- Date : 03/05/2018
- Read: 4 mins
A health insurance policy is a critical piece in the overall puzzle of a family’s personal finances. A claim free year does not mean that the money goes down the drain. These covers should be treated as pure risk covers where the return is peace of mind of having secured family’s financial position.
An otherwise happy and fun loving person, my colleague Sujay was feeling a bit let down last Monday. Over a routine water-cooler coffee interaction, he told me that the renewal premium for his health insurance was due and since he had not claimed under the policy for this year, he was thinking whether paying premiums actually makes sense, given that he did not get anything back. He was thus contemplating letting go of his insurance policy.
Sujay is not alone.
It is commonly observed that consumers of pure insurance products look at them more like an investment from which some kind of yield/ monetary benefit/ return is expected. And when this does not happen (no claim lodged in a particular year), consumer feels that the money he/she paid as a premium went down the drain. Had they invested it somewhere else, it would have atleast given some return.
Is this kind of thinking right? Let’s explore this further.
Premium paid is a risk cover and not an investment:
One must understand that the premium paid for pure risk policies works like an umbrella: covering you throughout the year from the financial impact of hospitalisation costs. Even if no claim is lodged, the premium has actually done its work i.e. securing your family’s finances and ensuring that these costs do not strike a big hole in your pocket & mess up your finances. So, the real return of investment (ROI) from these products is that they help you sleep peacefully at night, without losing sleep what will happen in case of such eventuality arises.
Wealth protection is equally important as wealth accumulation:
One big mistake families make in their wealth creation process is to focus too much on wealth accumulation and not on wealth protection. Health insurance is one way to protect your wealth from erosion due to unforeseen medical costs. Given the rise in medical inflation in India, this assumes all the more significance. Hence, premiums paid towards health insurance should be considered as going towards your wealth protection which is a very important component in the overall wealth creation process.
Each claim free year entitles you to a no-claim bonus
As a standard feature in most health insurance policies, you are entitled to a no-claim bonus of around 10% of the sum assured. This percentage, in some policies, can even go upto 50%. NCB can be either by way of an increase in sum assured while premium remains constant or a discount in renewal premium where sum assured remains constant. If you claim in a particular year, the NCB for that year stands lost. That’s one reason it is advised to not claim for very small amounts.
Tax savings on health insurance premium
Section 80D of the Income Tax Act allows you to claim health insurance premium as a deduction. So assuming that you are under the 30.90% tax bracket and claim Rs. 25,000 as deduction under section 80D, there is a clear cut tax saving for that year amounting to Rs. 7,725. If you factored this in to your calculations, then the pinch of premium payments will be comparatively less.
Continued coverage helps close mandatory waiting periods
Every year that you continue renewal of your policy, the waiting periods for pre-existing diseases or for specified illness as per policy terms and conditions get reduced. So effectively after a few years of continuous renewal, even if you’ve not claimed, you end up with zero waiting periods and as a result, you can get the full amount you claim. Hence, claim or not, one should continue renewal of health insurance policy.
Claim free preventive annual health check up
We remember to have our cars serviced atleast once a year but when it comes to our body, we somehow forget it. Most health insurance policies offer a preventive health check-up benefit. Even if you do not make a claim, you can use the preventive health check-up facility. Apart from helping you know in advance of any warning signals about your physical well-being, you can derive consolation from the fact that you’ve got some value from the premium paid under the policy.
How was Sujay?
After our conversation, Sujay felt the afternoon coffee tasted a bit better and was convinced to renew his health insurance policy at the earliest, lest he miss the due date.
After all, a health insurance policy is a critical piece in the overall puzzle of a family’s personal finances and its merit/utility is defined not by the claim amount received but as a wealth protection tool.