Case 067Goal and retirement planningCore
A client of 50 supports her parents aged 78 and 75. Should she build a Rs 30 lakh medical corpus or buy a top-up health policy at Rs 45,000 a year, and how do the two combine?
1The situation
Sunanda Joglekar, 50, pays her parents' medical costs. They have a basic health policy covering Rs 5 lakh a year. Routine costs the policy does not cover, medicines, consultations and tests, run to about Rs 1.5 lakh a year. A major illness, a surgery or long hospital stay, costs about Rs 18 lakh; for planning, assume a 5% chance of one in any year.
She is weighing two approaches for the next ten years. Set aside Rs 30 lakh as a medical corpus and pay everything above the basic policy from it; or buy a super top-up policy covering Rs 25 lakh above the Rs 5 lakh already insured, at Rs 45,000 a year rising an assumed 10% a year, with a 10% co-payment on claims. Whether an insurer will accept her parents at 78 and 75, on what exclusions and waiting periods, and any tax deduction on the premium, must be confirmed with insurers and current rules.
2Your task
What does each approach cost over ten years in a good case and a bad case, and what would you advise?
Quick check
If her parents have two major illnesses in ten years, how much does self-insuring cost her?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Combine them: buy the top-up if it is available on acceptable terms, and keep a smaller corpus of about Rs 12 lakh for routine costs and co-payments. Self-insuring is slightly cheaper on average, Rs 21.5 lakh against Rs 22.8 lakh over ten years, but two major illnesses would cost Rs 41 lakh and exhaust the corpus. With the top-up the same bad case costs Rs 24.8 lakh. Insure the tail, self-fund the routine.
Step 1Which costs should be insured and which paid directly?
Nobody insures their monthly grocery bill, because it is certain and affordable; people insure the house against fire, because that loss is rare and ruinous. Insurance is worth buying for costs that are rare and large, and not for costs that are frequent and small, where the premium simply returns the money with the insurer's margin taken out. Sunanda's parents' Rs 1.5 lakh of routine costs is the grocery bill. A Rs 18 lakh illness is the fire. The top-up should cover the second; the corpus should pay the first.
Step 2What does each approach cost in a good case and a bad case?
Premiums starting at Rs 45,000 and rising 10% a year total Rs 7.17 lakh over ten years. With no major illness, self-insuring costs Rs 15 lakh and the top-up route Rs 22.2 lakh; with two major illnesses, self-insuring costs Rs 41 lakh and the top-up route only Rs 24.8 lakh. Each major illness costs Rs 13 lakh above the basic policy when self-insured, but only the 10% co-payment, Rs 1.3 lakh, with the top-up.
| Over ten years, Rs lakh | Chance | Self-insure | Top-up route |
|---|---|---|---|
| No major illness | 60% | 15.0 | 22.2 |
| One major illness | 32% | 28.0 | 23.5 |
| Two or more | 9% | 41.0 or more | 24.8 or more |
| Expected cost | 21.5 | 22.8 |
Step 3If self-insuring is cheaper on average, why buy the policy?
Because the average is not what she has to survive. The top-up costs about Rs 1.3 lakh more on average, which is the insurer's margin, and in exchange the worst case falls from Rs 41 lakh to Rs 24.8 lakh. A corpus also has a timing problem: a major illness in year one arrives before the corpus has grown, and a second one can empty it while she is still paying her own bills. The combined plan keeps about Rs 12 lakh for routine costs, co-payments and any waiting-period gap, and frees the rest of the Rs 30 lakh for her own retirement, which at 50 is the goal most at risk.
Name the limits. At 78 and 75, acceptance is not assured, pre-existing conditions may be excluded for a waiting period, and premiums can rise faster than 10%. If the top-up is refused or excludes the likely illnesses, the corpus has to carry the tail, and it should then be closer to the full Rs 30 lakh. The 5% chance and Rs 18 lakh cost are planning assumptions, not medical forecasts.
Where candidates lose it
The usual error is comparing expected costs only and choosing the corpus because it is cheaper on average. For a rare, large cost the average is the wrong test; the question is whether the bad case can be absorbed.
The second miss is treating the choice as either-or. The interviewer asked how the two combine because the right answer uses each for what it is good at.
What the interviewer asks next
- The insurer excludes her father's heart condition for three years. What changes?
- How would you invest the medical corpus she keeps?
- At what premium would you stop recommending the top-up?
Company names and figures are illustrative.