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Is it right to expect your Health Insurance to cover OPD and Maternity?

There was a time, during my early years of my previous engineering career, I used to get phone calls to sell me Health Insurance. I used to ask the caller, do their health cover covers OPD (Out Patient Department) expenses (i.e. expenses incurred on consultation charges etc on visiting clinic / doctor for minor sicknesses), diagnostics, Pharmacy bills etc (the regular medical expenses, in short). Those days most of the health insurance plans did not cover these regular medical expenses, unless followed by minimum period of hospitalization. So, I used to argue and deny buying health insurance saying there is no point in buying a cover that hardly covers more likely expenses but only less likely (rare) things like diseases and accidents requiring hospitalization.

Later after few years, out of personal interest and as part of my personal finance learning endeavour, I attended some professional training on Insurance. I got to learn many new things and it changed my perspective about Insurance.

Later after few more years, when I took up personal finance as my profession, I am on the other end of the table, being asked the same questions as I did years ago.

In fact, many people have asked me to suggest a Health Insurance Policy with OPD benefit or Maternity Benefit. I understand why they think so. If there is a strong demand for something, how can’t industry respond with appealing products? It’s a business opportunity for them. But for us, let’s understand whether what we are asking (expecting) for is correct.

It’s wrong to expect such things!

Let me explain why. Insurance is all about “Sharing the loss of few people by many people”. Many of you, I believe know this concept. If not, let me quickly explain it through simple example of motor car insurance. Say, in a town there are 1000 car owners and statistics show that every year there are about 10 accidents with average loss / repair cost per accident is about 1 Lakh. Nobody knows who among these 1000 are going to meet with accidents. But mostly some 10 people will. Now for these 10 people, bearing a loss of 1 lakh each is too heavy. So, all the car owners decide to share loss of these 10. Total Loss per year is 1 Lakh x 10 = 10 Lakhs; shared by 1,000 people it will come to Rs. 1,000/- Now this 1,000 is far more easily bearable than 1 lakh. This is what is insurance. Every year, they contribute Rs. 1,000 and buy peace of mind (Security / Insurance). Rs. 1,000 they pay is the price of it (premium for Insurance). [In real life, as the insurance company is professionally & commercially run organization, in addition to the loss (risk) premium, company’s overheads and even the profit of the insurance company will added to the premium]

We can extend this example to any kind of insurance. In life Insurance, the loss to be suffered due to death of and earning member of the family is the loss of Income from that person. In fact total value of the loss (future incomes) suffered in case of death of earning member will be far bigger than loss on of any other asset like car or home.

Now, let’s go back to the example of Cars and Accidental Losses. Just for the sake of argument and arithmetic interest, if the number of accidents per year, say increase from 10 to 1000 (means on an average every car meats with an accident), what will be the premium? Obviously it will be 1 lakh! In other words premium payable is equal to the loss being (to be) suffered by each person. There is no point in buying insurance.

So, exactly same way we should not expect insuring some loss, which is very likely to happen. As per the principles of the Insurance, Only uncertain losses (may or may not happen) can be insured and in a situation when such loss happens to few only out of many who are exposed to same risk.

Looking at the demand and business opportunities may be Insurance companies my tweak the principles or tell things in different way. But you need to understand the concept. Think of OPD expenses; aren’t they are kind of expenses we all have to bear every year for some or the other minor sicknesses? And maternity is an expense almost every married couple would incur. Trying to cover them under insurance is like above example of all cars meeting with accidents. Similarly the health insurance is mostly given very restrictively to the old aged persons, that too with very high premium. Guess why? Obviously, most of the old people make claims as it very likely that old aged person getting hospitalized! For very older ages 65+ the premium rates for health insurance are prohibitively expensive. So, expecting / taking health insurance for OPD, Maternity and very Old Age is abuse of health insurance.

You may ask then what is the use of health insurance, if it is not helping when it is needed the most (Old age). I’ll answer that.

An insurance (any kind of insurance) is always your B-Plan (Back-up Plan). There is a room for B-Plan only when you have A-Plan (Actual / Primary Plan). B-Plan is for use when A-Plan for some reason doesn’t work or fails. So, obviously there can’t be B-Plan if there is no A-Plan in first place or if the A-Plan is successfully executed.

One of your financial goals should be creation / accumulation Long Term Emergency Fund for your old age health care expenses. You need to have this goal very early / from the beginning of your working career. So, by the time you will be able to create a sizable fund exclusively earmarked for your & spouse’s old age health care. Your A-Plan is to build this corpus over a period of time (say in 10 years) or by the time you turn 50 years old (age since when Health Insurance premium rates start increasing sharply). While you are on the course of saving and investing for this goal, what if a critical illness hits you? Or you are required to get hospitalized for some accident / prolonged sickness? You will be ill prepared to pay for such huge expenses; it will turn all your plans upside down. So, in such case B-Plan is having health insurance and critical illness insurance.

Once you have achieved your goal of creating Long Term Emergency Fund through A-plan (Saving & Investing), B-Plan (Health & Critical Illness Insurance) is not required or you may switch to a cheap super top-up /deductible policy (a kind of economic health insurance which pay only if the hospital expenses are beyond a pre-determined (deductible) limit.


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