Financial planning has become a natural part of personal finance management in Indian households. But, this is predominantly restricted to the need to plan in order to effectively move towards future goals of savings or retirement, make the most of available financial resources, manage taxes, etc.
The common notion that these aspects are enough to fulfil all financial obligations, it may not be completely accurate, as one of the most important aspects of financial planning that should take precedence is being prepared for unexpected emergencies. This too demands deeper introspection. While preparing for such emergencies, the most obvious consideration is that of untimely death and term insurance (pure protection) plans in order to cope with that eventuality financially. The other, less considered eventuality is that of not dying, but facing a serious illness.
It seems a less scary scenario than death at face value, but the financial implications may narrate quite a different story. Costly medical bills, the need for hospitalization or home care, the need to provide financial security for surviving family members and the fact that you may not be around for too long can have a profound impact on the your family’s lifestyle and peace of mind.
The other factor that compounds problems is the rising costs of healthcare and the rising incidence rates of such illnesses. For example, Herceptin, an effective drug for breast cancer treatment costs around Rs 75,000 to Rs 1 lakh a vial and patients generally require anywhere between 6 and 17 vials for treatment. Without an appropriate insurance cover, one will need to pay such expenses out of their own pocket and deplete their savings substantially, if not totally. According to a recent report, 78% of India’s healthcare expenditure comes from the patient’s pockets and the World Bank estimated that 2.2% of the country’s population is forced into poverty every year due to medical costs of Critical Illnesses.
However, in order to plan for these circumstances, it is also important to choose the right health insurance. For comprehensive cover against such exigencies, one should consider critical illness, surgical benefit plans or riders. These plans pay a lump sum tax-free benefit in case one is diagnosed with one of the illnesses that are covered by the policy. Such lump sum payouts can be utilised to pay off debts, mortgages or compensate for the loss of income that one faces during the 3-6 months required for treatment and recovery. The resulting benefit that these plans offer is that one does not have to dip into his existing savings and hamper his financial planning for future financial goals like children’s education.
The next step in the process of being future-ready is the purchase of an appropriate policy. A major parameter would be the number of illnesses that are covered and those that are excluded. It is suggested to read the fine print in the policy document as this time invested goes a long way in saving one from the hassles when it comes to making claims. The other main parameters to be compared would include the survival period, the cover for pre-existing diseases and the claim settlement history of the insurer.
These covers, with a purpose of paying for expensive treatments, turn out to be cheaper than an indemnity plan. As a reference mix for middle-class households, a Rs 5 lakh indemnity cover coupled with a Rs 10-15 lakh critical illness/surgical cover is a good benchmark mix. Fixed benefit health policies can be purchased from both life and general insurers, though life insurers offer policies with much longer tenures.
The writer is vice-president, products, HDFC Life