While health consciousness is at an all-time high, the incidence of critical medical ailments has also surged. The rising cost of healthcare, too, has become a major cause for concern. To keep diseases at bay, people nowadays take all possible preventive measures, such as eating right, exercising and practising yoga and meditation.
However, one crucial aspect that still does not receive due attention is effective financial planning to meet healthcare exigencies. There are different ways of handling health care exigencies, one of the commonly used way is to keep aside a certain amount every month as an emergency fund. The other ways are health insurance and the new concept of Health corpus or Health savings account.
So, let’s look what is emergency fund and Health corpus or Health savings account, what is the difference and its benefits?
An emergency fund is an account for funds set aside in case of the event of a personal financial dilemma, such as the loss of a job, a debilitating illness, or a major repair to your home. The purpose of the fund is to improve financial security by creating a safety net of funds that can be used to meet emergency expenses as well as reduce the need to draw from high-interest debt options, such as credit cards or unsecured loans.
This fund is essentially an amount of money that you keep aside for emergencies. It is a fund that you can access at the hour of crisis or for unexpected and unplanned scenarios, and not for meeting your routine expenses.
The most critical feature that you should keep in mind when you are choosing where to park your emergency fund is that you should be able to withdraw the money when you need it without any delay. At the same time, you should ensure that you do not get penalized in the form of an exit load or pre-withdrawal penalty fee. The value of the amount invested should not go down either and must deliver guaranteed returns.
How to create an emergency fund?
One of the most discouraging aspects to building an emergency fund is the large amount of money you must contribute. The good news is that you do not have to fund your emergency account all at once. You can build it up a little at a time. The most important thing is to get started and to remain consistent so that over time you can reach your emergency fund goal.
Some tips for creating an Emergency fund
Break it down. Decide how much you want in your emergency fund and figure out how much you can put in each month.
Use wasted money. Some estimates indicate that each household wastes at least 10% of its income each month. Look for the money leaks in your budget, such as over-ordering at restaurants or leaving the lights on.
Make it automatic. Schedule regular payments from your checking account to your emergency fund, using automatic bill payment plans.
Health Corpus or Health savings account (HSA)
This is comparatively a newer concept in India, but it is very common in countries like US and South Africa. This will take time for our people to realize the opportunities it has in the India.
A Health Savings Account (HSA) is like a personal savings account created for individuals who are covered under high-deductible health plans (HDHPs) to save for medical expenses that HDHPs do not cover. Contributions are made into the account by the individual or the individual’s employer and are limited to a maximum amount each year. This contributions are invested over time and can be used to pay for qualified medical expenses, which include most medical care such as dental, vision, and over-the-counter drugs.
How does HSA works?
A Health Savings Account is one of the ways an individual can cut costs if they are faced with high deductibles. A deductible is the portion of an insurance claim that the insured pays out-of-pocket. A high-deductible health insurance plan (HDHP) is an insurance plan that has a higher annual deductible than typical health plan. When an individual has paid the portion of a claim they are responsible for, the insurance company will cover the remaining portion, as specified in the contract. To supplement the funds that an insured has to pay out-of-pocket, a Health Savings Account (HSA) can be used.
Importance in India
Healthcare costs have been rising exponentially across the globe. These costs alone have pushed around 55 million Indians below the poverty line. To make healthcare affordable, the government has announced the Ayushman Bharat scheme.
The National Health Accounts released in October 2017 stated that Total Health Expenditure (THE) in India was around Rs 4,832.59 billion in 2014-15. Of this, 62.6 per cent or Rs 3,024.25 billion was out-of-pocket expenses borne by households. With insurance providers covering just about 1.5-2 per cent of total healthcare expenditure, Indian households have to dig into their savings to cover the rest. Cases, where families resort to borrowing, after exhausting all their savings to foot medical bills, are quite common. It is, therefore, wiser to be prepared for unforeseen medical contingencies by setting up a separate health corpus.
Post-retirement, 90 per cent of Indians rely on their savings to meet their expenses. Even if you take all possible measures to stay fit and healthy, a few medical conditions are common with advancing age. If your savings are not sufficient to meet these costs, you may have to rely on your children for financial support. Planning your finances well will ensure that you live with dignity and independence even after retirement.
Do we need to build a separate corpus for Health savings and Emergency fund?
This is a big question which is very difficult to answer. When we look at the purpose of the funds, both of them differ on their purpose. The Health Corpus or Health savings account is only meant to meet the medical expenses which your insurance plan will not cover or rather deny. There arises the necessity of paying certain amount along with your claim. This is commonly in the form of your contribution towards the claim or any health issues occurred at the time of waiting period or multiple claims during a specific period.
The emergency fund is to overcome unexpected and unplanned scenarios like loss of a job, a debilitating illness, or a major repair to your home. The emergency fund can be used for any situation irrespective of its nature, only the occurrence of the event should be unexpected and there should be a financial loss which has to be compensated.
In certain countries, the Health savings account has certain Income tax benefit. The amount used for the purpose of any qualified health expenses are fully tax free. In the case of any other withdrawal, the full amount will be taxable while the emergency fund does not carry any tax benefit.
The corpus on the Health savings account will be invested and will carry a certain percentage of returns. Whereas, the emergency fund should have high liquidity so these funds can be invested in liquid funds or any ultra-short term funds which does not carry any entry and exit to the scheme. This will reduce the overall returns of the emergency fund than Health savings fund.
So, when you consider these points, it is better to keep both the funds separately as both serve different purposes.
Dilzer Consultants Pvt Ltd