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Words of Wisdom : "No matter how great the talent or efforts, some things just take time. You can't produce a baby in one month by getting nine women pregnant." ~ Warren Buffett

Absolute Bogus Maternity and OPD Covers

To be very frank, if you are planning to buy a maternity insurance or OPD cover you are making a big fool of yourself.

Let's start from the very basics of insurance to understand why maternity and OPD covers make no sense at all.

What is insurance?
Insurance is basically a product that protects us from a "large" financial expense by paying a "small" premium. 

So let's say you get a Rs.5 lakhs insurance cover against medical problems for a premium of Rs.5000 per annum.

Now suppose after 3 years a serious illness happens and you end up with a medical bill of Rs.4 lakhs. This would be paid by the insurance company. But you have so far paid them only Rs.15,000 (= Rs.5000 * 3). In other words, the insurance company has lost Rs.3.85 lakhs.

But, an insurance company is not running a charity organization.

So how does it take care of such losses?
Very simple.

It sells the health insurance policy to say 200 people. Thus, in 3 years it would have collected Rs.30 lakhs as premium (= Rs.15,000 * 200). Based on its claim experience, the insurance company has worked out the probability that in these 3 years around 5% people (i.e. 10 nos) would be hospitalized and the average expense per person would be Rs.2.50 lakhs. This works out to a total claim payout of Rs.25 lakhs. Thus, insurance company ends up with a profit of Rs.5 lakhs.

This is how insurance works. The big risk is spread across a very large number of people, so that each one has to bear only a small burden.

You are happy as you are financially secured against the BIG "unforeseen and unexpected" expenses. Insurance company is happy making its profits. A win-win situation for both.

But what if the insurance company's estimates go wrong?
Suppose instead of 10, 15 people land up in hospital incurring an expense of Rs.2.50 lakhs. Then the total claim payout works out to Rs.37.50 lakhs against Rs.30 lakhs collected as premium. Thus insurance company has lost Rs.7.50 lakhs.

Hence, you can appreciate that insurance companies have to be extremely careful with their estimates of both (i) the number of people falling sick and (ii) the average medical expense per person.

Keep this fact in mind as we move on to the crux of this article.

So why maternity and OPD covers are bogus?
It is but natural that only the young generation, in the child-bearing age group, would buy maternity insurance. No one else would be interested in such a cover. And probably 80% to 90% of these policy buyers would have kids. In other words, the claimants for maternity expenses would be very high (as compared to 5-7% discussed in the above example).

Maternity is neither unforeseen nor unexpected.

Therefore, if practically everyone ends up lodging a claim, it is but natural that insurance companies would simply go bankrupt. They will have no money to pay for all the claims.

Insurance companies are no fools. So they must definitely have plans to be able absorb such a high claim ratio... and still make profits.

Besides, you would normally have the normal health insurance policy for lifelong. Whereas maternity cover is bought at best for 5-7 years. So, with maternity policies, insurance companies have very limited time to ensure a "mutually beneficial" business.

So this is how they protect their business interests...
... the premium is relatively much higher (almost double) for policies with maternity cover than those without
... the limit on cover is restricted to a very small value (Rs.15,000 - Rs.25,000); whereas your normal expenses would be in the range of Rs.50,000 or more. In other words, don't expect more than 30-50% of your expenses to be reimbursed.
... a long period of 3-5 years of continuous policy renewals would be mandatory before you become eligible to make a claim. In other words, it would have collected substantial sum from you so that it doesn't have to pay your claim out of its own pocket.
... a long list of limits, sub-limits and exclusions means that you will have to anyway bear quite a few expenses even if you have such a policy.

The same logic applies to OPD covers too, where again the claim ratio is very high.

Therefore, the simplest and the best strategy would be to
a) Buy a simple policy WITHOUT maternity cover, that will come at a very nominal premium
b) Put aside the additional maternity and OPD cover premiums into a Fixed Deposit
c) Hope that you have an employers' group insurance policy that covers maternity expenses.

In 3-5 years, you will end-up with MORE BANK BALANCE than the amount you can expect from the insurance company under a typical maternity or OPD insurance plan.

In short, its an ABSOLUTE NO to the absolute bogus maternity and OPD insurance policies.

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