Why we all need a corpus for medical expenses and how to build it

“How much medical insurance I need?” can be answered in two ways: (a) as much as you can afford and (b) 50 lakhs to one crore. Naturally, option (b) is not only scary but also not affordable. Hence we all need a corpus of medical expenses to handle increasing medical costs, fund our lifestyle diseases and expensive treatments. In this I post I discuss simple ways to build a corpus for medical expenses.

Why we all need a corpus for medical expenses

  1. Health insurance for even a few lakhs is expensive, will increase with age, can increase if the insurer faces huge underwriting losses (see below)
  2. Health insurance will cover only medical expenses. There are plenty of non-medical expenses that amount to 15-20% of a hospital bill.
  3. Health insurance will not cover lifestyle disease management – eg. daily expenses for diabetes or heart health. You can use this cost of a chronic illness calculator to understand how dangerous this is.
  4. Critical and non-critical health costs can run to several lakhs within days or months. A critical illness cover is also expensive and has a narrow coverage mandate.
  5. Premiums shoot up if the insurers report a loss and this means the ability to increase our medical cover.

Why are health insurance premiums increasing?

  1. Both private and public health insurers are suffering from underwriting losses.
  2. IDRA’s rule to not increase premium when there is a claim is hurting insurers and all the insured in the risk pool.
  3.  There should be more, but as a non-expert, this is as far as my thinking takes me.

What is underwriting loss?

Underwriting income  = premium collected – claims paid out (including expenses incurred).

If the underwriting income is negative it is known as an underwriting loss. That is, more claims are paid out than the premiums collected from policies in force.

What is the cause of underwriting losses?

The insurance industry is based on taking a calculated risk.  Let us think about it like an insurer.

  1. We need to have a good understanding of how age and lifestyle of people, their medical history is related to the probability of hospitalization and therefore a claim.
  2. This will help us set the right premium – not too high to be uninviting, not too low to result in a loss. Then hope to make up for it by adding silly features like restore, re-fill, hope people do not read policy wordings and sell more policies.
  3. The sales force must be trained well to ensure that medical history is properly disclosed. The lure of commissions can the ABC of selling “always be closing” can render the training waste.
  4. Admitting more and more “sick” people into the insured pool either with (meaning poor probability models) or without proper disclosures is eventually going to come and bite the insurers hard and therefore the policyholders. It is a vicious circle.

The key is the probability model to determine how likely a person is to make a claim. This model has to be updated on a yearly basis at least as that is changing rapidly. Meaning robust research is required. If an insurer is making losses, as a non-expert, I would first blame the models used to accept and price claims and next blame the training given to agents in “closing”.

According to the Indian Express:

the underwriting losses of the non-life insurance companies rose to Rs 14,962 crore in 2015-16, from Rs 10,576 crore in the previous year. The underwriting losses increased by 41.47 percent over previous year, it said. IRDA is yet to come out with losses for fiscal 2016-17. Of this, PSU insurers’ losses increased by 54.42 per cent to Rs 10,839 crore in 2015-16 from Rs 7019 crore in 2014-15. The private sector insurers’ losses increased to Rs 3,662 crore in 2015-16 from Rs 2495 crore in 2014-15.

When New India Insurance came out with an IPO (it is now listed), premiums rose by 20-25%. Shareholders cannot stomach such losses, can they? Oriental insurance hiked its premiums about two years ago but a much higher amount and its IPO (along with United India’s) is deferred to late next year!. So when I renew my United health policy in October 2018, I am staring at a minimum 25% increase in premium.

Should I stop paying such high premiums?

This would be stupid unless you have a crore dedicated just to handle medical expenses of your family. If you don’t have such a corpus for medical expenses, grumble all you want, and pay up. There is no other reasonable choice.

How to build a corpus for medical expenses?

Well, this is pretty much common sense.

  1. Invest more in your current long-term goals. For eg. try and add at least Rs. 1000 to Rs. 5000 a month to your investments. I know it is hard, but then again not everyone can afford everything in life! So do what you can.Invest say 40% of that extra amount in fixed income and 60% in equity. Or pretty much in the same asset allocation of your long-term goals.
    • Rs. 5000 a month for 15 years at 10% return results in a nearly 20 lakh corpus.
    • Increase the investment by Rs. 1000 more to get 4 lakhs extra.
  2. Invest as soon as possible. Time is essential to building wealth. The sooner you start and the more you invest, the bigger your corpus. In this year’s personal financial audit, I had described how one can simply continue investing for goals even after they are near-complete so that the extra corpus becomes the corpus for medical expenses.
  3. Increase your investments each year, at least 5% a year, preferably 10%. Not easy, but try, we must.
  4. Build a strong emergency fund: This will handle the bulk of your medical expenses in the near future. Read more: ₹e-Assemble Step 2: Lay the Foundations to Get RichBuy
  5. Buy as large an health insurance cover, as early as possible and never stop it. This is essential to leat your medical expense corpus grow in peace without redemptions.
  6. Remember that it takes time! Wealth needs time to grow. So plan to touch your corpus only 15 years or so later. In the meantime manage health issues with your health insurance and emergency fund.
  7. Do not forget about Things to do AFTER you buy a health insurance policy

Health insurance resources

If want help choosing a health insurance cover, then you give these posts a try:

₹e-Assemble step 4: How to choose a suitable health insurance policy

Apollo Munich Optima Restore Benefit vs Max Bupa Re-fill Benefit

Star Health Comprehensive Insurance vs Religare Care Comprehensive Insurance

Building a health insurance comparison chart + Cigna TTK vs Royal Sundaram Health Policies

Reader story: How I selected a health insurance policy

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