Why and how to build a healthcare kitty?

A simple laparoscopic surgery will cost you at least Rs 25,000 in a hospital in a metro city. The same surgery will cost you at least 30% to 40% more after five years, thanks to the rising medical inflation. Just as the prices of milk and petrol are on the rise, so is the cost of healthcare facilities. You can turn into a vegan or start taking a public transport to mitigate the impact of rise in prices of milk or fuel.

But you cannot have the same approach towards your healthcare cost. If you encounter a health issue, you have to give it the necessary medical attention, which comes with a heavy price tag. And you have to provide for these expenses as you climb up the age ladder. "Typically, a medical insurance covers mostly hospitalisation but not the other expenses related to medical treatment,  "Earning couples who primarily live out of their salaries, have cash in terms of savings, service EMIs, and have limited assets to liquidate, should ideally build a healthcare corpus. This should be over and above the health insurance policy bought by the couple," he says. 

 

NEED FOR HEALTHCARE CORPUS

 

Rising medical inflation:

The Insurance Information Bureau recently unveiled data on the rising medical inflation and its impact on health insurance claim amount. The average claimed amount for circulatory diseases, cardiac problems and paralytic stroke mainly, had increased by 56.99% in 2009-10 when compared with 2007-08, according to the data. "Overall, there is an increase of 27.09% in the claim severity for the year 2009-10 when compared with 2007-08," the IIB report said. 

 

Stringent mediclaim norms for elderly:

Health covers for senior citizens — be it a fresh policy or renewal — come with a higher price tag than for others. Industry experts justify the higher premium cost saying it is to account for the risk factors. For example, if you paid 1.5% of the sum assured as premium at the age of 25 years, the premium amount can shoot up to 8% of the sum assured when you are 60 years old.

"If you don't have any financial constraint, then you should sign up for a medical insurance. "Even if you exhaust the limit on one cover, you will have a back-up option although it is an expensive affair. The second option is to build a contingency fund just to fund your healthcare expenses. If senior citizens don't want to depend on their children, they should ideally build a corpus for healthcare expenses over and above the regular retirement kitty.

Another common aspect in most health covers for senior citizens is the co-payment clause. This refers to the portion of a claim a policyholder agrees to bear, while the insurance company undertakes to chip in with the rest. "Co-payments happen only in certain reimbursement covers to make the insured more responsible for judicious payments. This clause is seen mostly in health covers designed for senior citizens. It is also common in group mediclaim covers offered by employers, which cover employees and his/her family members. The co-payment clause is applicable mostly to the family members of the employee

 

Mediclaim doesn't cover all expenses:

There are two kinds of medical policies available in India. The first is the indemnity policy, which is the traditional mediclaim policy offered by general insurers. These are largely reimbursement plans, which cover expenses related to hospitalisation. The claims are settled by the insurer either on a cashless basis through a tie-up with hospitals or by reimbursing the bills. Then, there are the defined benefit plans offered by life insurers, like critical illness policies and payment of a lump sum on the diagnosis of any of the named critical illnesses in the policy document.

"If the insurance company is stipulated to pay Rs 5,000 for a certain critical illness, the company will pay Rs 5,000 irrespective of the size of the claim. However, the caveat is critical illnesses such as cancer, stroke, renal failure or major organ transplants are not standardised and may vary from insurer to insurer. "Similarly, there are various expenses like commuting to the hospital, buying medicines post hospitalisation and so on, that fall outside the purview of a traditional reimbursement plan.  Hence, it always helps to having a healthcare kitty which can be used as a top-up fund over and above your mediclaim. 

 

HOW TO BUILD A HEALTHCARE KITTY

 

Save systematically:

Investors often complaint that they don't have money to save even for their regular goals. Hence, a separate healthcare corpus becomes out of the question. But if you save just Rs 1,700 in the form of SIP for 20 years, you can accumulate a corpus of Rs 10 lakh after 20 years. (The annual rate of return is calculated at 8%). Hence, the size of the amount need not be high. Just ensure you start at an earlly stage in your life to benefit from the compounding effect.

However, if you are not cash strapped, then save up all your money for 3-4 months just for your healthcare needs. "It should not be a long-term plan. Dedicate the excess cash over 2-3 months to build a healthcare kitty. Look at stable instruments such as bank deposits or liquid funds. Do not look to earn higher returns on this corpus through risky instruments, as stability of the corpus is a key factor 

 

Re-balance portfolio with age:

Sometimes, you may avoid taking any decision because you fear it may backfire in future. This is called regret aversion in behavioural finance. But you have to fight this fallacy as one investment approach cannot suit you across different life stages. When you turn 60, asset allocation should get more tilted towards debt since your risk appetite will be much lower.

For example, you may have a high exposure to equity at an early age, say in you late 20s, so as to meet your goals. But, the fact is you have the risk appetite to deal with a portfolio skewed towards equity, which carries market risks. The same strategy will not apply to you when you touch 40. Your needs change and your responsibilities are higher. The debt-to-equity ratio shifts from 80:20 at 25 to 20:80 at 50. This is the time to enjoy your savings rather than regret over losses from an aggressive, equity-driven investment plan. 

 

Bank on deposits and liquid funds:

Save the corpus in fixed deposits (FDs) and liquid funds, which are more stable in nature. The returns from liquid or liquid plus funds, which come with a lock-in period of a maximum of three days, are in the range of 6-7 % and are also redeemable within 24 hours.