95 Financial Planning Handbook PDP

Chapter 14
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Health Insurance
M
edical insurance is a type of insurance where the insurer pays the medical costs of the insured if
the insured becomes sick due to covered causes, or due to accidents
Why does one need health insurance?
Today, health care costs are high, and getting higher by the day. In case of a medical emergency, the
cost of treatment cannot be predicted, and thus can be very well beyond what one can afford. In a
particular year, the cost of medical treatment might be low, but in some other year it could be prohibitively
high. Thus, medical insurance is required to protect oneself against such emergencies as well as
uncertainties.
Example
Suppose A is driving back to his home after work on his two-wheeler. He gets hit by a speeding car from
behind and suffers intensive brain injuries. He has to now undergo immediate surgery. He has to bear all
those expenses out of his pocket in case he has not taken any medical insurance.
Who can avail health Insurance?
Medical insurance can be availed by anyone between the age of 5 years and 75 years. The lower and upper
age limits may vary depending on the policy. One can avail of medical insurance for himself only (individual
cover) or for himself and family members like spouse, children and dependant parents (group cover).
Benefits of Health Insurance
Provides cover against sudden illness or accidents that one may encounter
Adequate coverage can prevent sudden cash outflow and can sometimes help by providing capital
for immediate surgeries
Different Types of Medical Expenses
Hospitalization
Surgery
Medicines
Diagnostic procedures and tests
Various types of medical expenses can be incurred by a person. Medical Insurance Policies usually tend
to cover the expenses only on and after hospitalization. So this means that once the hospitalization of
the consumer has taken place, then rest of the expenses like medicine, diagnosis etc are taken care of.
Types of Medical Insurance
There are two major categories of Medical Insurance namely
Indemnity Plan
Managed Care Plan
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Indemnity Plans
These are also referred to as reimbursement plans, and they offer reimbursement against medical expenses,
irrespective of which service provider is used. There are three common practices that are used to determine
the amount of reimbursement in an indemnity plan:
Reimbursement of actual charges : Where the actual cost of medical expenses is reimbursed.
Reimbursement of a percentage of actual charges: Where only a set percentage of the actual
charges is reimbursed. The rest has to be borne by the consumer.
Indemnity: Where a specified amount per day for a predetermined number of days is paid regardless
of the actual cost of care. The reimbursements however, will never be more than the actual expenses.
Example
A person enrols for a Medical Insurance Plan. He opts for coverage of up to 1 lakh rupees. Suppose, he falls
sick and incurs an expense of Rs 10,000 over a period of 5 days. If the insurance company reimburses the full
10,000 rupees to him, this will be an example of indemnity plan with reimbursement of actual charges.
In case the medical insurance company pays him @ Rs 1000 per day, i.e. Rs 5000 in total (since he was
ill for 5 days only) then this would be an example of indemnity plan with indemnity.
In case the medical insurance firm reimburses 80% of his total expenses, i.e. to say Rs 8000, then this
would be an example of indemnity plan with reimbursement of a percentage of actual charges.
Managed Care Plans
These are the plans in which the insurer has a network of selected health care provider i.e. hospitals and
they offer incentives to the insured to encourage this to use the provider in the network.
Need for determining the appropriate coverage
After one decides to enrol for a Medical Insurance, the next task is to decide on the amount of coverage
one should take. The amount of coverage that one enrols for in a policy is an important decision as it
would directly affect the premium he/she needs to pay. More than this, if the coverage is too low, the
benefit of taking the insurance is lost and in case the coverage is too high, cash is wasted.
What are the factors that need to be considered while determining the coverage?
The determination of an appropriate coverage will depend on a number of factors. A few of them are
as follows:
Age
Health history and Present health condition
Profession
Income and Prior Financial Commitments
Options of floater cover
Example of age as a factor
A 23 year old will be less susceptible to disease than a 45 year old, who might run a risk of heart attack,
diabetes or blood pressure.
Example of profession as a factor
A cricket player, or for that matter any sports person, is more likely to suffer injury and thus need medical
assistance. In contrast, a professional would have a lesser chance of needing medical attention.
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Income and Prior Financial Commitments
Income of a person would also determine what amount of coverage he/she can take. Again, if a person
has some prior financial commitments, that would also limit his capacity to pay premiums.
Example
Person A is earning Rs 1 Lakh per annum. Person B is earning Rs 3 Lakh per annum. Both will have
different capacity to pay premium and hence, would take different coverage
Person A earns Rs 1 Lakh per annum but has no prior financial commitments. Person B earns Rs 2
Lakh per annum, but has an education loans worth Rs 1.5 Lakh. This prior commitment would reduce
person B capacity to pay premium and thus, he would take a lower coverage.
Options of floater covers
A person might decide on the amount of coverage based on the concept of floater covers. Floater cover
policy is a policy under which the policy is purchased by a group of members, mostly belonging to the
same family. This policy allocates a total amount for the family rather than for individuals; giving the
advantage of a large cover for the family. This policy is based on the assumption that at any point in
time, all the members of the group would not require the complete amount of cover.
Example
Suppose 3 members of a family purchase Rs. 1 Lakh worth of cover individually. However person A of
the family uses only Rs. 50 thousand of the entire cover, person B doesnt use the entire 1 Lakh while
person C requires Rs. 1.5 Lakh for his treatment and has to provide the 50 thousand rupees from his
side. This family can take a floater cover policy of a total of Rs. 2 Lakh which is available for all the three
members. As the total sum insured is less than the individual cover, the premium on this policy is lower
and thus the cash outflow is lower.
Personal Accident/Disability Income Insurance
This kind of insurance helps one to plan in case of a sudden accident or permanent disability that can
happen because of it. With the increase in number of vehicles in cities, roads have become a less safe
place and thus the need to invest in such a policy has grown.
Benefits
This policy offers compensation in case of death or bodily injury to the insured person, solely as a
result of an accident, by external, visible and violent means.
The different variations have different coverages ranging from death to comprehensive covers including
death, permanent disablements and temporary total disablements.
An Indian adult up to the age of 70 can cover himself / herself and dependent family members
between the age of 5 and 70 years.
This policy also provides a daily allowance for the tenure of hospitalization.
Some policies of this category also provide for the education of 2 dependent children of the insured
person and a bonus on the total sum insured in case of permanent disability.
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Exercise
Sethi and Malik, both age 35 decide that they should invest some of their savings in a life insurance
policy. Sethi took a term policy for the cover of 25 Lakhs and Malik took an endowment policy with a
similar cover of 25 Lakhs. The expected cost of these benefits, based on the risks of the claims helps
determine the premium. Which one will have a lower premium and why?
Solution : Term will always have a lower premium, so Sethi will pay a lesser premium than Malik. There
is always a claim from an endowment policy irrespective of the person living or dead. After a specified
time, Malik will receive sum assured plus bonuses. However a term assurance claim arises only on
death during the term of the policy. So it is purely a risk cover, Sethi made a smarter choice than Malik.
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