Are SIPs competing with traditional health insurance plans as well?
When Mercedes announced that SIPs (systematic investment portfolios) were their competition, it rang a bell
PremiumWhen Mercedes announced that SIPs (systematic investment portfolios) were their competition, it rang a bell. Being active on social media, I have seen so many financially savvy young people actively discussing the creation of their own fund as an alternative to having health insurance.
Yes, SIPs can be a threat to health insurance, even before they become a competition to luxury cars. When you analyse the conversations, there are two specific reasons why people have started considering their own funds as an option to health insurance.
One, there is increasing negative publicity about insurance, especially insurance claims. Most people have heard negative reviews about the difficulty and time-consuming process of making a claim, which can be frustrating and stressful.
In my own experience of nearly two decades, I know for a fact that health insurance claims aren’t as good as insurance salesmen want you to know, and not as bad as what you read or hear on social media. Unfortunately, that is not what people know, and honestly this will soon get out of hand, in the absence of a collective effort from the industry to regain customer confidence.
Two, and this one is more serious, people have been experiencing unpredictable, huge hikes in health insurance premiums. In fact, there is an increasing trend of people, especially senior citizens, talking about dropping out of plans. Since the entire pitch and idea of buying health insurance to younger folks was to financially insulate families during old age when the risk of hospitalization is at its peak, the fact that people are dropping off when they need it the most makes the whole investment look uncertain when you are young.
Since people want visibility over pricing and claims, they have started exploring having their own fund that they can track and control completely, instead of living in the dark.
But let’s understand if having an alternative fund for hospitalization risk is a feasible option.
The simplistic way to look at this is to create a fund equal to the sum insured you are buying. But, it’s important to understand that conventional health insurance provides recurring annual coverage for hospitalization risks for a lifetime. Health insurance does not cover a one-time risk or claim occurrence like term insurance. Therefore, before considering an alternative fund, it’s crucial to do a detailed calculation on the lifetime hospitalization expenses that a family will require, including an adequate buffer for healthcare inflation—which, in my view, is a complicated task.
A more practical alternative to protect against hospitalization risk, while keeping a tab on unpredictable pricing, would be to combine the idea of an “own fund" with traditional health insurance.
For instance, consider the purchase of two insurance plans: a base plan with a coverage of ₹10 lakh and a super top-up plan with a coverage of ₹40 lakh (over the ₹10 lakh threshold). Now, the base plan will cover healthcare expenses up to ₹10 lakh, while the super top-up plan can cover costs above that amount till ₹50 lakh.
In the event when you grow old, and the cost of the base plan becomes unaffordable, you simply drop the base plan, and continue with the super top-up plan to cover larger costs.
Parallel to this, you also build a fund to manage the cost of smaller surgeries. This allows you to maintain some level of control over your healthcare expenses while still having a safety net for unaffordable health insurance premiums.
But won’t the cost of a super top-up plan also go up? Super top-up plans generally come at a fraction of the cost of base plans, because they are extensions to base plans. The reason for this is they kick in only when you exceed a certain threshold of healthcare expenses—the frequency of which is significantly low, keeping the premiums low.
To understand this better, it’s useful to compare the pricing of base plans with super top-up plans. For example, a 30-year-old might pay around ₹20,000 for a ₹40 lakh base plan, but only ₹800-1,000 for a super top-up plan with the same coverage, but with a deductible of ₹10 lakh. This clearly demonstrates how base plans will always remain relatively more expensive than super-top ups.
In conclusion, the idea is to have an alternative fund to work as a stop-loss arrangement to cover annual healthcare expenses of up to ₹10 lakh, with a super top-up plan to cover costs above that amount.
Mahavir Chopra is founder & CEO at Beshak.org.
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