ifp_14_Health_Insurance.pdf

8/11/2019 ifp_14_Health_Insurance.pdf

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95Financial Planning HandbookPDP

Chapter 14


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96 Financial Planning Handbook PDP

Health Insurance

Medical insurance is a type of insurance where the insurer pays the medical costs of the insured ifthe insured becomes sick due to covered causes, or due to accidentsWhy does one need health insurance?

Today, health care costs are high, and getting higher by the day. In case of a medical emergency, thecost of treatment cannot be predicted, and thus can be very well beyond what one can afford. In aparticular year, the cost of medical treatment might be low, but in some other year it could be prohibitivelyhigh. Thus, medical insurance is required to protect oneself against such emergencies as well asuncertainties.

Example

Suppose A is driving back to his home after work on his two-wheeler. He gets hit by a speeding car frombehind and suffers intensive brain injuries. He has to now undergo immediate surgery. He has to bear allthose 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 upperage limits may vary depending on the policy. One can avail of medical insurance for himself only (individualcover) 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 capitalfor immediate surgeries

Different Types of Medical Expenses

Hospitalization

Surgery

Medicines

Diagnostic procedures and testsVarious types of medical expenses can be incurred by a person. Medical Insurance Policies usually tendto cover the expenses only on and after hospitalization. So this means that once the hospitalization ofthe 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 determinethe 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 actualcharges 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 regardlessof 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 fallssick and incurs an expense of Rs 10,000 over a period of 5 days. If the insurance company reimburses the full10,000 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 wasill 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 thiswould 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 andthey 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 itwould directly affect the premium he/she needs to pay. More than this, if the coverage is too low, thebenefit 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 areas 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 medicalassistance. In contrast, a professional would have a lesser chance of needing medical attention.


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Exercise

Sethi and Malik, both age 35 decide that they should invest some of their savings in a life insurancepolicy. Sethi took a term policy for the cover of 25 Lakhs and Malik took an endowment policy with asimilar 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. Thereis always a claim from an endowment policy irrespective of the person living or dead. After a specifiedtime, Malik will receive sum assured plus bonuses. However a term assurance claim arises only ondeath during the term of the policy. So it is purely a risk cover, Sethi made a smarter choice than Malik.

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