Tired of rejected health claims? Here’s your escape plan

With inputs from Bipin Ramachandran.

If there’s one thing we hate at PrimeInvestor, it is financial firms reneging on their promises and ripping off investors. We’ve not had to deal with this problem too much with mutual funds or stocks because of a hyper regulator. Whenever we’ve seen governance problems, we avoided the firm. 

But insurance, particularly health insurance, has been a totally different story. Whenever we write about health insurance, we are dismayed by the dozens of folks telling us their story of how their insurer fully or partly rejected their health claim citing flimsy excuses. We have also personally experienced such episodes. On social media, we see few health insurance buyers happy with their purchase and scores complaining about a poor claims experience.

Many policy buyers are in fact so vexed that they ask if they can completely avoid a health insurance plan and set up their own healthcare fund, like they do for their other goals.

This idea is not outlandish nor one to brush aside as a frustrated outburst! For many of you, building a comprehensive health cover for a lot cheaper and far more certainty is absolutely doable. In this report, we explain the hack to use.

Why insurance is cheaper

Let’s start with the bad news first. If you want to financially prepare for health emergencies, you can’t do it completely without a health insurance policy. This is because the premium you pay for a health cover is always going to be a fraction of the investment you would need to set up your own healthcare fund of the same size.

Let’s take a simple illustration here. Let’s say you are 35 years old and looking for a cover of Rs 25 lakh. In this case:

• The annual premium for a policy currently works out to roughly Rs 20,000- Rs 25000 for a Rs 25 lakh cover.
• If you tried to create a fund of Rs 25 lakh out of your own savings over a 5-year period, this is how the math looks. Our SIP to Target calculator shows that you will need to invest Rs 33,799 a month at an 8% CAGR. An 8% CAGR is a reasonable assumption because you can’t go with an all-equity portfolio for a 5 year goal. This works out to an investment of Rs 4.05 lakh a year to get to that Rs 25 lakh fund. This is 16 times the premium of Rs 20,000 to Rs 25,000 that health insurers would charge on a policy with Rs 25 lakh sum assured.  

Insurers are able to price their policies like this because they have the game of probability working to their advantage. Insurers know that if a hundred 35-year-olds buy health cover, only 5 of them may actually get hospitalized and file a claim in any given year. Even if insurers pay these 5% claims in full (which they try to avoid in real life 😊) they will still pocket premiums from the remaining 95% customers and invest this float to make money. As an individual, it is impossible for you to beat insurers at this game of pooling risks from hundreds of people.

However, it is only when you try to build a healthcare fund for very large sums that you will come up against impossible savings targets.

Let’s say you scale down your cover to a more modest Rs 5 lakh. Building this won’t be too difficult. You will need a monthly investment of Rs 6,760 to build a Rs 5 lakh fund in five years at 8% CAGR.

So, we combined these two aspects – the probability game that insurers take advantage of and the ease of building a small-sized corpus to draw up our healthcare fund hack.

Super top-up with deductible

To build your own healthcare fund that is affordable for you, maximises health cover and significantly reduces risks of rejected claims, here’s what you can do:

Step 1: Invest and build a corpus dedicated for your healthcare expenses for a scaled down amount as explained above. Rs 5 lakh is a good target as it covers the cost of most of common treatments. You can, of course, change this corpus based on your requirement, such as if you have more dependents – but the idea is that this target needs to be achievable without having to save large amounts.

Step 2: Sign up for a Super Top-up policy and skip taking a base health insurance policy. We have explained earlier what a super top-up policy is. To put it very briefly, a Super Top-up will meet your medical expenses beyond a certain limit, called a deductible. Opt for a deductible of Rs 5 lakh on the Super Top-up policy (or set the deductible to the value of your healthcare corpus you’re aiming for in Step 1). Go with insurers who have better claims records. You can also use our super top-up recommendations in our Prime Health Insurance.

Essentially, you are meeting your initial healthcare expenses out of your own pocket and using the super top-up to cover any higher costs.

Why this works: Super Top-up policies entail far lower premiums than base health policies. You can thus take a king-sized Super Top-up cover to take care of high-cost treatments. Using the above strategy can substantially cut down your cost of insurance. For example:

• Bajaj Allianz charges an annual premium of Rs 21,176 including GST for a base policy of Rs 25 lakh for a 35-year-old individual.
• If you opt for a super top-up policy of Rs 20 lakh with a Rs 5 lakh deductible, the premium outgo for the same individual would be only Rs 3,978 a year.
• So, to build your own health fund with this Super Top-up, you would incur a cost of Rs 7,092 a month (SIP of Rs 6760 + Annual premium of Rs 3978). Remember here that once you build your health fund corpus, you don’t need to make any more monthly savings towards it – unlike your base policy where you will need to continue paying premiums perpetually to keep it in force.

The calculations work out similar for most insurers. The table below shows Super Top-up premiums for our recommended plans for individuals of various ages.

Download this spreadsheet for premiums of other age groups and floater policies 

The reason why health insurers are able to offer you Super Top-ups at such low premiums again boils down to probabilities. Insurers know that the majority of health conditions for which policyholders file claims fall in the below Rs 2 lakh bracket. It is only in worst-case health emergencies (which carry very low probability) such as organ failure that patients file hospitalization claims of over Rs 10 lakh or Rs 20 lakh.

If you take a Super Top-up of Rs 20 lakh with Rs 5 lakh deductible, the insurer is betting that your likelihood of filing a claim that exceeds Rs 5 lakh is next to nothing. The policy is priced accordingly.

For you, however, having this Super Top-up is worth it, because it can cover extreme health emergencies that can leave you bankrupt. Unfortunately, there is still a risk of the insurer not settling the claim. But you can’t help this and the premiums you would have incurred will be much, much lower.  

Do note that as Super Top-up covers account for deductibles based on your cumulative health expenses over a year, you will need to intimate the insurer of any hospitalisations for which you have paid out of your own pocket to set off the deductible limit.

What you gain

What are the advantages of having your own health fund of Rs 5 lakh and opting for a Super Top-up with the deductible?

• The deductible plus Super Top-up will work out cheaper than having a base policy plus Super Top-up. As mentioned earlier, once you build up your health investment corpus, you don’t need to put away any more towards unlike your insurance policy for which you will always need to pay premiums. This invested amount will grow as returns build. Further, you don’t need to contend with insurance premiums rising over the years or if you lose any no-claim bonus.
• Most of the common hospitalization episodes or surgeries can be covered by your own health fund, without any anxiety about whether the insurer will or will not settle your claim in the end, in full or in part.
• If hospitalized, you need not drag on your hospital stay after you are cleared to go home, because your insurer is delaying reimbursement of your bills.
• The health fund can take care of all kinds of health emergencies and not just those needing hospitalization. You need not admit yourself unnecessarily for daycare procedures or worry about pre- and post-hospitalisation limits imposed by the insurer when seeking treatment.
• You need not worry about getting treated only at network hospitals. You can go to any hospital or doctor you are most comfortable with.
• You can flexibly use your health fund for treatment of any family member, without restrictions.

There are disadvantages to this strategy, though, which you need to weigh.

• The additional investments you may need to make, to build your healthcare fund, over and above what insurance premiums would have cost carry an opportunity cost. You could have used that money to fund other goals.
• Senior citizens or others with high-risk health conditions may find it tough to buy a large Super Top-up policy. But the same problems are likely with a base policy as well.
• If you have to use up part or whole of your health fund for a particular ailment, you will need to start from scratch to replenish the fund. Many health insurance plans, on the other hand, offer an automatic restoration benefit that takes care of this problem.
• You may remain uncovered until you build the required corpus to take care of the deductible limit.
• Folks in the very early stages of their career will find it tough to save and invest sufficient sums for a health fund, alongside their other financial goals.

Strategy suitability

The above pros and cons suggest that doing away with a base policy and simply taking a Super Top-up with deductible may work very well for folks who are well established in their career, already have a savings buffer or are able to save and invest sums towards the health fund. Therefore, if keen on a DIY health fund, you can follow this strategy.  

Doing entirely away with health insurance is not everyone’s cup of tea. But if you see value in the advantages explained above and building a health fund is well within your capacity, it’s quite possible to do what health insurers don’t want you to!