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Should I invest R1m in a balanced unit trust for medical expenses?

If I go through with this, I would then cancel my medical aid.

I have been wondering if it would make sense to ring fence an amount of say R1 million into a personal medical account invested in a balanced unit trust and only use proceeds for medical expenses when needed? At 61, I am approaching retirement together with my wife. At the moment I do have a medical aid, which I would then cancel.

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This is a question we are inundated with time and again from investors across the divide. Ringfencing an investment for medical purposes relative to normal medical contributions might prove to be a worthy strategy on face value, depending on an investor’s circumstances. Circumstances vary and thus might be a contributing factor in sharpening one’s overall investment goal and strategy.

Medical aid can be seen as a cost, depending on an investor’s liquidity needs – or, in times of urgent need, a blessing. In this article, we are going to delve into the pros and cons of these two near similar financial planning decisions with a converging outcome.

Decision 1: Forgo your medical aid contributions and ringfence the investment with a conservatively managed investment

This decision seems increasingly attractive from a bird’s eye view because the monthly debit order instruction is effectively eliminated. But suppose an investor opts for this decision, balanced on a scale of asset and liability match; assets being the returns from the investment and liabilities being the unforeseen medical expenses in the event of sickness.

The benefit of this strategy is that an investor has control of their investment by selecting investment vehicles that enhance growth. For instance, an investor with R1 million to invest for medical purposes might invest 20% of this amount into money market instruments and the remaining 80% into conservatively managed unit trusts to avoid capital loss or asset-liability mismatch.

Apart from control, an investor has flexibility in terms of access to the funds whereupon they can settle the medical bill upfront.

Having gone through some of the few merits of this decision, in my opinion this might not be right for everyone for several reasons.

Most investments have a long-term horizon to allow the investment to grow. Therefore, based on one’s age and medical history, an investor with a history of morbidities might end up not seeing the benefit of this strategy.

Age is another crucial factor to consider; older citizens generally need more medical attention relative to younger ones, thus rendering this strategy meaningless.

The investor suffers the risk that the saved amount might not be enough to cover all their medical needs, as the costs of medical assistance are exorbitant. Therefore, the investor experiences asset-liability mismatch.

Despite investing into money market instruments or conservatively managed unit trusts, the investment is exposed to macro-economic metrics that adversely affect the investment performance, resulting in output imbalance. For instance, Covid-19 shook the markets in an unprecedented fashion thus wiping out gains made in 2019. In that regard, an investor’s invested amount is significantly reduced and may  not be able to cover the medical bills.

Also, this decision might be unappealing due to fees charged by several platform providers thus shrinking performance. With such narrowed performance, there is a risk that the medical liabilities might be excessively higher than the invested amount, thus resulting in an unceremonious loss.

Decision 2: Monthly medical aid contributions

This decision somewhat counters some of the disadvantages highlighted above in that the investment risk is not borne by the member but by the medical aid, where coverage can be 100%, 150% or even 200%. Age and medical history play a pivotal role in most medical aid formations. However, in terms of investment formulations, one does not have to have a long-term horizon to get medical cover.

Furthermore, monthly contributions are not adversely affected by market volatilities as the member pays the prescribed monthly amount. Added to that, when submitting yearly tax returns, one gets a rebate as defined in Section 6B (1) of the Income Tax Act, 1962.

This decision has its own drawbacks in that the monthly contributions do not mature, though one might opt for a savings option as defined by the rules of the medical aid. In addition to that, contributions soar based on the consumer price index, making medical aids unaffordable for many.

A member might also be forced to pay co-payments, which might be steep. This steepness of co-payments makes medical aid increasingly unattractive.

In some instances, one might be slapped with penalties for joining late, coupled with excessively high monthly contributions. This late joiner penalty could be a deterrent for many. Moreover, some pre-existing conditions might be excluded or subject to a waiting period.

So, what then?

In my view, each decision has its own advantages and disadvantages which will be up to the investor to consider. However, when one makes such a decision, one must consider the investment horizon, age, medical history and liquidity constraints.

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