Insurance: Supplemental products to hedge against medical inflation

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on November 5, 2018 - November 11, 2018.

It is never too late to review your medical insurance policies as health conditions tend to worsen with age and that may mean people are no longer able to get insured or get a standard scope of coverage when they are older or nearing retirement - Neoh. Abdul Ghani Ismail/The Edge

If you are a normal person planning for retirement, medical bills that set you back RM50,000 or RM100,000 will affect your retirement funds. In this situation, it is good to have a basic policy plus a top-up - Lim. Haris Hassan/The Edge

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It is becoming more important to regularly review one’s health insurance coverage, especially in the light of rising medical costs and increasing life expectancy. This will prevent the risk of exhausting one’s retirement funds earlier than expected, which could place an unnecessary financial burden on loved ones.

Reviewing your insurance coverage is important to protect your offspring, says YC Lim, financial coach and managing director of Wings Alliance Sdn Bhd. “If I do not take the responsibility to protect and provide for myself, the next generation will suffer because of the high medical charges they will have to bear,” he adds.

Malaysia has experienced “a consistent increase in medical costs since 2016, resulting in the largest growth of all surveyed Asia-Pacific countries”, according to Willis Towers Watson’s 2018 Global Medical Trends Survey Report. It says the country’s medical inflation net of general inflation is at 10.3% this year, up from 8.8% last year and 9.7% in 2016.

Kevin Neoh, a financial planner with VKA Wealth Planners Sdn Bhd, points out that insurance products used to provide coverage up to the age of 70 or 80 but nowadays, insurers are extending it to the age of 100. “You had good coverage in the past, but it only covered you until you are 80 years old, for example. But now, you are concerned that you will live beyond this age. Then, you will have to explore other options to revise your medical insurance,” he adds.

Neoh says buying a new medical policy to replace an existing one is not a good idea as it means that a person needs to apply based on his current health conditions on top of having to pay for commissions. He points out that the medical underwriting will not be as ideal or as wide as the existing plan.

“If your plan does not allow any alteration of the benefits, you will have to consider purchasing a top-up or buy a new policy to supplement whatever you currently have, instead of replacing outright the whole policy with a new one. Similarly, if you have an existing insurance policy that you think is good enough or covered under company benefits, but you need to have higher annual coverage for peace of mind, you can consider just buying a top-up [or extender] kind of product to provide the additional safety net,” says Neoh.

He adds that supplemental products are part of a “back-up” plan to provide financial capacity when there are illnesses that warrant hospitalisation. Nevertheless, he maintains that, “A better and safer way to have a sound and secure retirement would be living a healthy lifestyle and having adequate exercise so that the risk of ‘befriending’ certain conditions or illnesses can be reduced.”

Revising your medical insurance policy
To decide which product is better suited to one’s needs, Lim suggests taking into account one’s existing insurance plans, health condition and budget. He says top-up products improve or add benefits while allowing the insured to retain his or her existing policy.

Upgrading a policy could mean increasing the benefits of the same product or replacing it with a new and improved product, says Lim. He adds that supplementary benefits are additional components that may not exist in a basic product.

Some products may need to be replaced as they may be outdated. For example, older products may have lower coverage, expires when the insured is at a younger age or have little to no coverage for outpatient cancer or kidney dialysis treatment. Hence, the older policy should be replaced,” says Lim.

“Top-ups can be done on some existing policies, where there is a trigger to activate the top-up product. [This] usually implies the medical limit of the older product. Certain companies such as Great Eastern Life Assurance and Lonpac Insurance allow the purchase of a separate top-up policy.”

Employees in the private and public sectors who are nearing retirement and are health insurance policyholders may consider getting a top-up product to supplement the coverage provided by their employers, says Lim. “If you work as a government servant and are nearing retirement or have already retired, and you are entitled to basic medical coverage, then you will need top-up coverage if you are admitted to hospital for critical illness such as cancer,” he points out.

“[Private companies] have a group scheme, but the coverage can sometimes be a smaller sum [assured] of, say, RM60,000. So, employees may want to buy top-up insurance as well. Regardless, working people should have at least one policy of their own because if they are laid off or have to quit their jobs, they will still have insurance protection.

“If you are a normal person planning for retirement, medical bills that set you back RM50,000 or RM100,000 will affect your retirement funds. In this situation, it is good to have a basic policy plus a top-up.”

Lim says top-up policies can pay out up to RM1 million, but the coverage only kicks in if the medical bill exceeds a certain amount, which is stipulated in the policy. For example, if the amount is set at RM100,000 and the bill is less than that, the policyholder must pay the amount out of his own pocket or use another medical card.

Apart from top-ups, policyholders may also consider extenders that stretch the coverage of existing policies, says Lim. “It is modifying your existing policy, but you pay an extra premium. For example, your basic coverage has a yearly limit of RM150,000. But with an extender, this can be increased up to 10 times. That means the coverage could be up to RM1.5 million a year.”

The premium depends on the policyholder’s age and the daily room and board allowance if he is hospitalised. “Although the extender’s coverage may be stretched up to 10 times the initial coverage, the premium may only increase minimally,” he says.

Another type of extension prolongs the medical coverage in terms of age, says Lim. He points out that policies of yesteryear only covered the insured up to the age of 70. But in the last 10 years, the coverage has gone up to the age of 80.

Now, there are calls for coverage to be extended to the age of 100. However, the premiums that policyholders will have to pay to extend the age band will differ, depending on whether their medical policies were bought from life or general insurers.

“Both life and general insurance companies have medical policies. But their structures differ as the financial underwriting considerations are different. While life insurers use a long-term assessment of surplus, general insurers’ are based on the annual performance of the funds,” says Lim.

“Thus, general insurers may charge an extra premium for individual claims on top of the increment of the age band while life insurers’ premiums mainly increase based on the age band only.”

He emphasises that this is an important factor to look at in view of longer life expectancy. “You may have started working at 25 and work for about 35 years, but if you live until 100, you will need to support yourself for 40 more years. And nowadays, it will be difficult to rely on your children.”

Lim says that when buying supplemental insurance products, in addition to the annual limit, it is important to look at the lifetime limit, which is the dollar limit on what insurers would spend for a policyholder’s covered benefits during the entire time he is enrolled in a particular plan. “Most insurers now offer a lifetime limit of about RM2 million to RM3 million,” he adds.

Lim reminds policyholders to take note of the list of exclusions that are set out as they tend to be more extensive as one ages or has deteriorating health. “You must also find out if a room and board allowance is listed as a benefit,” he says.

“Another thing to look out for is the method of claiming allowed by the insurer. Some insurance companies do not give out letters of guarantee (LG) for top-up products. So, check whether you can claim using a medical card and LG or whether you need to use your own medical and credit cards, for which you would be reimbursed.”

It is never too late to review your medical insurance policies as health conditions tend to worsen with age and that may mean people are no longer able to get insured or get a standard scope of coverage when they are older or nearing retirement, says Neoh.

“However, we should be mindful that it is important to ensure we have sufficient cash flow to achieve our other life goals, as well as live a reasonable lifestyle of our own choice, instead of tying up most of our income to pay for insurance premiums. We have to strike a balance between being safe and too safe,” he adds.