Medical Loan vs. Health Insurance

We know that Financial institutions can do many things to sell their products. However, they refrain from codifying their thoughts or practices in an article or a blog post. Therefore, even though they indulge in many dubious activities to sell, they don’t write about it.

medical careI recently came across an article on the website of a fintech company that suggested a medical loan as an alternative to a health insurance policy. The fintech company sells loans and credit cards. The article pointed out many issues with health insurance, most of which were valid. Then, the article pointed out how a medical loan did not suffer from such issues and is thus better than a health insurance policy. That’s where it got all messed up. In my opinion, it is one of the most insipid pieces of financial advice that I have come across. To be fair to the fintech company, there were not hard-selling anything. However, they did provide a spin that benefited them.

Let’s first look at the problems with health insurance plans. Then, we discuss how medical loans, albeit a useful product, can’t be an alternative.

What Are the Issues with the Health Insurance Plans?

  1. There is clear lack of trust. You pay premium regularly for years. When you make a claim, your claim gets rejected for a minor technical reason. By the way, even that reason may not be justified and may have been made up by the insurance company. Therefore, despite having health insurance, you can never be sure if your next claim will be honoured.
  2. The premium goes up every year. Many times, the premium goes up by 30-40%. Yes, insurance companies employ loopholes in regulations to do. They can discontinue your existing plan and force you to move to a more expensive plan.
  3. If you have not made a claim, there is always this grudge that your premium payments are going waste.
  4. It does not cover all types of expenses. Cosmetic treatments are not covered. HIV/AIDS related treatments are not covered.
  5. It is difficult for elderly or applicants with pre-existing ailments to get health insurance in the first place. Mostly, such applications are either rejected or the premium made prohibitively expensive.
  6. You may prefer to get treated at cheaper and smaller medical establishments. However, those hospitals may not be covered under your health plan.

It is not difficult to see that your health insurance plan can let you down. Even then, does that mean that you do not purchase health insurance when you can?

Insurance industry is built upon the concept that the insured events are adverse events. Such events affect you adversely. So, you wouldn’t want to experience these events just to make a claim. It takes just one event to realize the importance of medical coverage. You have been paying Rs 20,000 per annum towards health insurance coverage of Rs 5 lacs. No claims made for 10 years. Rs 2 lacs gone down the hole. In the 11th year, you make a claim of Rs 5 lacs. You wouldn’t feel as bad about your decision to purchase health cover, would you?

Moreover, from the perspective of financial planning, a health insurance fills a gap (or gives that impression). There is no other way to do it.

Can Medical Loan Help?

A medical loan is a fine product. It can offer you quick access to funds in times of need. You may be able to get discounts on hospital bills. It can be a life saver. It can help you or your family get the quality of medical treatment that you want. A medical loan is quite like a personal loan. The only difference is in the way the payment is made and how the repayment is structured. The payment is typically made directly to the hospital (and not to you). For more on medical loans and how these loans work, refer to this post.

However, a medical loan can’t still be a replacement for health insurance. Why?

Under health insurance, you pay Rs 20,000 and get cover of Rs 5 lacs. Insurance company takes care of the treatment cost up to Rs 5 lacs. You are out by only Rs 20,000. With a medical loan, if you take a loan of Rs 5 lacs, you must pay back say Rs 5.5 lacs. Compare Rs 20,000 vs Rs 5.5 lacs.

You may argue that Rs 20,000 must be paid every year irrespective of whether you make the claim or not. You will take a medical loan only when the event happens. Fair enough. However, have you considered the risk involved? Rs 5.5 lacs could have been used to pay health insurance premium for over 25 years (assuming premium remains constant). Another way to look at it is that if you put Rs 5.5 lacs in a fixed deposit, the interest from that fixed deposit may be enough to fund the annual premium for life.

What if you acquire an illness that requires regular hospitalization? Health insurance coverage will reset every year. So, you can use the same policy to make payments for the same illness year after year. Remember, insurance regulations do not allow insurance companies to hike premium or refuse to renew your policy just because you made a claim in the previous year. How many medical loans will you take, or will you be able to get? After all, these medical loans need to be repaid too. What if you don’t get a medical loan? It is not that a medical loan is your right. What if your credit score is not good? What if your salary can’t support the quantum of loan sought? How will you or your family fund the treatment?

What Do You Do?

If you don’t trust insurance companies, the alternative is to build up a medical emergency fund. A fund that you can bank upon to fund hospitalization and medical expenses for the family members. You can accumulate this money in fixed deposit or a liquid fund. By the way, if you contract an ailment that requires regular hospitalization, your medical fund can deplete very fast unless it is quite big. However, you may still want to play with the odds.

A medical loan can’t be a strategy. It can’t be a replacement for your health insurance or medical fund. A medical loan comes into picture when your first line (health insurance) and second line of defence (medical fund) are depleted. And that is how you should think about it. It can also be a good option when you must first pay from your pocket and then file for reimbursement with the health insurance company. However, it can’t be your sole vehicle to fund expensive medical treatments. That won’t be good planning.

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