Should I save for my own healthcare instead of buying tricky health insurance?

• Introduction
• Pros of creating your own fund
• Cons of a Health Care fund
• The impression that health insurance is complicated
• When does investing in a healthcare fund make sense?
• A fund could be useful, but not a replacement for health insurance

Health insurance usually comes with a series of complicated terms and conditions - leaving many with doubts about whether or not a claim will ever be paid - even if they consistently invest in a health insurance policy for years. This leads them into believing that building a health fund will be a better option for them. This is a very common thought many individuals have when looking at health insurance for the first time.

But, do the pros of building a fund actually outweigh the cons? Can you depend on an adequate fund alone - and what is an 'adequate' fund in the first place?

This article - is written to specifically put all these questions to rest, with a detailed comparison of how a health insurance plan and a health fund differ and how you should strategise your expenses to cover all the medical and healthcare expenses your family will have in the long-term.

Let's dive in!

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A healthcare fund is saving for your own healthcare expenses in the future, especially when you are old. You keep away some amount of money on a regular basis - investing in some form of easily accessible investment option, accumulating sufficient money, for all your future healthcare expenditure.

• You are in complete control, free to use the funds wherever you like.
• You have complete visibility on what you can afford and what you can't
• You have an incentive to take full care of your health and utilise the money you have invested, elsewhere.

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1. Your healthcare fund does not replenish itself.

Health insurance does.

Let us begin with the story of Akshayapatra in Mahabharat. 

In the Mahabharata saga, when the Pandavas were in exile in the forest, they needed to host several kings and dignitaries. As the wife of the Pandavas, Draupadi - was in-charge of making sure the guests were well-fed. However, she couldn't find enough ingredients to make hearty meals. In the fear that the family might face the anger of hungry sages, she asked the Sun god for help. Pleased with her devotion, he blessed her with the marvellous vessel called - Akshayapatra. The specialty of the vessel was that it would fill itself up with food, regardless of how many times a meal was taken out from.

Think of health insurance much like the Akshayapatra. It has multiple features and buffers which ensure your family is financially protected.

• Predefined funds you can use every year. The concept of Annual Sum Insured. If you ever use up partial or entire cover amount, it'll refill itself to the base cover as soon as you renew the policy. Unlike say a Term Insurance, Health insurance is not a one-time cover, paid only one time in the event of death. It covers your hospitalisation expenses for the sum insured for the number of years you renew your policy. The cover is essentially your Annual Sum Insured multiplied by the number of years you live or renew the policy. So in case you need to spend for hospitalisation equal to the sum insured every year, the policy would keep paying, without stop.

True cumulative cover for your hospitalisation expenses = (Sum insured) X (No. of years the policy is renewed)

• Reinstatement of Sum Insured: What's more, most of the modern health insurance policies come with a feature called - Reinstatement of Sum Insured (also called Refill benefit, recharge benefit, or restoration benefit). This feature replenishes the sum insured within the year, commonly in case of a claim for an unrelated ailment or another family member.
• No Claim Bonus: Most of the health insurance policies also reward you with an additional sum insured when you do not make a claim in a specific year. This reward ranges from 5% to 50% every year and accumulates up to 50 to 100% the base cover you bought. This cover gets withdrawn gradually only when you make repeated claims on the policy.

So in effect, many such buffers in your health insurance policy ensure you do not fall short of funds in the long term.

Health funds on the other hand would grow on a systematic basis before they become big enough to pay for multiple hospitalisations in a year, or in a span of years. Also, in case the funds are utilised in a particular year, they won't get replenished again in the coming year.

For instance, say you create a 30 Lakh fund by the age of 50 to take care of your healthcare expenses, versus buying a 30 Lakh health insurance cover. Say there is a 30 Lakh expenditure on hospitalisation - in this case, you would be in better control using the 30 Lakhs from your own fund, however, once the fund is utilised you will have zero balance. On the other hand, the health insurance cover will get replenished on renewal, keeping you financially covered year after year.

2. Calculating a healthcare fund is way more complicated than you thought.

Having your own fund will require you to play the role of an insurance company for your family.

You will need to - 

a) Guesstimate illnesses your family may suffer from.

b) Estimate for any possible hospitalisations due to accidents, infectious diseases (like COVID 19) that might occur - something you cannot predict or prevent

c) Estimate how your preferred hospitals will bill and hike their charges in the future.

d) Estimate yours and your family's life span.

e) Estimate the improvement in medical science and possible treatments available in the future and their costs.

It gets further complicated if your family has a medical history. In our view, if you sit down to make a calculation in detail, it is very likely that you are risking over-investing in the fund or leaving it inadequate.

Estimating losses and planning for systematic investment into a fund, to ensure the smooth settlement - is the exact qualification of an insurance company. You should rely on the experts, unless you are an expert yourself.

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The impression that health insurance is complicated is not misplaced. It has a host of exclusions, conditions, limits - it is difficult to understand how the policy will play out in the future, especially if you have not seen any claims in your life. Whether insurers would use the fine print to deduct claim amounts or decline payments altogether.

On top of this, there is a notable amount of bad word of mouth about the product - we hear more bad news about health insurance than good news. All this results in growing anxiety, mistrust about the product.

In our view, health insurance is not complicated, except for four things:

1. Early limitations: In the early days when the policy is bought, there are a host of temporary exclusions for the first 2-4 years that block claims. Till this period is passed, health insurance can be a tad restrictive in terms of benefits and inclusions.
2. When you are late in applying for health insurance- When you apply for health insurance either after a chronic illness or on touching old age - say above 60 years. Insurers are super nervous about taking such "high risk" cases, as it impacts their overall profitability - they may apply additional exclusions, financial limits over and above the standard ones in your plans.
3. When you are careless: When you buy a health insurance policy only because your brother or close friend bought it. You haven't understood the core terms and conditions well, neither have you filled the proposal form yourself after doing thorough homework. All this results in surprises at the time of claims - and then you mistrust the product or the company.
4. Premiums increase randomly: 2020 and 2021 have seen some really big spikes in health insurance premiums due to multiple reasons - This can happen in the future too. What you need to understand is that the premium hikes are also a reflection of healthcare inflation - the more the inflation, the more the expenses are growing, and hence impact on premiums. The hike in premiums is actually a signal that healthcare is getting expensive, and probably you may not afford it.

Except for the 4th point, the remaining 3 are very much in your control. If you really buy your policy on time, understand the terms well, fill the proposal form right - you have a great financial tool in hand, that you will not regret. Believe me!

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There are some specific situations in which you can look at building a health fund, instead of - or in addition to a health insurance plan. Here are some such scenarios you might run into.

 1. Insurance premiums are very high: For some individuals, health insurance premiums could become extremely high as a result of their age or pre-existing conditions. In cases where the premiums are higher than say, 30% of the yearly sum insured, it might make sense to instead invest into a fund and save up that money.

But mind you, if you're old or have a serious medical history - it is also more likely that you would need hospitalisation, treatments, and medical care in the future. So, you will have to take your healthcare fund very seriously - and contribute to it consistently. If not, you will be left without health insurance or a fund to cover rising medical costs - and even a single hospitalisation could quickly deplete your savings.

2. For individuals who cannot get a health insurance cover: Remember, insurance companies are for-profit organisations and are under no obligation to provide you coverage. It is possible that they even outright reject your policy in case the medical history becomes too risky for them to cover. In such cases, it becomes crucial that you build a health insurance fund - to have enough money kept away for your medical bills.

3. To cover OPD expenses post-retirement age: In India, health insurance essentially only covers hospitalisation expenses. Other medical expenses that occur without hospitalisation such as medications, doctor visits, regular medical tests, etc. also cost a lot of money. These might not seem like much today when you're earning a good salary, but as you age and retire - you will need a separate amount kept away to meet these costs.

These costs can be paid by the health insurance fund.

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We may not realise it while we are young, but we are all exposed to high risks of suffering from a chronic lifestyle disease, given the sedentary lifestyle we live in, exposure to pollution, high levels of stress at work. You may not disagree that our health conditions and hence the costs of healthcare are increasingly unpredictable. The pandemic just helped us realise this even more. To be able to predict and plan a fund that is available when required requires high-level skills and risk appetite.

Health insurance and its terms are complicated only if you buy it at an old age or after you suffer from a disease. Health Insurance opens up and improves its benefits gradually when you keep investing it and grow old with it.

As far as the ever-increasing premium goes - this is bound to happen given the healthcare inflation. Remember if you invest in your own fund too you will have to factor in complex healthcare inflation in your calculations.

So, in the interest of good health for yourself and your family - you should

a) build a strategy to have as much health insurance cover as you can afford, and

b) top that up with a decent healthcare fund that will cover all the exclusions, OPD expenditure for you and your family.

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Questions? 

If you have any further questions about how you should go about building a strategy for your healthcare expenses - you can post them on our forum. Insurance experts, as well as fellow insurance users, can share their experience - and help you make a better decision.