Can personal medical fund replace health insurance?

With medical treatment costs rising sharply, should you rely on health insurance to protect yourself from expensive hospital bills, or build a personal medical fund that you can use whenever a healthcare need arises?

Each option has its benefits, but they serve different purposes.

A personal medical corpus offers flexibility and control over your money. However, saving enough to handle a major medical emergency can take many years. Till you build such a large corpus, you stay at risk if a major medical expense happens and you don’t have enough saved.

Health insurance works differently. It can provide financial protection against eligible hospitalisation expenses, starting from day one.

“Medical costs are rising at 12 to 14% a year, and a personal corpus built on safe investments will struggle to keep up,” says Sarita Joshi, the Head of Life & Health Insurance, Probus.

A personal medical fund can play an important role in managing healthcare costs, but it shouldn’t be your only protection instead of insurance.

“A personal medical fund can act as an excellent secondary buffer for out-of-pocket expenses, routine OPD consultations, or non-medical items; it should not replace health insurance,” says Abhishek Bansal, CEO, Insurance Business, InsuranceDekho.

The key difference is that health insurance pools risk across a large number of policyholders, giving an individual access to a sum insured without having to accumulate the same amount through savings over several years.

Pros and cons of building a personal medical fund

A personal corpus offers liquidity, flexibility and complete control over how the money is used. Unlike an insurance policy, the money belongs to you and can be deployed according to your needs.

Another advantage is that the corpus is not subject to policy-specific exclusions, room-rent limits or disease-specific sub-limits.

If you stay perfectly healthy, the capital remains yours to use for other life goals, avoiding what some perceive as the "sunk cost" of unutilised insurance premiums, explains Bansal.

“However, building a substantial fund takes time, and withdrawals for medical emergencies can disrupt long-term financial goals,” says Minoo Mantri, EVP - Insurance, Anand Rathi Share and Stock Brokers Limited.

If a critical illness or major accident occurs early in the savings cycle, your personal medical fund will be easily wiped out, halting long-term wealth creation.

This is where health insurance has an advantage.

For a fraction of the cost (the premium), insurance transfers the entire financial liability of a multi-lakh hospitalisation to the insurer from day one, safely ring-fencing your personal investments and retirement savings, says Bansal.

Should you build a medical fund for post-retirement?

Health insurance premiums are generally more affordable when you are younger and tend to rise with age. For senior citizens, premiums can become particularly expensive. Building a separate medical corpus early in life can help you meet healthcare expenses after retirement and reduce your dependence on costly insurance.

Starting early gives you more time to build an adequate medical fund by the age of 60, even with modest returns.

How much to invest monthly to build a Rs 50-lakh or Rs 1-crore medical corpus at 60?

Building a pure medical corpus of Rs 50 lakh or Rs 1 crore requires significant monthly capital allocation, which creates an immense opportunity cost for other essential financial milestones like buying a home or funding retirement.

The table below shows the monthly SIP required to build the target corpus by age 60.

Source: Probus.

Note: Assumes a fixed monthly SIP, monthly compounding at the stated returns, and no taxes. Figures are rounded and illustrative.

The illustration shows how starting early can reduce the monthly investment needed to reach a target corpus. For instance, someone starting at 25 has 35 years to build the fund, while someone starting at 45 has only 15 years.

However, these calculations assume a fixed target corpus. They do not account for the fact that medical costs may rise significantly over the same period. A corpus of Rs 50 lakh or Rs 1 crore at age 60 may therefore have less purchasing power than it does today.

Safe investments you can consider for your personal medical fund

If an individual chooses to build a supplementary medical fund alongside their base insurance policy, capital preservation and high liquidity must be prioritised over aggressive returns.

Because medical emergencies are unpredictable, this money cannot be locked away in volatile or illiquid instruments.

According to Bansal, suitable low-to-moderate risk investment avenues include:

• Liquid Funds and Arbitrage Funds: These offer high liquidity and low volatility compared to equity, making them ideal for immediate access. Arbitrage funds also provide better tax efficiency for those in higher tax brackets.
• Banking & PSU Debt Funds or Corporate Bond Funds: Suitable for investors with a slightly longer horizon of 3–5 years to build the initial cushion, offering relatively stable returns by investing in high-quality debt instruments. They can also consider other debt mutual funds with nil exit load after three months or less, depending on the scheme, to maintain higher liquidity and flexibility.
• Multi-Asset Allocation or Conservative Hybrid Funds: These can be considered for a longer 10-to-15-year horizon, blending fixed-income security with a small equity exposure to help the corpus combat medical inflation.
• Recurring or Fixed Deposits (FDs) with Sweep-in Facilities: The simplest tool for absolute capital safety, ensuring instant breaking capability during a hospital emergency without heavy penalties.

Why should you start building a medical corpus early?

Starting early is absolutely vital because compounding requires time to do the heavy lifting. When you begin in your 20s or early 30s, your contributions have decades to grow, meaning your out-of-pocket investment burden is significantly lower.

More importantly, starting early allows you to build a meaningful financial cushion during your healthiest years, when your immediate healthcare utilisation is low. This ensures that by the time age-related health vulnerabilities naturally increase later in life, a substantial, inflation-protected medical fund is already fully mature and ready to deploy, explains Bansal.

Should you choose health insurance or a personal medical fund?

Health insurance premiums are generally more affordable when you are younger and tend to rise sharply as you age. Instead of relying on either health insurance or a personal medical fund alone, consider building both early in life. This gives you time to accumulate a sizeable medical corpus by retirement, even with modest returns.

After retirement, this fund can help cover medical expenses, giving you the option to continue or discontinue health insurance, depending on the size of your medical corpus.