18 Oct 2016

How Much Medical Insurance Should You Get?

My landlord passed away last year after a battle with cancer that cost him ₹30 lac. He had medical insurance for only 15 lac, so the family coffers were drained to the extent of the remaining 15 lac. He encouraged others to get a lot of insurance like 25 lac. In fact, you can get insurance up to 60 lacs.

You might think that insurance for 60 lacs will be very costly, but it costs 27K a year [1], which is just 2K a month. Much less than a single month's expenses for you. You almost certainly blow up that much money eating out, or buying a smartphone, or vacationing, or other frills. And for that small premium of 2K a month, you get a benefit of 60 lac. Imagine the impact it would have on your savings if you had to pay that much out of your pocket. Assuming you could even afford it at that critical juncture!

Another way of evaluating whether insurance is a good deal is to note that the benefit is 200 times the premium you're paying every year [2]. What other transaction do you do in your daily life that could give you a benefit of 200 times what you pay?!

The other factor is that when you increase the sum insured, the premium often increases less than proportionally:
As you can see, insurance for 10 lac costs 7K, and insurance for 20 lac costs 11K, not 14K. That is in effect a discount of 3K. This makes insurance for 20 lac a great deal [3].

You can see this effect more clearly when you calculate the premium per lac of coverage:

You can see how much the premium per lac fluctuates depending on how much insurance you buy!

From this chart, insurance for certain sum insured is an especially good deal — 5 lac, 25 lac and 60 lac. If you're considering buying insurance for some other amount, consider upgrading to the next tier. That is, if you're considering buying insurance for 2 lac, buy 5 instead. If you're considering buying for 15 lac, consider 25 instead.

In summary, buy lots of medical insurance, like 60 or 25 lac. It costs less than a lot of frills in your life. And it can pay out 200 times what you've paid, which is an excellent deal. Finally, medical insurance for certain sum insured is an especially good deal, so if you're not at one of these tiers, upgrade to the next tier.

[1] Methodology:
  1. These premia are for a 33 year old male.
  2. I've picked the cheapest policy for each sum insured.
  3. I've eliminated some values of sum insured, like 9 lac, since insurance for 9 lac costs more than that for 10 lac.
  4. Premia are inclusive of tax.
  5. Premia are annual, and the policy is also for one year.
  6. All data is from Bank Bazaar.
[2] 400, if you consider restore / charge. If you don't know what that means, many medical insurance policies nowadays have a restore / recharge benefit that, when you exhaust your sum insured, restores the sum insured for use in case of a different disease. Or for a family member, if it's a family floater. Without asking you to pay more for the restoration. In other words, if you buy insurance for 10 lac, and you're hospitalised, and the insurance money is exhausted, and you're hospitalised a second time the same year, but with a different illness, you again have 10 lac insurance. This effectively doubles the sum insured, so you could consider the payout to premium ratio to be 400.

[3] Unlike term insurance (life insurance), which requires you to pay double the premium for double the sum insured.

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