This series of articles aims to take a closer look at the effectiveness of risk life insurance (RŽP).
To begin, let's review the difference between public health insurance and private risk insurance.
Public health insurance ensures the financing of healthcare in the Czech Republic. Every person who has permanent residence and works in the Czech Republic is required to have health insurance. The system is based on solidarity, and therefore insured persons are entitled to the same level of healthcare regardless of how much they contribute to the system. It covers a wide range of health services, including outpatient and inpatient care, dental services, rehabilitation, maternity care, diagnostics, and prescription medications. Some services are fully covered, while others require partial co-payment from the insured person.
Risk life insurance (for our purposes, let's consider purely risk-based, i.e., non-investment variant) primarily serves to ensure the financial stability of the insured person and their family in situations where health issues temporarily or permanently limit the earning capacity of one of the breadwinners. Insurance benefits can be used either as compensation for income loss or as financial support to cover treatment costs that cannot be paid from public health insurance.
RŽP as a financial tool + price/performance ratio
We spend a substantial part of our lives working to provide for our own needs and those of our loved ones. With the money earned, we manage daily finances, monitor income and expenses, consider what to purchase, where to invest, and build reserves. In this cycle, we usually start addressing health issues only when problems arise – this is normal human nature. However, as in other areas, it is true here as well that dealing with damages is significantly more expensive than prevention. If I have substantial financial reserves available, I can handle the situation more easily because I can focus purely on the problem at hand and its solution – the reserve gives me the necessary time and peace of mind to assess the situation and decide on the next steps.
When making decisions, I most often consider whether I am getting adequate value in return for the amount of time / effort / money spent. Properly set life insurance should ensure that whenever health issues significantly limit me, an imaginary reserve fund opens up, starting to pay me sufficient resources so I can slow down and focus on recovery. When considering whether to take out life insurance, I simply reflect on which reserves I would have to tap into if "something happened," and how significantly it would impact the quality of life for myself or my family.
In the following example (calculated in March 2023), we consider a model life insurance for a healthy individual, covering the following risks:
- 3rd degree disability: CZK 4,000,000 (constant + decreasing amount)
- 2nd degree disability: CZK 2,500,000 (constant + decreasing amount)
- 1st degree disability: CZK 1,300,000 (constant + decreasing amount)
- serious illnesses: CZK 1,000,000 (constant amount)
- permanent injury consequences: CZK 1,000,000 (with progressive payout)
- hospitalization: CZK 1,000 / day
- daily compensation: CZK 500 / day
Why exactly these risks and why the payouts in these amounts will be discussed in subsequent articles. For now, it is sufficient to say that the described setup represents a "personal reserve fund" that I pay for and from which I can draw if any of these situations occur.
In the table below, we compare the costs of "purchasing such a fund," meaning the amount of monthly premium, the total amount I would spend this way until the age of 65, and the sum I would have saved over the same period if I regularly invested this amount with a fixed annual return.
