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A guide to creating self insurance via mutual funds

While a lot of the workforce is covered by Medical insurance for a nuclear family including a husband, wife and up to two children, the coverage may not be sufficient for the complete household.

As per a recent media report, Indian Healthcare inflation has been rising continuously at a pace double the overall retail inflation. These rising medical costs can actually strip one off their hard-earned money in case of an unannounced medical emergency. 

A case of insufficient coverage

While a lot of the workforce is covered by Medical insurance for a nuclear family including a husband, wife and up to two children, the coverage may not be sufficient for the complete household. 

For someone who may be having additional responsibilities such as elderly parents who may not be eligible for insurance or a young sibling who is uninsured, sickness can strip away a healthy chunk of their savings. So, having a self-insurance in such cases can make one feel at ease and be better prepared to deal with these emergencies. 

Self-insurance – the mutual fund way

Self-insurance as the name suggests is getting an amount ready to deal with medical emergencies for anyone in the family, particularly for those members who may not be able to get medical insurance coverage due to numerous reasons. 

This is the perfect way to save enough to deal with medical contingencies. The first step for this is to understand how much coverage would be required in general. For a young nuclear family, a coverage of Rs 10-15 lakhs is enough; while experts recommend a ratio of 5 lakh per person in the family as an adequate coverage to cover the likes of hospitalisation and such.

For a double income family with healthy elderly parents, an SIP of Rs 10, 000 per month in a debt fund returning 6% a year, with 10% increase in SIP each year,  can help one accumulate nearly Rs 10 lakh in a period of 5 years. 

Starting an SIP in liquid funds will give the much needed liquidity while the money will grow at a better rate compared to a savings account. This will be particularly helpful when one has to raise money in a short duration such as under a year. 

For a double income family with healthy elderly parents, an SIP of Rs 10, 000 per month in a debt fund returning 6% a year, with 10% increase in SIP each year,  can help one accumulate nearly Rs. 10 lakh in a period of 5 years. 

This money will help to offset some of the medical costs of the elderly parents or a family member who may not be covered by insurance companies for pre-existing ailments. With lifestyle related diseases on the rise, it is always better to have a safety net for Healthcare kitty, rather than being dependent on insurance companies. 

The biggest advantage of self-insurance probably is the ability to offset the rising medical costs and beat inflation on a longer term. Starting early is always good, if one decides to invest about Rs 5000 per month in a mutual fund for a period of 10 years one can accumulate a corpus of about Rs 9.5 to 12.46 lakh depending on the scheme chosen. This will be over and above the emergency money required to run the household and bring the much-anticipated, peace of mind to the concerned individual. Also, even if these funds remain un-utilised one is definitely not in a loss as they will continue to accumulate as long as the SIP is active and eventually add to one’s wealth at the same time. 

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