Monday, January 18, 2010

Health is Wealth?

I was recently asked by a blog reader for a review of ICICI Pru Health Saver policy. Health insurance is also a topic that i covered a couple of weeks back in a guest post at Jago Investor.

ICICI Pru Health Saver policy is a unit linked health insurance plan, where the policy provides Health Insurance as well as creates a "Health Fund" by allocating a part of the premium to market linked investments. Unlike ULIPs the costs associated with unit linked health insurance plans are somewhat opaque. Have a look at this link for an illustration.

As per the link: For a coverage of 5 lakhs for a 30 year old male, the annual premium for ICICI Pru Health Saver is Rs.12,000 (Rs.1,000 per month). To critically analyze this plan, let us consider insurance and investment separately (which I will refer as the alternate plan from hereon ).

For health insurance, consider Reliance Individual Mediclaim policy. For 5 lakhs coverage for a 30 year old male, the yearly premium is Rs. 5359.

For investment, assume that Rs.6,641 (Rs.12,000 – Rs.5,359) is invested yearly in a well diversified mutual fund giving annualized returns of 6% or 10% (as the case may be that it needs to compared against).

If we assume an optimistic 10% returns for the alternate plan and compare it against the illustrated 10% returns of ICICI Health Plan:
  • At the end of 10th year, the alternate plan beats the returns of ICICI Health Plan by 9% (Fund value of alternate plan – Rs.1,16,424; Fund value of ICICI Health Plan – Rs.1,07,000)
  • At the end of 20th year, the alternate plan beats the returns of ICICI Health Plan by 21% (Fund value of alternate plan – Rs.4,18,400; Fund value of ICICI Health Plan – Rs.3,47,000)
  • At the end of 30th year, the alternate plan beats the returns of ICICI Health Plan by 42% (Fund value of alternate plan – Rs.12,01,645; Fund value of ICICI Health Plan – Rs.8,45,000)
Have a look at this spreadsheet for calculations. Note that the returns from both the plans are market linked and hence equally risky.

A point to note here is that there will be some differences in the coverage provided by ICICI Pru Health Saver and Reliance Individual Mediclaim policy. But the broadly both serve the same purpose for the same coverage.

So it is best to opt out from unit linked health insurance plans and consider insurance and investments separately. Health Insurance has to be decided based on policy coverage and service and investments has to be based on expected returns and risk taking abilities.

Disclaimer: The views posted in this blog are my own and are based purely on my own way of assessments. Readers are  requested to consult with their financial/ insurance advisers before making any investment/ insurance decision, do their own due diligence and validate factual information.


Srikanth said...

There is a new plan "ICICI Pru Health Saver" in market. This is being called as ULIP and which boast of availing tax benefits u/s 80D for the entire amount invested.
Being a ULIP, Because of benefits u/s 80D It looks attractive.

Here is the analysis of the same for your Benefit.

Earlier the combo of Health Plan & ULIP was available from LIC as well as Reliance but in both these policies, the 80D benefit was not available on investment part. So ICICI Prudential Life Ins. cos. has moved with this cleverly drafted policy. Here the investment part of ur prem. or in other words fund value can only be redeemed against medical treatment/expenses. This policy is a combo of usual mediclaim policy & ULIP. Just dig deep into the skin of this policy & you will come to know the real truth.

First understand what this policy offers?
Apart from a normal mediclaim benefit, due to investment component from 3rd policy years onwards u can claim more than ur standard Sum assured with a ceiling set by company. Say ur original SA is 3L Rs, after completing 3 policy years u can claim a normal claim of 3L rs. under mediclaim benefit & another 20% of ur accumulated fund value. In other words u can redeem ur fund upto 20% value of fund. This fund value ceiling `ll increase with the years pass & after 10 policy years u can claim 100% of fund value.

As per the product brochure of this plan, This policy can be taken as individual plan as well as family floater plan.

Here r the negative aspects of this plan.

1. High Prem. allocation charges - 20% for 1st year, 2 & 3 year 9%, 4-10 years 2% & Nil from 11 year onwards.
2. In case of family floater option, in case of death of primary insured (the eldest member of family), the policy `ll be terminated immediately.
3. Regular prem. pmt. is compulsory for first 5 years for cover continuance option i.e if u don`t want to pay prem. in future to keep policy in force u `ll have to pay prem. for first 5 years.
4. No surrender of policy is allowed except the first 15 day free look period window.
5. Ins. charges for general mediclaim policy as well as policy admin charges `ll be recovered by cancellation of UNITs which `ll impact u severely in prolong bearish phases like the current one.
6. For individual plan option the mly. policy admin charge is 60 Rs. where as for family floater option the same is 90 Rs.
7. A long list of exclusion, which i can`t post here in this limited space.
8. Actually the health saving option of this policy is similar to our general practice of dipping into our savings to set off the medical bills.
9. Plz. note the prem. for general mediclaim benefit (known as Hospital insurance benefit in this policy) `ll be charged on ur actual age every month by cancellation of ur UNITs. this is not the case in normal mediclaim policies of Gen. ins. cos. where u pay prem. as per age band of say 31-35, 36-40...... Again this monthly cancellation of UNITs `l impact more in case of bear phases as more UNITs `ll be cancelled to pay insurance prem. per month.

For individual Plan - Min. entry age is 25 years completed & max. age is 55 years.

For family floater Plan - Min. entry age is 90 days & max. age is 55 years.

In each of the above policy the maturity age is common i.e. 75 years.

The same effect of mediclaim & saving can be achieved by purchasing a cheaper mediclaim policy as well as investing the surplus amount as per our comfort level in Eq. or Debt funds or anywhere else. So this policy should be avoided.

If there is anything that is good about this product, then that is, salaried persons who can't afford to pay for Health Premium after retirement, can take this policy as the Fund Value will take care of your Premium allocation and you can still continue to enjoy the Health Policy benefits.

Thanks to Ashal for valuable inputs


Get Human said...

Hi Ganesh,

your blog is an eye opener for me. I was about to get this ICICI Pru health Saver. after reading your Blog I am thinking go taken Family floater + balance amount in a decent MF which I will only use for Medical reasons.

Now I am really confused on which medical insurance to take. too many options. As of now i am working so i might use company insurance I just wanted to start building a health insurance schema for longer term. Say after 58 when I retire.

As of now I am 32 (M) + 2 F 32 and 9 months. i am looking @ 5 Lac cover.

please suggest some pointer..

Ganesh said...

@Get Human I am not an insurance advisor/ financial planner. So please take advice from credible/ experienced sources. But if you want to build a health corpus, i would advise a good MF and a decent Health Insurance. For ages above 60, you may have to shell out more for medical insurance as such, but if you are planning a contingency fund in MF, that should be sufficient as well. For regular Health Insurance i would recommend Star Health for health insurance. They are into Health Insurance and nothing else. The logic: Better buy from experts than from any generic providers. (i don't believe in "saving for 80D benefits"!)

Get Human said...

Thank you sir, decent comment.

please continue your blog.

Alex Stephen said...

Thank you for another great article. Where else could anyone get that kind of information in such a perfect way of writing? I have a presentation next week, and I am on the look for such information.
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