan and Rs.7 lakh by your top-up plan. The premium paid on a top-up cover is cheaper as compared to a regular Rs.10 lakh health insurance policy.

Similarly, critical illness covers bought in addition to regular health insurance are useful. Especially, when there is a case of medical history in the family like heart attack, cancer, etc. One can thus maximize health insurance coverage by buying Rs.15 lakh top-up plan and Rs.5 lakh critical illness cover.

But would a health insurance package of even Rs.20 lakhs be adequate enough in the long run? Let us examine the reasons why one cannot rely only on medical insurance to take care of long term healthcare needs.

  1. Inflation, the monster – Nowadays a single instance of hospitalization can easily wipe out about Rs. 2-3 lakhs. A by-pass heart surgery in a hospital presently costs in the range of Rs.3 lakh in an average hospital to Rs.7 lakh in a higher end hospital. Health care inflation in general is rising by about 10 per cent per annum. Assuming this inflation rate, the costs of a bypass surgery would cost a maximum of Rs.7.8 lakh after 10 years, Rs.20 lakh after 20 years and Rs.52 lakh after 30 years. The costs of other critical surgeries are likely to rise in a similar fashion. Do you think your current health insurance would be able to cover such huge costs? The answer is an obvious NO.

  2. No options for long term healthcare funding Unlike the developed countries, India does not have adequate social security measures to take care of long term health care needs of its citizens. Unlike a government organization, a private employer cannot be relied upon for health care benefits after retirement. Senior citizens, old parents with no private health insurance have to depend upon children for their medicare needs.

  3. Health insurance not adequate to take care of medical needs during retirement – There are many health insurance products available in the market today which cater to senior citizens. However, while health insurance is a good safety net to prepare for medical emergencies, it has limited benefits during old age. Firstly, health insurance pays only for hospital bills. Even pre and post hospitalization costs are reimbursed up to 60 and 90 days respectively. Health insurance does not take care of medicine costs, preventive health-checkups, which are a routine during old age. Even domiciliary treatment, i.e. medical treatment taken at home is not covered under health insurance.Further, senior citizens have to pay a certain amount out of their own pockets, as usually 100 per cent of the medical bills are not reimbursed. And, premium loading can be high in the event of any hospitalization.

It thus immensely helps to have a personal healthcare fund to take care of medical expenses during retirement. We strongly advocate the creation of a medical fund as one of the essential goals in financial planning.

How much to save?

The target corpus would depend upon an individual’s situation. Someone who is already suffering from serious ailment and has incurred huge medical costs in the past 5 years may want to allocate more for the medical fund. We recommend an average of the hospitalization costs incurred in present times. In a worst case scenario, the average costs of treatment of critical illnesses like diabetes, stroke, cancer, etc can be considered as the base amount which comes to roughly about Rs.7 lakh. Considering healthcare inflation of about 10 per cent per annum, one can target to save approximately Rs.30 lakh for medical costs during retirement.

When to start saving?

Usually, creation of a medical fund would not be a topmost priority for an individual in his 30s who has more important goals to save for. While the medical fund is meant to be utilized during retirement, one can start saving for it after 45 and give it some time to grow. In some exceptional cases, where an individual has a medical history and has frequently spent on medical expenses, he can start a medical fund early on and contribute a minimum sum every year.

Where to invest?

To create a medical fund, you can start a systematic investment plan (SIP) in a debt fund. At the age of 45, you would have another 15 years to accumulate the medical corpus till retirement. Assuming a monthly contribution of Rs.3,000 in a debt fund which would rise by an annual 10 per cent and yielding 7.5 per cent per annum compounded return, you would accumulate roughly about Rs.30 lakh at retirement. This coupled with your health insurance package including critical illness cover and top-up plan would be adequate to fund your future medical costs.

Conclusion: You do not want medical costs to deplete your retirement savings and then worry about outliving your expenses. Remember, the purpose of creating an own personal medical fund is to take care of medical expenses in the twilight years. Consider it as a long term investment for your retirement period. In the event of any hospitalization before 60, you can utilize the health insurance cover first and then dip into the medical fund, if necessary. However, resist the temptation to utilize the funds for some other purpose.

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