This paper examines the extent to which families in Indonesia can insure consumption against major illness using a unique panel data set that combines excellent measures of health status with consumption information. The authors find that major illnesses have significant economic costs, primarily from income loss rather than medical expenditures. They reject the full consumption insurance hypothesis, finding that families smooth less than 30% of the income loss from severe illnesses. These results suggest large welfare gains from formal disability insurance and that public subsidies for medical care may improve welfare by providing consumption insurance. The study highlights the importance of health insurance and the limitations of informal mechanisms in low-income countries. The authors also find that consumption smoothing is more significant for basic ADL changes than intermediate ones, and that the effects of illness on consumption are not fully explained by changes in tastes or preferences. The study concludes that major illnesses represent large and unpredictable changes that are difficult to smooth through savings, and that formal insurance markets could significantly improve welfare. The paper also discusses the implications of these findings for policy reform in insurance markets.This paper examines the extent to which families in Indonesia can insure consumption against major illness using a unique panel data set that combines excellent measures of health status with consumption information. The authors find that major illnesses have significant economic costs, primarily from income loss rather than medical expenditures. They reject the full consumption insurance hypothesis, finding that families smooth less than 30% of the income loss from severe illnesses. These results suggest large welfare gains from formal disability insurance and that public subsidies for medical care may improve welfare by providing consumption insurance. The study highlights the importance of health insurance and the limitations of informal mechanisms in low-income countries. The authors also find that consumption smoothing is more significant for basic ADL changes than intermediate ones, and that the effects of illness on consumption are not fully explained by changes in tastes or preferences. The study concludes that major illnesses represent large and unpredictable changes that are difficult to smooth through savings, and that formal insurance markets could significantly improve welfare. The paper also discusses the implications of these findings for policy reform in insurance markets.