Why health insurance?
Need for health insurance explained using data
Way too often, insurance agents try to convince customers on the need for ‘health insurance’ by using imagery of sick , injured or old people. Idea behind this imagery is the ‘association principle’ in psychology — ‘association’ refers to a mental connection between concepts, events or mental states that stem from specific events or experiences. While this method in itself is not bad, it quickly tends to lose its power because it doesn’t fit into a logical framework that a human mind can easily comprehend. That’s where a data-driven explanation makes sense.
What we’ve tried to do in this article is to build a convincing argument on the need for health insurance using data.
Let’s look at some major points:
- Health inflation: We hear everyday that prices of onions or tomatoes are shooting through the roof. What nobody tells you is that medical inflation is growing at an equally alarming pace.
It is estimated that medical inflation in India over the last decade has been in the 15–18% range whereas average salary growth was 10%. Hospitalization expense can leave a person a lot poorer today than it did 10 years ago.
To illustrate clearly the effects of inflation, let’s take a realistic example. Rahul Sharma in 2007 earned 6 lacs per annum and in that year an accident surgery costs rupees 1 Lac. That means an unfortunate accident would have costed 16% of his annual income in 2007.
Assuming a 10% inflation in salary and an 18% inflation to medical costs, let’s look at how the same situation would look in 2017. Rahul’s salary would have grown to rupees 15.6 lacs and cost of the same surgery is 5.2 lacs. In 2017, the same surgery would have costed 33% of his annual income.
A higher medical inflation means that it consumes a great share of annual income every passing year.
2. Impact of sudden financial shocks to your savings:
Next we look at how a sudden, big medical expense can disrupt long term savings. Let’s say Rahul saves 10% of his annual income every year for the next 25 years of his career. From previous example, let’s assume Rahul started with rupees 6 lacs per annum and will see a long term annual growth of 10%.
Assume 10 years from today, Rahul has to undergo a surgery that costs rupees 10 lacs. Without insurance, Rahul naturally uses his savings to pay for medical expenses. Let’s see how his savings will change over the long term.
As you can see, a medical expense of 3 lacs at 5 years blows a hole in savings of 14 lacs over a period of 25 years.
A small investment in health insurance is actually a financial rewarding investment.
3. How people pay for emergency expenses:
Have you ever wondered how people arrange for emergency finances to meet healthcare expenses? While a lucky few depend on their life savings, most of them either borrow from friends or family or do a fire sale of assets. Not withstanding the mental stress and embarrassment in asking money from relatives, a more serious impact is the financial cost of borrowing and fire sale of assets.
NSSO, a national statistics organization, has infact run a study of how people manage health expenses without insurance. And here is a major finding of that study:
According to this study, 1 in 4 people either borrow or sell assets or take money from friends and relatives to fund medical expenses. A simple insurance can save a lot of needless stress & trouble, don’t you think?
4. Claims data shows young are equally likely to file a claim
Here is the last myth that we wish to burst — being young, people think that health insurance can be postponed because the likelihood of making claims is low & even if they do file a claim, the claim size would be much lower than that of older people. Reality is very different when you look at claims data. Claims data published by IRDAI shows that 26–35 age groups makes the highest number of claims and average claim size is not significantly lower than claim size of senior citizens.
As an age group, 26–35 year old’s file the maximum health claims and average claims size is ~25,000 rupees which is not significantly lower than the claim size of 66–70 year age group whose claim size is 40,347.
By now, we’ve provided data that hopefully should have convinced you the need for health insurance. Oh! By the way, we didn’t tell you the best part yet. If you are under 35 and reasonably healthy, insurers like you and want you to be their customer. After all, no insurer wants a pool full of people whose potential health risks are high.
To attract young, healthy people to buy insurance, insurance companies offer health plans at an extremely competitive price.
To give an illustration, a health plan that provides a 3 lac cover (basic protection) to a 30 year healthy male should cost about 5000 bucks. That’s a couple of visits to a high-end bar, isn’t it? When something so useful is so cheap, it doesn’t make any sense not to have it.
