Are your finances geared for medical emergencies?

Individuals build a corpus for various purposes like child's education, buying a house and child's marriage, among others. However, when it comes to accumulating a corpus for medical emergencies, individuals are not as proactive. With avenues like medical insurance (or mediclaim as it is commonly known) on hand, individuals believe that having a medical insurance will suffice all their medical expenses. However, the reality is far from this.

It is true that medical insurance provides compensation for the medical expenses incurred, but there are several limitations. Depending only on medical insurance may not be enough to take care of all medical expenses. Therefore, individuals must aim at building a separate medical corpus to supplement the medical insurance.

For the uninitiated, let's first understand what a medical corpus can do for you. Put simply, a medical corpus is a fund that can help you provide for medical expenses during an emergency or when your medical insurance cover is not sufficient to cover your medical expenses.

What is medical insurance?

Medical insurance provides for reimbursement of hospitalisation expenses for illnesses/diseases suffered or accidental injuries sustained during the policy period. In other words, subject to the medical insurance cover and the terms and conditions of the policy, the insurance company undertakes to compensate the policy holder for hospitalisation expenses that he incurs over the policy tenure.

In order to take a medical insurance cover, the policy holder is required to pay an annual premium. The premium amount is calculated based on the policy holder's age and health condition. The premium amount increases with an increase in the individual's age, among other factors. However, in case of an existing medical insurance policy wherein no insurance claim has been made, the insurance company compensates the policy holder by enhancing the insurance cover at the same premium.

Now the point is, when you already have a medical insurance policy, why would you need an additional medical corpus? Shouldn't the medical insurance take care of all your expenses in that year?

While it is true that having a medical insurance is an important step in providing for medical emergencies, there are certain points you need to appreciate about medical insurance. Medical insurance has its own limitations, which could make it difficult for you to get compensated for all your medical expenses. The reason why medical insurance is 'incomplete' is because:

1. In order to claim medical insurance, hospitalisation is a must even if it's only for a day. If the policy holder has incurred an expense that does not result in hospitalisation (like a mild heart attack for instance), he cannot claim any compensation.

2. Insurance companies have a limit of upto Rs 500,000 on their policies. So your compensation is limited to that amount. If the policy holder incurs an expense higher than Rs 500,000 (like on a bypass surgery for instance, which can be very expensive) he will have to pay the excess amount on his own.

3. Another point that can be drawn from the above point is that for those who have opted for a cover less than Rs 500,000, like Rs 200,000 for instance, their compensation is even lower than the maximum permissible Rs 500,000. Most individuals opt for a medical cover of Rs 100,000-200,000 usually for the tax benefit. Now a Rs 100,000-200,000 can prove to be very low during a major medical crisis. In times like these, the policy holder will have to pay for the excess amount.

4. Medical insurance is usually made available only upto a certain age limit (for most insurance companies this is 65 years). So if the policy holder's age is above this limit, he will not be given a fresh policy and on the same lines his existing policy will not be renewed. Ironically, this is the age when individuals need financial assistance the most; unfortunately insurance companies are not interested in extending a medical cover to senior citizens in their hour of need. If they incur any medical expenditure at this age, they will have to foot the entire bill.

5. Some insurance companies even when they do give a medical cover to older policy holders, raise the premiums considerably. At that age when a policy holder is probably retired, mustering a large premium amount every year isn't easy.

6. Medical insurance policies usually have exclusions. This means that they do not compensate the policy holder for certain illnesses/medical problems. If the policy holder is afflicted by any of these medical problems, he will have to pay for the expenses on his own.

It is clear that medical insurance has a number of limitations and it is likely that at some stage an individual will find it inadequate in meeting his medical expenses.

What should you do?

While it is important to have a medical insurance policy (and not just for the tax benefit), as we have shown it is hardly sufficient to meet your medical expenses over the long-term. It is best to have a back up by having a medical corpus of your own. How can you go about building a corpus? When you come to think of it, it's not very difficult.

Let's take a 30-Yr old individual Vivek. He wants to build a corpus of Rs 500,000 for medical emergencies by the time he retires (at the age of 60). Now Rs 500,000 may look like a very paltry sum, but considering that he has a medical insurance policy of Rs 500,000, it should prove adequate. Of course, if he did not have this cover or had a lower cover, he would have to aim at building a larger corpus.

Since the medical corpus is sacred money, his investments are limited to low-risk, high yielding debt investments. For this we have assumed an 8 per cent rate of return. Also we have assumed a 6 per cent inflation rate. Our calculation shows that Vivek will have to set aside Rs 14,058 annually or Rs 1,172 monthly.

Medical insurance is a must to provide for medical expenses. However, considering the limitations of medical insurance, individuals would do well to maintain a separate medical corpus to take care of future medical expenses that are not provided for by the medical insurance policy.

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