Health Insurance Coverage - Planning for your Retirement and beyond

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"....he never saved money or invested in mediclaim facilities and that's why he went through financial crunch," said Vijay Hangal, on the demise of his father, the legendary AK Hangal, (best known for his "Rahim Chacha" role in the iconic movie "Sholay")

This comes as a surprise to many of us. How can a famous film personality, who continued working till the age of 95, go through a financial crunch?? Film personalities are known to be paid well, drive flashy cars, live in large houses in prime locations.

When you delve deeper, you realize, that even the rich and the famous are not insulated, from the lack of financial planning. With huge income come huge expenses, mostly dead/sunk expenses. Not planning, or worse - not saving can kill your peace and happiness, in your second innings, your retirement years. 

Coming to the lesser mortals like you and me. What is known to us, is the power of saving, but what's often ignored is the power of financial planning. Simply saving money in your savings account, or may be a fixed/recurring deposit, buying a house, will not insulate you from a financial earthquake in your life. One crisis can swipe everything you saved. Think about it, One hospital bill for a major/critical illness has the might to rip apart your savings, leaving you exposed. The cruel part of such an expense is that it is niether avoidable, nor adjustable. It has to be faced. 

Your Financial planning will go far in deciding how peaceful your retirement life would be. A very big piece in the pie of costs post retirement, is healthcare, specially hospitalization. 

Most of us have realized this, and hence want to invest in Health Insurance. One of the pertinent questions that crops in your mind, once you have decided to buy health insurance is the coverage - how much health insurance to buy?

The question is rather obvious, given 2 things:

  1. Health insurance is a super looooonnng term investment, which you would need most in your old age, beyond say 60 years of age.
  2. It’s common knowledge that Hospital costs are increasingly rising, gradually becoming unaffordable, to the middle class family.

So, how much is enough to financially support your family’s healthcare needs, ensuring you have a peaceful retirement life.

Let us take this up, step-by-step.

What are the costs of common surgeries today?

A recent analysis done by our Research team show that the cost of some major surgeries in hospitals across India. Going by these numbers, assuming only one surgery is required during a year, per member; a sum insured of Rs. 3-4 Lakhs should be good enough for the year 2012.

What is the rate at which hospital costs are rising in India?

Major supply deficit with respect to healthcare infrastructure - hospital beds, doctors and nurses, increase in cost of medical equipments, land has resulted in an increasing trend of healthcare inflation.

Here are the 2012 costs for surgeries, compared with costs in 2007.

The costs of common surgeries have increased by 50-60% in 5 years! This means healthcare costs have increased by 9-10% year-on-year, since the last 5 years.

We spoke to Sudhir Sarnobat, CEO at Medimanage.com. Here’s what he had to say “the average annual healthcare inflation would be at 5%, if you look at 30 years duration.  The hospitals do not increase their tariffs every year. Generally, they increase it by around 15-20% every 2-3 years. This would effectively come to 5% CAGR.”  “India is currently having Supply Deficit when it comes to Hospital Beds. But we are seeing a good amount of capacity increase in beds in last 7-10 years which should continue to grow. On the other hand, our population is stabilizing. In 15 years, the equations should change & ease pressure on prices. India is a developing economy and from credible reports, will continue to be on growth path for next 10 years. After that once the wealth distribution is even, we would see stabilization of inflation (world over that's been the phenomenon, look at US Medical Inflation for last 5-7 years, it is 4%)” Sudhir added.

Some reports on Hospital infrastructure talk of a major crisis in the making in the Healthcare Industry, due to overflowing demand, coupled with very slow growth in the poor hospital bed to patient and doctor to patient ratio in India, primarily due to deprived participation from the Govt.

A Tower Watson Report pegs healthcare inflation in India at 13% for the year 2012.

In my opinion, while costs are bound to rise due to the slow growth in the ratios, on a 30 year horizon they have to plateau somewhere. Looking at this, I suggest, let’s take the inflation year-on-year for the next 10 years at 12%, and then average 5% for the remaining 20 years.

Future Healthcare Costs:

Factoring healthcare inflation on Rs. 4 Lakhs of costs expected today, in 10 years, @ 12% inflation, the sum insured requirement would increase to Rs. 12 Lakhs, per member. In 20 years @ 5% inflation, to Rs. 20 Lakhs, and in 30 years to 33 Lakhs.

For calculation of floater coverage, take 50% ad hoc for every additional adult member and 10% for every child, and here’s the kind of cover you will need, for some of the family combinations.:-

 

So a family of 2 – Self and Spouse will need a cover of Rs. 50 Lakhs year-on-year every year, from the age of 60. 

This is a huge sum!  So, what does one do? 

A middle class guy would either have to “afford”, “plan” or “pray” Smile to be able to afford such astronomical expenses. 

Let’s see how we can plan to afford such healthcare expenses.

Plan to fund your Healthcare Expenses, post retirement. 

Look at the Present Value (http://en.wikipedia.org/wiki/Present_value) of Rs. 50 Lakhs at 10% inflation on 30 years, it calculates to just Rs. 3 Lakhs. So though the problem looks huge, it definitely can be resolved by the power of financial planning.

Here are the steps we recommend you to create a fool proof plan for your healthcare expenses.

<!--[if !supportLists]-->a) Commit yourself to healthy living: Yes, it’s very awkward for a Health Insurance services company, asking you to commit to health, but then we at Medimanage.com, truly believe that Healthy living is the most primary form of Health Insurance. No amount of financial planning can compensate a bad lifestyle full of unhealthy habits. That is precisely the reason we have invested on a Preventive Health Magazine which has recently crossed 1000 pages of "original" and "indian" content. Healthy living would of course mean Regular Exercise, Healthy nutrition and No ill-habits. A Health lifestyle will simply help avoid huge hospitals bills. Also, read an excellent article by Nandish from Jago Investor - here

(b) Long term and Short term financial plan: Given point (a) is a way of life for you, you now need to create a Long term and Short term financial plan, for the unavoidable healthcare expenses, like hereditary ailments (Diabetes, Thyroid), age related (like knee replacement), or infectious diseases (like Malaria), or even diseases like Cancer (which still have many unknown causes. Perfectly healthy people have got cancer, in spite of no ill habits).

Note, if you cannot commit to point (a), your needs for long term and short term funds increases multi-fold, to cover healthcare expenses.

  1. Cover yourself with Health Insurance! Investment in Health Insurance, will ensure your short term health insurance needs are met, before you build your contingency fund. Also, if you calculate the amount of money you invest into a Health Insurance policy in a lifelong, the total amount would be measly compared to the risk it covers. For instance, the sum total of premium paid for a cover of Rs. 3 Lakhs for a 30 year is Rs. 240000. This premium paid in 30 years, covers you for hospital bills of Rs. 3 Lakhs every year, for 30 years. Which amounts to Rs. 90 Lakhs of coverage. If you make a claim of the entire sum insured in one particular year, the entire sum insured is reinstated on renewal of the policy. No amount of savings can match buying a good health insurance. You can safely invest in a good health insurance, and the remaining savings can be peacefully invested according to a good financial plan. Note, when you buy Health Insurance, preferably buy one which covers you for lifetime, and provides a no claim bonus, for the sum insured of Rs. 5 Lakhs individual or Rs. 7-8 Lakhs Floater.  If you are buying plans, with Restore options, then the sum insured could be lower at around Rs. 5 Lakhs. In case you are stuck and unable to take a decision on Health Insurance, you can have a one-to-one discussion with our advisory team, Post your inquiry here
  2. Take a good top-up plan, which is a smart cost-efficient way to cover a large hospital bill. Take a cover in a floater of Rs. 10-15 Lakhs for the entire family.
  3. Invest in a Critical Illness Policy: Buy a nice Rs. 5-10 Lakhs critical Illness plan, which covers maximum no. of ailments, especially for the earning members of the family. This will help you get lump sum payment for critical ailments, and compensate for any loss of earnings. You can also explore the option of a more comprehensive benefit plan with your health insurance advisor, with products like Tata AIG Wellsurance, Aegon Religare iHealth, which provide lump sum benefits for large no. of surgeries, in addition to the Critical Illness benefit.
  4. Build a Strong Healthcare Contingency fund, for Rs. 15 Lakhs for individual, and Rs. 25 Lakhs for a family of 4, maturing at age 60. A contribution of Rs. 15000 per annum at 10% return will accumulate Rs. 25 Lakhs in 30 years.  

So what’s the total outgo for the above healthcare financial plan?

At the age of 30-35 years, you would incurr approximately Rs. 2500 per month, or Rs. 30000 annually to insulate yourself, from a healthcare expenses of the future. Here's the break-up of the approximate cost. 

Ofcourse, the plan above is indicative and would have to be customized depending on some of the following factors:

  1. No. of members you want to cover,
  2. Their age
  3. Their health condition
  4. Family history of critical ailments like
  5. The city where claims are expected
  6. The type of hospitals, rooms you prefer.
  7. Your lifestyle. 

So what's your reaction to this article? Was it helpful? You agree? You dont agree? Let's discuss in the comments section right down here...!

 

About the Author:

 Mahavir Chopra is the Head - Personal Lines & eBusiness at Medimanage.com, a specialist health insurance advisory service for Individuals, Families and Corporates. Know more about Medimanage's free advisory services here

 

If you want to speak to Mahavir's team of expert advisors for a one-to-one discussion on your requirements, post your inquiry here

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