Though most people use mediclaim policies to take care of their health insurance, they have a problem. A medi-claim policy usually covers expenses incurred on hospitalisation up to a maximum ‘sum assured' under the policy. But what if the cash you need overshoots this sum assured? One has to fall back on savings in such times.

This is where insurance companies have stepped in, with health unit linked insurance plans (ULIPs).

A health ULIP is a combination product where a hospitalisation plan's benefits are combined with a market linked fund. A part of the premium you pay goes to service a pure medi-claim policy with a fixed sum assured and the remaining premium is invested to create a fund.

In a situation where the policyholder exhausts the sum assured he can use the money accumulated in the fund to meet his bills.

Sounds a good idea, but is it a smart thing to put the money saved for emergencies in a health ULIP? Maybe not.

Product brief

ICICI Prudential, Birla Sun Life and IndiaFirst are some insurers offering a health ULIP. There are single as also regular premium products with single and floater (to cover spouse, kids and parents) options.

The health cover is indemnity-based, subject to the maximum of sum assured under the policy. However in cases where the sum assured has been used up fully or when the claim is on medical expenses not covered under the hospitalisation plan, policyholders can claim the money invested in the health fund.

The premium on the policy depends on the sum assured the policyholder asks for. For a male of 30 years and a hospitalisation benefit of Rs 2 lakh, the premium with ICICI Prudential's health unit linked insurance plans is Rs 15,000 a year.

Health ULIPs enjoy tax benefits that are the same as those for a regular unit linked scheme and IRDA's mandate on costs and charges too apply. So you can be assured that on a ten year investment the difference between gross and net yield on your investment in a health ULIP is capped at 3 per cent.

What is the catch?

The key attraction of health ULIPs is that they are money-back plans, you get back some money even if you have no occasion to use the medical insurance in such plans. However, we do not recommend health ULIPs for the following reasons:

Sub-limits: Despite a health fund to cover extra expenses, health ULIPs set an upper limit on benefits such as room rent on hospitalisation, ambulance charges, charges on medical check-up and so on.

ICICI Prudential, for instance, has a sub-limit of 1 per cent of annual premium on the claim for room rent. A co-payment of 20 per cent will be applicable if the policyholder claims for expenses above the eligible limit. This is a disadvantage as most standalone hospitalisation plans in the market have no sub-limits and offer a wider coverage.

Only for medical expense: A claim on the health fund is honoured only to the extent of the medical expenditure incurred by the policyholder. A standard critical illness policy will be of greater help here as it gives the sum-assured under the policy as a lump-sum on the detection of the insured disease and the claimant can use the money for any purpose he desires — be that a medical expense or a loan he has to settle.

Birla Sun Life's health ULIP offers critical illness benefit as well, but just four illnesses are covered under it and the benefit is limited to Rs 20,000 multiplied by the policy year in which the illness occurred, whatever be the total sum assured on the plan (minimum sum assured available is Rs 10 lakh).

Lock-in: The policyholder can't start drawing the accumulated money in his fund from the second year. He has to wait until the lock-in period is completed. With ICICI Prudential the fund is locked for claims until the completion of three years. With Birla Sun Life the fund is locked for five years for any claim.

Limit on claim against the fund: There are limits on the amount that can be claimed against the accumulated fund. With IndiaFirst's policy, the policyholder is not allowed to withdraw more than 10 per cent of the fund value in any year.

With ICICI Prudential one will be given a maximum of 20 per cent of the fund value only in the fourth and fifth years (the policyholder can get 100 per cent of the fund from the eleventh year onwards). Birla Sun Life however lets the insured claim 100 per cent of the fund from the sixth year onwards.

Charges: Insurers levy a high premium allocation charge in the initial years of the policy. In the first year of the policy the premium allocation charge is 20 per cent with ICICI Prudential and 13 per cent in the case of IndiaFirst. These charges become nil only after the third year in some cases and after five years with some insurers.

Fund management charges too eat into fund returns. The fund management charges are around 1-1.75 per cent on an average (equity options have higher fund management charge) across insurers.

High-cost: As the investment component is inbuilt in the policy, the premium on the policy is higher compared to standard hospitalisation policies in the market. For a sum assured of Rs 2 lakh for a male of 30 years (policy term 10 years), the health ULIP with IndiaFirst Insurance comes for a premium of Rs 13,300 and with ICICI Prudential for Rs 15,000. However, the cost of a standard hospitalisation policy with Rs 2 lakh sum assured will be only Rs 2,500-3,500.

A critical illness policy of Rs 5 lakh for the same person will come for a premium of Rs 3,000. So, one can buy a comprehensive cover with 2 lakh hospitalisation benefit and 5 lakh critical illness benefit for Rs 6,500 itself.

Those of you who are looking to build a fund for medical emergencies can save up the money in debt options such as public provident fund or recurring deposits of a bank.

You may even ask your employer to increase your contribution to the provident fund. These options give you capital safety as well as tax benefits.

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