How much sum assured, and other common questions

Published in Mint on 5th November,2014, Written by Kapil Mehta

I like algorithms. These systematic rules can solve most problems. Google’s PageRank forms the basis of Web search; travelling salesman algorithms help schedule flights; poor quality queuing algorithms explain why I always have the longest wait at elevators in Gurgaon.

In this column, I share a simple algorithm to buy the right health insurance.

This algorithm is derived from my responses to the hundreds of health insurance queries I get each year. What sum assured to buy? Is family floater better or individual insurance? Is this company better or that? Should I buy a top-up plan? I used to offer specific, personalized responses to each person but, soon, saw a pattern. Based on what I observed, here are a few steps to follow to buy health insurance.

Decide the target sum assured

This is easier said than done. An experienced underwriter once explained that one gets to know the sum assured is inadequate only when it runs out. There is, however, an excellent surrogate to set sum assured and that’s the cost of a coronary artery bypass graft (CABG), commonly known as a heart bypass surgery.

CABG is a common treatment for cardiac disorders, a disease category responsible for the largest number of deaths globally. The Public Health Foundation estimates that 8% of hospitalization cases, second only to accidents and other injuries, are due to cardiovascular disease. And this is one of the most expensive ailments to treat.

Last year, I saw about a hundred CABG insurance claims. These were generally the most expensive claims and cost between Rs.2.5 lakh and Rs.8 lakh. Health cover that you buy today must cater to costs over at least 10 years. At current medical inflation of 15%, a CABG procedure 10 years from now will cost around Rs.10 lakh if you go to a ‘no-frills but reputed’ hospital and Rs.30 lakh in a ‘5-star’ facility. Ask yourself which hospital you are likely to go to and then set your target sum assured.

I have used 10 years as a benchmark rather than a longer period because experience suggests that medical advancements are likely to keep costs in check.

You need to decide if this target sum assured should be bought on a family or individual basis. Counter-intuitively, in most cases, I find individual sum assured to be cost-effective. That’s because insurers price family floaters based on the age of the oldest person whereas other family members may be much younger. Also, the probability of a claim in a family floater in higher than in individual insurance policies.

 Decide product type

The variety of product structures available is confusing: mediclaim pays for hospitalization; top-up plans pay after a certain minimum expense is crossed; critical illness policies have a fixed benefit if you get specific diseases; personal accident plans cover medical expenses in an injury.

Buying a regular mediclaim should be the first priority. This pays for hospitalization costs. If you don’t already have one, buy any “A” rated product from the Mint Mediclaim Ratings (http://www.livemint.com/mintmediratings). These comprehensive ratings factor in premiums, exclusions, claims track record and product restrictions.

If you do have mediclaim, then continue with that. Regulations require all health insurance products to meet a minimum standard of cover and life-long renewability; and the longer you hold insurance the more difficult it is for an insurance company to reject claims.

Your current mediclaim cover is likely to be far less than the target sum assured. Bridge the gap with a top-up plan that pays costs above a certain minimum threshold (also called deductible). Buy any top-up plan that has a ‘super top-up’ structure; set deductibles in the top-up insurance equal to your current insurance and the sum assured to bridge the gap between your target and current insurance.

So what is the ‘super top-up’ structure? It goes by various trade names—‘super top-up’, ‘enhance’, ‘super’—but it is not ‘super’ expensive. In this plan, deductibles can be set off across ailments and not restricted to one instance of hospitalization.

 Buy a critical illness plan

Critical illness plans serve several objectives: out-of-pocket, non-hospitalization costs and lost income get covered. However, its major benefit is that diseases that do not require hospitalization also get insured, for example, Alzheimer’s, blindness, deafness, paralysis and stroke.

Buy a critical illness plan that covers a large number of diverse diseases, at the very minimum, 20. Set the sum assured equal to the target sum assured on your regular mediclaim.

People who ask me about health insurance tend to focus excessively on price. I’m reminded of the greedy algorithm taught to us in college. In this, short-term objectives are maximized in the hope that the final outcome will be best. That’s a fallacy. Getting the lowest price in health insurance is fine, but it is crucial to get the broad health insurance structure in place first. Sum assured and policy type are most important.

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