Do I really need health insurance?

The other day at a social function, Aniket Gupta, a 30-year-old aggressive friend of my cousin challenged me to prove why it would be advantageous for him to buy a health insurance policy. His plea was I am young and healthy. Why should I “waste” my money on health insurance now?

I quote here what Aniket had to say:

“I am 30 years old and in perfect health. My wife is 28 years old and also in perfect health. Both of us work out regularly. None of my family members (or my spouse’s family members) have had any health problems before they reached their late 50s. The premium for a Rs 3 lakh individual policy is around Rs 3,600 per person or around Rs 7,200 per annum for my spouse and me.

If I avoid paying this premium for 20 years I will end up saving at...least Rs 1,44,000. I will then take a health insurance policy when I reach 50, which is when I might need it. Why should I not invest this money and earn returns on it and take the health insurance policy only when I ‘need’ it?”

My reply to this is below:

Congratulations Aniket for maintaining a healthy life style and also taking “informed decisions” on personal finance matters. Your calculation of premium “wasted” for 20 years is on the lower side. The total premium “wasted” will be around

Rs 1,80,000 rather than Rs 1,44,000 that you have calculated since you have not factored in the increase in premium that becomes effective with reaching the age of 35, 40, 45 and 50. Even assuming that nothing happens till 50 years as you have calculated and you have a claim only in the 50th year of your life for Rs 4,50,000 (remember you...would have accumulated no claim bonuses and hospitalisation costs would have risen sharply in 20 years) the “IRR” for this “investment” would still be 9% +. In fact even if the claim happens in your 55th year the “IRR” for this “investment” would still be 5% +. Not bad for an “investment” that provides risk cover even in the meanwhile. After all, we live in stressful times and people fall ill at much younger age than they did just a decade back. The additional risk of not taking insurance early is that if you start suffering from a disease like Diabetes, the assumption that you will take the health insurance policy when you need it will fail.

Taking a cover today protects you from this risk as well. After all even you acknowledge that you won’t be able to live without health insurance after you reach 50 years.