Use gap cover to protect your savings

You have to plan to protect your savings and one way to do this is to use gap cover. If there is one thing that Covid lockdowns taught us, it is the need for financial resilience. As many of us found, the unexpected can occur and having a cushion of savings to fall back on is critical.

“South Africans just do not save enough, and it is therefore doubly important that your savings are not depleted unnecessarily by entirely predictable ‘extra’ costs, such as medical costs not covered by medical aid,” says Michael Emery, marketing executive at Ambledown Financial Services.

He says South Africa’s savings rate is 0.5%. Compare that to our peers, such as Brazil (16.9%), South Korea (13.7%) and India (10.8%).

You can use a common budgeting strategy made popular by Elizabeth Warren in the book All your worth: The ultimate lifetime money plan where you use the 50/30/20 rule and use 50% of your income to pay the bills, 30% on discretionary expenditure and 20% on savings.

ALSO READ: Why is everyone buying gap cover?

You must be prepared with gap cover

“I doubt most South Africans come even close,” says Rob Immelman, CEO at MEMP Group.

While pandemic lockdowns may be considered true black-swan events, Immelman says that unexpected medical expenses are one of the more common reasons people find themselves needing cash fast and yet few people have sufficient savings for these.

“You need a plan,” he emphasises.

Michael Stow, principal at HOLD Consulting, agrees.

“For many, household income, even for well-heeled professionals, barely covers expenses, with little or none left over for saving for retirement and leisure, let alone unexpected health costs. It is human nature to focus on the present and let the future take care of itself, but life is rarely what we want it to be.”

Health costs often exceed medical aid rates, with the balance falling to the member to pay, he points out.

“No surprise then that the demand for gap cover increased and the size of payouts as well. According to a recent article, gap cover can now total more than half some patients’ medical aid payouts, the result of high medical inflation.”

Peter Hallendorff, director of Healthcare Solutions, says clients are very exposed to uncovered costs, especially when they are admitted to a hospital due to an unexpected event.

“In such instances, they have no control over what the on-duty provider will stipulate and are not in a position to negotiate. Then there are also cases where a co-payment is required for an in-hospital event.”

ALSO READ: Gap cover for medical expenses almost as important as a good medical aid

Medical schemes saving money with less coverage

In a bid to reduce costs and so limit increases, medical schemes have increased the number of procedures requiring co-payments and reduced the limits on expensive items like prostheses. At the same time, many medical scheme members have downgraded their medical aid cover to reduce monthly expenses.

Hallendorff recalls a member who was diagnosed with spinal stenosis and needed spinal surgery. The difference between the orthopaedic surgeon’s invoice and what the medical scheme covered was R124 000.

The member then needed a second procedure due to complications that arose from the first and the shortfall on the surgeon’s second invoice was over R72 000. Fortunately, the member had gap cover that could settle both amounts not covered by the medical scheme.

In another example, Hallendorff says a member’s gap cover policy paid a dread disease lump sum payment of R50 000 to the member after he was diagnosed with cancer. He says the member was relieved because part of his treatment included therapy that was not covered by the medical scheme. He could fund that therapy with the gap cover payment.

Stow says less expensive medical schemes may cover fewer high-cost procedures, exacerbating the challenge. “The brutal truth is that the amount you can pay determines the quality of care you receive.”

All three of them argue that gap cover has a growing role to play in helping financially pressed medical scheme members ensure that they and their dependents continue to receive a high quality of care.

ALSO READ: Rising cost of medical aid requires urgent attention

These case studies show how important gap cover is

Immelman recounts the story of a client who was put into an induced coma for 11 days, requiring specialist treatment. The shortfall between what his team of anaesthetists charged and the medical scheme paid was in excess of R150 000. His gap cover paid in full.

Another case involved a rugby injury, which required intensive treatment over a three-year period, during which time the gap cover paid out R300 000.

“Gap cover is an absolute must to ensure your family will continue to receive appropriate care, while protecting your savings pot. However, you must remember that gap cover is only available to medical scheme members.”

Stow believes that innovation is critical in ensuring that gap cover providers come up with products that provide genuine safety nets when families run out of medical savings or do not have the money to pay for things such as glasses, tests, wheelchairs, hearing aids and specialised, life-saving medicines.

“There is never a bad time to start saving regularly or to develop a strategy to protect your savings against unexpected medical costs. Building a relationship with a reputable broker is critical in developing the right gap cover strategy,” Emery says.