The recent Covid-19 crisis tested the adequacy of health insurance covers for many of us. What seemed like robust health cover proved to be inadequate, at least in some cases. The employer cover of Rs 3 lacs and private health plan of Rs 5 lacs seems woefully inadequate now. Doesn’t it?
- What is an adequate health cover then?
- How do you enhance your health insurance cover? After all, the extra coverage comes at a cost.
The first question is difficult to answer. If you are out of luck, no amount is ever going to be enough. However, in my opinion, a base cover of Rs 5 lacs per person in a family floater plan is decent. And this is before no-claim bonuses. So, for a family of 4, a floater plan of Rs 20 lacs should be a good choice.
If you have an individual plan, Rs 10 lacs looks like a good number.
About the increase in coverage, there are 2 ways to do it.
Enhance existing cover or buy a super top-up plan.
Here a few things to keep in mind.
The Marginal cost of Health Insurance is not very high
And you must use this to your advantage.
I produce actual data for an insurance plan for a family of 4 (40, 38, 12, 10):
Rs 5 lacs cover costs ~ 19,000.
Rs 10 lac cover costs ~24,600. Thus, the next 5 lacs of cover comes at just 5,600 more.
Rs 20 lac cover costs ~31,200.
Thus, while the health insurance coverage has gone up by 4 times, the annual premium has less than doubled.
Contrast this with term life insurance coverage. If Rs 50 lacs term plan costs your Rs 12,000, a Rs 1 crore cover will cost you ~ Rs 24,000. Thus, the premium increases in proportion to the increase in Sum Assured.
Why this difference between a Term insurance plan and Health insurance plan?
The difference is due to the nature of the product.
And since the insurance company prices the product, let us look at this from the perspective of an insurance company too.
A term plan is a fixed benefit plan. If the policyholder passes away, the insurer must pay the Sum Assured to the family. And the probability of the policyholder passing away in a policy year does not depend on the quantum of life cover he/she has.
If you have a cover of Rs 50 lacs, they pay Rs 50 lacs to the family. If you have a cover of Rs 1 crore, the insurer will pay Rs 1 crore. The same insured event forces them to pay double the amount.
Therefore, from an insurer’s perspective, if life cover of Rs 50 lacs is priced at X, the cover of Rs 1 crore must be priced at 2X. Double the coverage, double the premium.
Health insurance products are indemnity-based plans.
The insurance company reimburses the cost of medical treatment as per the terms and conditions of the policy (admissible claim).
Now, the odds of your raking up a hospital bill of Rs 5 lacs is lower than running a bill of Rs 10 lacs.
Therefore, the underwriting team of the insurer can decide to price the additional coverage at a lower price. Moreover, with competition around, you can expect the marginal cost of insurance to be low.
A Super top-up plan can come in handy
You can augment your health insurance cover through a super top-up health insurance plan too.
The pay-out from a super top-up health insurance is trigged once the claim account breaches a certain threshold.
Let’s say you buy a super top-up plan of 20 lacs with a deductible of Rs 5 lacs. In that case, if the claim amount (admissible claim) breaches Rs 5 lacs, the excess bill amount will be paid by the insurer under the super top-up plan.
So, if the bill amount is Rs 8 lacs. Any excess over Rs 5 lacs (8-5 =3 lacs) shall be paid by the insurance company.
Now, if you had a base plan of Rs 5 lacs too, the first Rs 5 lacs will be paid under the base plan and the remaining Rs 3 lacs shall be paid under by super top-up plan.
When I refer to a base plan in the post, I am referring to a health insurance plan without any deductible. Your employer group health insurance plan or your existing private plan can be called the base plan.
- Base Plan of Rs 5 lacs (Pay the first Rs 5 lacs)
- Super top-up plan of Rs 20 lacs with a deductible for Rs 5 lacs (Pays the remaining Rs 3 lacs)
Big Base Plan vs. A small base plan + Big Super top up
You want to buy a health insurance cover of Rs 50 lacs.
You have two options.
- Buy one big base plan of Rs 50 lacs OR
- Buy a base plan of 5 lacs. Add a super top-up plan of Rs 45 lacs with a deductible of 5 lacs. I call this 5+ 45 arrangement. This can very well be 10 + 40.
Which is cheaper?
Ideally, there should not be much difference in cost since both provide the same level of coverage. However, in reality, there is a difference. Base + Super top up is usually cheaper than a big base plan.
I produce the data for a base plan and super top-up combination below.
Clearly, base plan + super top-up combination is cheaper.
Firstly, the base plans usually have no-claim bonus. Hence, your health cover under the base plan usually grows every no-claim year for no extra cost. Let’s say you have a base plan of Rs 10 lacs. The policy has a no-claim bonus policy of 20% of base Sum insured with a maximum of 100% of base sum insured.
After the first no-claim year, the Sum Insured will go up from 10 lacs to 12 lacs. If you don’t claim for 5 years, the base Sum Insured will go up to 20 lacs.
No such luxury in case of super top-up plans. While there is no regulatory restriction in providing no-claim bonus in super top-up plans, I have not seen no-claims bonus facility in super top-up plans I have seen.
Continuing with the above example, under the base plan of Rs 50 lacs, the Sum Insured will grow to Rs 1 crore after 5 no-claim years.
Under 5+45, the total Sum Insured will be only 5+5+45 = Rs 55 lacs after 5 no-claim years.
Secondly, the base plans usually provide various ancillary benefits such as free health check-up etc. Super top-up plans may not do so. All this adds to the cost of base insurance plan.
Finally, there could be difference in terms and conditions of the base plan and super top-up plans. And this is very important.
Things to keep in mind
Given the way super top-up plans work, your claim (under the super top-up plan) may not always be cashless, especially if the base plan and super top-up plans are from different insurers. This can sometimes be a problem.
Moreover, your base health insurance plan and Super top-up plans are two different plans with different terms and conditions. And claim settlement can be quite complicated if you have multiple health insurance plans.
It is possible that a certain medical expense is admissible under the base plan while it is not admissible under the super top-up plan.
Continuing with the above example, out of Rs 8 lacs, let’s say Rs 7.5 lacs is admissible under the base plan. Since the cover is only Rs 5 lacs, the base plan will pay Rs 5 lacs.
Now, under the super top-up plan, the admissible claim is Rs 6.75 lacs (and not Rs 7.5 lacs). Rs 5 lacs has already been paid by the base plan. Hence, the super top-up plan will pay only Rs 1.75 lacs.
Payment from your pocket = 8 – 5 -1.75 = 1.25 lacs
Therefore, do go through the policy wordings of both the plans to get a sense of expenses covered.
What should you do?
While a super top-up plan is a cheaper way to augment your health insurance coverage, do consider the following things.
- The payment from a super top-up plan may not be cashless.
- Ensure that the coverage under the base plan and super top-up plans is similar. This is to avoid surprises at the time of claim.
- You must still have a robust base health plan. I would prefer 10 (base plan) + 90 (super top-up) over 5 + 95.
- If you have the resources and want to keep things simple, a big base plan is a fine choice too. We know that the marginal cost of insurance is not very high. Will be much easier to make a claim too.