Health Insurance: Mathematics, Purpose & Emotion

 

The COVID situation has been an extreme event around the world, where at least once, we all must have felt like dumped into a war zone. It has been a challenging time since last 6 months; where some of us are battling with this either physically, financially, mentally, socially or by any other means.

On the contrary, there is also a positive side to this.

We all got good time with our family, we restored & enjoyed the hobbies which we left out earlier due to daily routine; we also tried to become chef in our own way and many more things which we missed earlier. More importantly we all have reshaped our awareness or trying to do so. This primarily includes necessity to keep ourselves really healthy & protected.

At macro & micro level, each one of us are compelled to think about health care and its infrastructure. One of the significant parts of health care system surely includes Health Insurance.

Owing to this, I thought to pen down about the mathematics, purpose and emotion attached to health insurance.

We all have heard once in our lifetime that how important it is to be insured against any major health expense that one may incur and thus have an adequate health insurance. But how many of us really implement this? According to an article of November 2019, by Outlook Money, health insurance penetration in India was merely 34% i.e. only 34% of Indian population is covered under any health insurance policy. This also means that not even half of the population in India is insured against any health risk.

Now from an advisor perspective, we also have encountered several thoughts from clients or prospects such as:

        a.    Why should I incur the premium cost when I am fit?

        b.    I will take health insurance when I will grow a bit old i.e. during 40s or after the age of 50.

        c.    I would rather save premium cost & invest somewhere.

        d.   We don’t have any hereditary problem so we don’t need health insurance etc.

Basically some people keep themselves on denial mode by such thoughts and end up being uninsured or under insured. But do we really need this? Let’s understand different scenarios:

Scenario: 1 – Buying health insurance

Scenario: 2 – Keeping a corpus aside for any major health expense

Scenario: 3 – Not paying annual premium & instead saving the same

Scenario: 4 – Saving the annual premium cost & investing it.

Considering the mathematics behind all these scenarios, let us see the illustration as follows:

Scenario: 1 – Buying health insurance

Assuming you are a family of 6 members i.e. Self, Spouse, 2 Children & Parents and decide to get a basic health cover of Rs. 5 Lakhs as well as top up (additional health) cover of Rs. 15 Lakhs.

Sr. No.	Insured Members	Annual Premium (Rs.)
1	Health Cover - Self, Spouse & 2 Children (Assuming highest age = 30)	17206
2	Health Cover - Parents (Assuming highest age = 55)	27890
3	Health Top up - For all 6 members (Assuming highest age = 55)	15840
	TOTAL	60936
Note:  All the above figures are actually calculated based on the prevailing rates of health insurance policy of one of the reputed insurance companies in India.

So, your family is covered for Rs. 20 Lakhs against any health risk for which you will have to pay annual premium of approx. Rs. 60000.

Scenario: 2 – Keeping a corpus aside for any major health expense

Considering that the facts of scenario: 1 remains the same, if you have to protect your family against the health risk for Rs. 20 Lakhs and you don’t buy insurance but you decide to keep aside the required corpus. Then Lumpsum Rs. 20 Lakhs has to be kept untouched from today.

Is it possible for you to have Rs. 20 Lakhs capital today and afford such substantial amount to be kept idle as contingency?

Scenario: 3 – Not paying annual premium & instead saving the same

It is not possible for every individual to have upfront capital of Rs. 20 Lakhs. Also the decision of not buying insurance is intact. So if you decide to accumulate the corpus merely by saving the premium cost, it means you saved Rs. 60000 annually. But to accumulate 20 Lakhs it will take roughly 33 years to reach that amount.

Now what if you incur hefty hospital cost during this 33 years for yourself or any family member?

Scenario: 4 – Saving the annual premium cost & investing it

Under this scenario, you save annual premium of Rs. 60,000 & do not buy insurance but you reinvest the money. Let’s assume you save this amount on monthly basis & invest i.e. Rs. 5000 invested per month. What will be the future value of this savings?

Refer the table below:

Instruments	Bank FD	Bonds	Conservative Equity	Moderate Equity	Aggressive Equity
Expected Annual Return	6%	8%	10%	12%	15%
Target Corpus (Rs.)	20 Lakhs	20 Lakhs	20 Lakhs	20 Lakhs	20 Lakhs
Monthly Investment (Rs.)	5000	5000	5000	5000	5000
No. of years required to achieve target amount	19	17	15	14	12
Total Investment (Rs.)	11.40 Lakhs	10.20 Lakhs	9 Lakhs	8.40 Lakhs	7.20 Lakhs

As you can see in 3^rd & 4^th scenario, to get a protection of Rs. 20 Lakhs for your entire family, your waiting period to reach that amount ranges from 12 years to 33 years approximately.

So, What if you may need to incur heavy hospitalization cost for any one family member during this accumulation phase?

Even if you did, what if again you have to incur such cost for any other member?

Also in scenario: 1, you had kept aside Lumpsum corpus of Rs. 20 Lakhs and assume that you have to use this money for once. What happens if you need to incur big cost again?

Please note that contingency does not only include medical reasons. It may occur for some other reason as well where you may need to use your contingency corpus and thus reducing it to a certain extent.

 PURPOSE OF HEALTH INSURANCE

In our earlier blog on Wealth Management, we discussed about wealth preservation. There we tried to explain that preserving wealth means protecting your capital & keeping it intact. By not buying insurance, you are preparing for deterioration of your capital which you must have accumulated from hard earned money.

Simply, assume that you have built your wealth of Rs. 100 Lakhs till date and due to a significant medical requirement you had to incur Rs 20 Lakhs (like discussed in above scenarios). Also you do not have any health insurance for yourself. This will result in reduction of your wealth by Rs. 20 Lakhs & thus your total wealth comes down to 80 lakhs from 100 lakhs.

Now in this example assume that you had bought health insurance. Then the medical cost which you had incurred will be reimbursed by the insurance company and thus your total wealth will remain intact.

So understand that by getting adequate health insurance cover, you are transferring the risk of heavy medical cost to insurance company and as a result you are protecting your capital.

THE EMOTIONAL SIDE

Earning money and building your net worth is surely an emotional exercise because you earn for your needs, goals, dreams & aspirations. When this money gets lost, it hurts; since you know the hard work, pain & sacrifice behind that.

We always wish & pray for everyone’s good health, but just try to imagine a situation where you are hospitalized and your family has to manage all the requirements including the finance part and you don’t have any insurance. They will have to manage medical needs, financial needs and you as well.

In such situation, your family should be with you and should not bother about any monetary aspect. For this, there should be someone for your support & handholding and thus advisor like us or insurance company comes into picture.

CONCLUSION

Looking at the increasing awareness of health insurance over last few months due to pandemic, we really believe that penetration will improve. But yes, there is lot more to be done. 

As an advisory firm, we are simply trying to make a point that one should not deal with financial planning with negligence. Sometimes people may think that an agent or an insurance company or an advisor is merely trying to sell the insurance product. But it is not true for all cases. Insurance is a subject matter of solicitation which essentially means that insurance has to be requested or asked for, not sold. This applies to both service provider & receiver. So next time when your advisor asks you whether you are adequately covered or not, then don’t ignore the question merely by thinking in terms of sales.

Stay healthy, stay blessed & have fun.