How to create your own medical emergency fund

Karan Deo Sharma
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How to create your own medical emergency fund

How to create your own medical emergency fund health insurance 30stades

Buying a family floater health insurance policy is now believed to be an essential part of one’s financial planning. There is a great push by the insurance industry, the insurance regulator and the government to increase the health insurance coverage of the Indian population.

Anecdotal evidence and official data from the Insurance Regulatory and Development Authority (IRDA) however suggest that health insurance seldom works as it is presented by insurers in their sleek advertisements. 

Most individuals are forced to run from pillar to post to get the insurance claim when someone falls sick and they are presented with hefty bills by hospitals. And it’s not uncommon for the health insurance company to reject the claim altogether citing one fine print in the policy document or the other. 

And if the insurance company does accept the claim, they don’t pay as much as they should or the payment comes with a lot of delays. As a result, the patient or her family is forced to make out-of-pocket payments to the hospitals, which defeats the purpose of paying a regular premium on a cashless health insurance policy.

According to data from IRDA, the incurred claim ratio (net incurred claims to net earned premium) for standalone private health insurers was only 75.43 percent during the financial year 2020-21. This means that health insurers on average paid only Rs 75.43 as a claim out of their total premium income of Rs 100 during the year. This is a very low claim settlement ratio by international standards and it should be closer to 90 percent.

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The low ratio just confirms the general perception that health insurers are reluctant to honour even genuine claims forcing many of their customers to spend hefty sums from their pockets.

Besides the low claim settlement ratio, most often health insurance policies don’t cover out-of-pocket expenses for consultations with doctors or therapists.

This means that most insured people end up spending thousands of rupees every year on doctor consultations and medicines besides paying a premium on their health insurance. This could be a financial double whammy for many individuals and families.

Aren’t many individuals and families better off saving and creating an emergency health fund rather than paying thousands of rupees every year to a health insurance company that will drag its feet to make payment in an emergency?

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To illustrate, consider the case of one of my friends. For the last 12 years now, this friend of mine has paid around Rs 20,000 per annum as an annual premium for a family floater health insurance from a specialised health insurance company. But, he never had the opportunity to claim the insurance coverage even once. It’s not that he or any of his family members never get sick. But on most occasions, the illness doesn’t require hospitalisation and he ends up spending on OPD consultations and medicines from his pocket.

Given this, someone may ask what if my friend had instead invested Rs 20,000 per annum in a diversified mutual fund or even a bank or post office fixed deposit? In the last 10 years, the top-performing diversified equity mutual funds have delivered 12 percent annualised returns on average. At this rate, an annual investment of Rs 20,000 in a portfolio of these funds would have created a corpus of Rs 5.5 lakh in the last 12 years. This is not very different from the sum insured on my friend’s existing health insurance policy.

Even if my friend had invested in a bank fixed deposit or recurring deposit with annualised returns of 8.5 percent, his medical emergency corpus would have grown to around Rs 4 lakh by now.

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The best thing about creating a corpus is that, unlike health insurance, your funds can be used for any emergency and not necessarily only for medical emergencies. This is very beneficial in today’s world of a fickle job market and growing economic uncertainty.

A hybrid approach should be to create a medical emergency corpus and combine it with medical insurance for critical illnesses such as heart disease, cancer and organ failures. 

This way, your corpus will take care of routine medical emergencies while health insurance will pay for the high-cost and life-threatening illnesses.

The best way is to start saving early, preferably when you are in your late 20s or at best early 30s, so when you approach 50 years of age and start receiving medical bills, your corpus is big enough to handle the expenses.

(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).

Also Read: How to get the right mix of equity, gold and fixed income in your investment portfolio

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