Sunday, February 19, 2012

The characteristics of health insurance for senior citizens


How will a health insurance policy for your parents, if they are senior citizens, differ from yours?
We asked the above question and asked our readers to tick correct answers from the choices below:
  1. Only about half a dozen insurers out of 23 will issue a new health insurance policy to people over 60
  2. The insurer will provide full re-imbursement for each claim
  3. Your parent's premium will be just a bit more than your premium
  4. Your parents will not be able to get a family floater option
Our view on the above is presented below:
The correct answer is that only about half a dozen insurers out of 23 will issue a new health insurance policy to people over 60.
Most mediclaim plans available do not permit entry beyond a certain age, though if a person is already having a policy, he/ she may continue for a longer period. Max Bupa is the only company which allows entry at any age. Apollo Munich allows entry up to the age of 65. Most other insurers do not allow entry beyond the age of 60.
However, some of the insurers have a separate senior citizen’s plan, which is offered to buyers who are 60 years or more. All the 4 PSUs (United, Oriental, National and New India Assurance) have senior citizen’s plan. However, in these plans the sum insured is limited to Rs 1 Lakh only. 
Among private insurers, Star Health has a senior citizen’s plan where entry can be made between the age of 60 and 74 (both included). 
As you can see, very few of the insurers at present allow entry to an elderly person.
All policies existing for senior citizens have a co-pay clause. In other words, whereas for younger people the insurers take 100% of the risk (ie, they pay the full amount spent on hospitalization, within the specified limits), in case of the elderly, for each and every claim the insurer pays only a part of the expenses. In case of Max Bupa, for all people above the age of 65 there is a flat 20% co-payment. In case of Star Health, the co-payment is higher at 30% (however, this is justified since their premium charges are considerably lower and they allow entry without doing medical tests which enhances the insurer’s risk). National Insurance policies have co-payment of 10% and they give a discount in premium if the insured opts for a higher co-payment of 20%. The other PSUs also have co-payment clauses for senior citizens.
The ratio of sum insured to the insurance premium, also called the insurance leverage, reduces dramatically with age. In your twenties you will find that you have a very high leverage of 70-80, ie, an annual premium of about 6,000 buys you an insurance cover of 5 lakhs. By your mid-thirties, this leverage will reduce to 50-55. Now a cover of 5 Lakhs will cost you closer to 9,000-10,000. By the time you are 45, a cover of 5 Lakhs will start costing you 12-13,000 and the leverage drops to below 40. When a person is in the mid-sixties, the risk of hospitalization is so high that leverage is only about 14-15. An insurance cover of just 2 Lakhs will cost the person something like 15,000. And, a seventy five year old will find his/ her leverage reduced to single digits – the sum assured will be just about 5-6 times the annual premium. This dramatic rise in insurance charges should be borne in mind while planning for your parents or for your own old age. Often, you would find it a good idea to build a corpus fund dedicated to health related expenses.
Max Bupa allows a family floater option. However, there is no other company where this is available for senior citizens.
For more information see this link

The fallacy of term with return of premium


The return of premium is an illusion. You are much better off by buying pure term cover and investing the balance amount in any safe investment without long period lock-in conditions 
We hear this often from our customers. "Am I not better off if all my premiums are returned after the term period has expired? Surely, it’s better than pure term insurance, wherein the premiums paid are forgotten?"
Let’s look at a particular example to understand the difference.
We take a 43 year old looking for a term cover of 1 crore, for a 20 year term period.
  • The premium for a pure term insurance from a company is Rs 34,050 per annum.
  • The premium for a term policy with return of premium, from the same company is Rs 83,368 per annum. 
In the former case, if the person is alive after 20 years, he gets back nothing, whereas in the latter case the person gets back Rs 16,67,360 at the end of 20 years. In the event of death in the interim period, the beneficiaries get Rs 1 crore in both cases.
To understand the difference, one needs to evaluate, what amount would the balance 49,318 (83,368-34,050) earn you over 20 years. Let’s look at the illustration below:
How much does an amount invested year after year earn you over 20 years at different interest rates?
Year
Invested amount/ year
10%
9%
8%
7%
6%
1
100
673
560
466
387
321
2
100
612
514
432
362
303
3
100
556
472
400
338
285
4
100
505
433
370
316
269
5
100
459
397
343
295
254
6
100
418
364
317
276
240
7
100
380
334
294
258
226
8
100
345
307
272
241
213
9
100
314
281
252
225
201
10
100
285
258
233
210
190
11
100
259
237
216
197
179
12
100
236
217
200
184
169
13
100
214
199
185
172
159
14
100
195
183
171
161
150
15
100
177
168
159
150
142
16
100
161
154
147
140
134
17
100
146
141
136
131
126
18
100
133
130
126
123
119
19
100
121
119
117
114
112
20
100
110
109
108
107
106







Totals
             2,000
        6,300
        5,576
        4,942
        4,387
        3,899
Multiplier

3.15
2.79
2.47
2.19
1.95
At 6% pa, the total amount invested multiplies by 1.95. At 10% pa, it multiplies by 3.15.

Rs 49,318 invested every year for 20 years equals a total outflow of Rs 98,63,60. From the above table you can see how much this money would grow to in 20 years for different interest rates-
Interest Rates
10%
9%
8%
7%
6%
Investment Multiplier
3.15
2.79
2.47
2.19
1.95
Value of 98,63,60 invested over 20 years
           3,107,034
       2,751,944
  2,436,309
   2,160,128
    1,923,402


Now, let’s go back to the two choices that we had. The first choice was to buy a pure term cover for Rs  34,050 per annum, and invest 49,318 in a safe instrument which gave a low but stable return of 6-8% (Bank FDs for example). The second choice was to take a term policy with return of premium for Rs 83,368 per annum, wherein at the end of 20 years the person would have received Rs 16,67,360. 
Clearly, even if the returns were as low as 6% pa, the first choice would be superior. Additionally, in the first choice one is not locked into investing the amount every year – one can accelerate or decelerate the investment. One can also opt to take a certain proportion out and invest in riskier options with a potential of much higher returns.
See it whichever way you want to, the term with return of premium is an inferior option. Buy pure term insurance.