Is a unit trust best option for medical expenses?

A Moneyweb reader asked: I have been wondering if it would make sense to ringfence 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.

Michael Haldene, who is an investment advisor at Global & Local, answered:

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. 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 longterm 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, 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. The investment is also exposed to macro-economic metrics that adversely affect the investment performance, resulting in output imbalance.

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.

Investment risk

Decision 2:

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 longterm 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, 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.

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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