Health Insurance or Medical Savings: Which is Better?

What is Health Insurance?

Health insurance is a financial tool that acts as a safety net for planned and emergency medical expenses. In exchange for a premium paid at regular intervals, the insured can receive cashless treatment or reimbursement for their medical expenses.

For instance, a person gets hospitalized for a surgery, and their medical bill costs ₹4 lakh. Their health insurance shall cover most or all of the expenses, depending on policy terms.

What are Medical Savings?

Medical savings refer to the pool of money you set aside or save separately for healthcare expenses. This can be in the form of an emergency cash fund, fixed deposits, systematic investment plans (SIPs) or even your bank savings account.

For instance, a person gets hospitalized and their treatment costs ₹1 lakh. They pay this amount from their savings or use investments made specifically for emergencies.

Pros and Cons of Health Insurance

Here are the advantages of health insurance. It:

• Covers expenses related to hospitalization, doctor’s fees, surgeries, pre- and post- hospitalization, ambulance services, diagnostic tests, day care procedures, etc.
• Provides additional benefits such as annual health check-ups, second medical opinion, OPD benefit, coverage for non-medical expenses, daily cash benefit, etc.
• Offers cashless treatment at network hospitals
• Provides tax benefits under Section 80D of the Income Tax Act, 1961.
• Provides peace of mind as the insured gets quality healthcare without any financial burden

Some of the disadvantages associated with health insurance include:

• A fixed amount has to be paid regularly, whether you raise a claim or not.
• Certain treatments or benefits may come with a waiting period, implying you cannot get their coverage for a set period.
• For certain diseases or procedures, you may not get full coverage. There may be limitations to the amount that the insurer would pay.
• Not fully understanding the policy terms and conditions completely can result in misinformation, implying you may misjudge policy coverage. You may not get covered at all or get covered for a lesser amount in a situation where you expect full coverage.

Pros and Cons of Medical Savings

Let us look at the advantages of medical savings. It:

• Does not require a fixed amount to be deposited regularly, as it is based on free will.
• Provides full control over your money, without you having to wait for approvals.
• Does not have restrictions on usage. You can use the full amount for any disease or procedure needed.
• Does not have any waiting period. You can use the amount whenever required.

However, there are certain limitations of medical savings. These are:

• These funds may not be sufficient for major illnesses or long, advanced treatments.
• One emergency can deplete all your savings, and you will be left with no funds if you face another medical crisis.
• If savings fall short, you will have to arrange funds immediately, and may have to sell investments or borrow money.
• It does not provide any additional benefits or options to expand coverage.
• It does not keep up with medical inflation. The savings amount that may be sufficient for a treatment today may not be enough for the same treatment after 3-5 years.

Key Differences Between Health Insurance and Medical Savings

Here are the key differences between health insurance and medical savings that one must know before deciding which approach to follow:

Real-Life Scenario Comparison

Let us consider two individuals, A and B, who are of the same age and have the same risk profile.

• Person A has a health insurance of ₹10 lakh for which they pay a premium of ₹10,000 annually.

• Person B has saved ₹4 lakh over time as a medical emergency fund.

They both face a medical emergency of ₹6 lakh.

In such a situation, Person A’s medical bill will be covered by their health insurance policy for most (or all) expenses, having them to pay only minimal out-of-pocket expenses. Their savings would remain intact, and they would again get a sum insured of ₹10 lakh on policy renewal.

On the other hand, Person B shall use ₹4 lakh from their savings and will have to immediately arrange the remaining ₹3 lakh. They may have to sell their investments or borrow money to make up the difference. Since they would have exhausted the financial pool, there would be no savings left for the future.

Comparing both scenarios, we can conclude that health insurance provides comprehensive financial protection, while savings alone may fall short to cover healthcare costs.

Health Insurance v/s Medical Savings: Which is Better?

If you are wondering whether it is better to buy health insurance or save for medical emergencies, the answer depends on your current health condition, medical history and risk appetite. In most situations, savings alone may not be sufficient to cover medical bills. You must rely on medical savings only if you are sure your medical bill would not surpass the saved amount. Otherwise, it is ideal to use a combination of health insurance and savings to ensure complete financial protection.

While young people can rely more on savings and choose health insurance with lower coverage, people with dependents must ensure they have high coverage, as a medical crisis can impact an entire family’s finances. Senior citizens and people with high health risks must have a comprehensive mediclaim policy, as savings is not enough to meet their healthcare requirements or cover critical illnesses.

Ideal Strategy for Managing Medical Crisis Financially

The best strategy to stay financially safe during a medical crisis is to use a combination of health insurance and savings.

While health insurance helps to cover major medical expenses without letting you feel the financial stress, medical savings can help to cover smaller or uncovered expenses.

Hence, the ideal approach is to choose a health insurance plan that offers comprehensive coverage and create an emergency fund of 3-6 months of expenses to ensure complete financial protection.

Final Verdict

Health insurance covers hospitalization costs, surgeries, ambulance charges, day care procedures, etc. Having health insurance helps you minimize out of pocket expenses in exchange for a premium paid to the insurer yearly. Even if you utilize this amount completely in a policy year, you can get the same coverage on health insurance renewal.

On the other hand, if an individual chooses to build an emergency medical fund, they have the free will to save as much as they wish to and whenever they wish to. But the saved amount usually is not sufficient to cover the entire hospital bill, especially if admitted for a long or serious condition.

To ensure complete financial protection, you must choose a mix of both health insurance and medical savings. This allows you to get major expenses covered via insurance and cover minor expenses with your pool of savings, minimizing financial burden during a medical crisis.

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