Investing in equities will help cope with out-of-pocket medical expenses

Do you have health insurance? It is among the first things financial planners suggest when preparing a plan. But what is a good enough cover? Most planners suggest having a Rs 5 lakh basic family floater, and then supplementing it with a super-top-up cover according to need.

But given rising medical costs, will your health insurance cover alone be enough to meet your healthcare needs? Health covers have limitations. Also, as premiums rise with age, servicing a health policy becomes prohibitively expensive. One way out is to build a separate healthcare emergency fund. This will enable you to pay for out-of-pocket expenses, bear the cost of treatments not covered by the policy, or pay for costs of they exceed the policy’s sum insured. “Often, the health policy doesn't cover congenital and pre-existing diseases. 
 

Some diseases require lifetime treatment and medication, which increases the financial burden. Hence, it is advisable to have a healthcare fund in addition to a health policy,” says Rachit Chawla, founder and CEO, Finway.

Assess your need correctly: Assume that you have health insurance and in addition you want an equivalent of Rs 10 lakh in today’s terms. Assuming you are 35, how much will you need at 55? Adjust the Rs 10 lakh figure for medical inflation.
Assuming a modest 8 per cent medical inflation (many say it actually runs in double digits), the Rs 10 lakh requirement will rise to around Rs 46.6 lakh in 20 years. Besides being able to pay for expenses not covered by health insurance, this corpus should also be able to pay for the deductible part of health insurance (several insurers are introducing high deductibles in senior citizens’ policies).

To meet the target corpus, assuming a 12 per cent rate of return on your investments, you will need to invest Rs 5,115 per month (see table). 

 

Invest systematically: You can get double-digit returns if you invest in diversified equity funds for the long term. If you use a more conservative option such as bond funds, you will have to increase your monthly savings, as they give a lower rate of return.  Says Chawla: “A Systematic Investment Plan (SIP) is an ideal instrument to deal with rising health expenses. One can invest the desired amount on weekly, monthly, quarterly, etc. basis,” says Chawla. If you do not have a long timeframe, then stick to bond funds.  

If you have invested through equity funds, then start shifting money into safer avenues such as fixed deposits and bond funds as you move closer to your target date. “The corpus that has been created should be invested in safe and stable investments with high liquidity, such as liquid mutual funds and short-term debt funds. Some cash may also be kept in the bank,” says Santosh Joseph, founder and managing partner, Germinate Wealth Solutions. 

Monitor periodically: After reaching the targeted corpus and parking it in safer avenues, keep track of your healthcare needs and your healthcare corpus. As you grow older, your needs may change. What appeared to be sufficient five years ago may turn out be inadequate. If you migrate from a tier-III city to a metro city, then your healthcare fund will need to swell. 

Medical inflation is high. But since your corpus will be in conservative avenues, it won’t be able to beat medical inflation. To overcome this situation, keep some money, say around 10-15 per cent, in a diversified equity fund after you reach your target level. This allocation will help you combat inflation more effectively in old age.