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How much health insurance do you need?

July 22, 2021

When you are gripped by greed or fear, you often make bad investing decisions. Of late, illness and mortality are on top of all our minds with Covid taking a heavy toll on our families and friends. This is prompting more folks to buy life and health insurance cover. While this is good, the pandemic shouldn’t scare you into making irrational decisions on the size of health cover you buy.

Recent reports suggest that as many as 35% of health insurance buyers in recent times – mainly in their 30s and 40s – are buying Rs 1 crore health insurance plans, against just 5% who used to buy them earlier.

1 crore, 1 crore health policy, health insurance

The insurance industry and its salesforce appear to be doing everything to push the notion that when it comes to your health, no cover is too high. Health covers for Rs 50 lakh or Rs 1 crore sum assured are sold by painting doomsday scenarios of how much it would cost you to fund an extended hospital stay on an ECMO machine or to get a lung transplant. 

But whether you’re looking to buy your first health policy or to upgrade your existing one, we suggest you ignore such alarmist pitches. Here’s why young folks don’t really need to buy a super-sized health policy and can afford to start with a modest cover.

Only actual costs are reimbursed

Unlike term life or critical illness plans, hospitalization covers are indemnity plans. This means that, irrespective of the size of sum assured you buy, the insurer will reimburse you only for the actual bills you incur on hospital treatment.

To decide on the size of health cover you need, what you really need to know is the cost of hospital treatment for serious ailments in India and the probability of your contracting them. 

Despite the horror stories you hear during Covid, it is quite rare for your hospital bill in India to come to Rs 20 lakh or more. The data below, sourced from corporate hospital professionals, capture the rough hospital costs you can expect to incur at a premium corporate hospital for serious conditions requiring a hospital stay.

So, you are likely to incur a hospital bill upwards of Rs 20 lakh at one go, only if you contract conditions requiring a major organ transplant, ECMO treatment or certain types of cancer. The number of organ transplants done in India in any given year is minuscule. Data from organindia.org show that India typically sees about 100-150 lung donations, 200-250 heart donations, 7000-8000 kidney donations, 2000-2500 liver donations a year. ECMO therapy is used in the rarest of rare cases where all other forms of support have failed. Cancer is a more common occurrence but most usual forms of it can be treated at costs of under Rs 10 lakh. The probability of such events is extremely low. 

Even if your hospital bill for a particular treatment comes to an outsized sum, your health insurer will reimburse it only after applying exclusions and policy fine print. To gauge the typical claim amounts that health insurers pay out, we culled data from the latest public disclosures of a few leading health insurers. In the January-March 2021 quarter, these insurers paid out average claim sizes that were well below Rs 1 lakh.

Covid has not materially changed this situation. Data from the insurance industry says that the average size of hospital bill reimbursed towards Covid claims during the second wave was just Rs 1.5 lakh, for a typical hospital stay of 7 to 15 days. 

In fact, it is because health insurers don’t expect to ever pay you claims worth Rs 50 lakh or Rs 1 crore that the premiums for such policies are not much higher than those for Rs 15-20 lakh policies. 

Nor does signing up for a Rs 50 lakh or Rs 1 crore cover guarantee that your insurer will clear your bills without hassle. All the fine print and exclusions that lead to partial rejection of health claims in other policies apply to large policies too. An earlier article we wrote cites at least two cases of folks who had bills for less than Rs 1 lakh rejected, despite their paying for Rs 50 lakh- Rs 75 lakh covers.

All this suggests that rather than buying a super-sized hospitalisation policy that you are unlikely to use and paying premiums for it year after year, it would be better to have a moderate cover to insure you against the most likely health emergencies. 

If you are in your 20s, a base plan of Rs 5 lakh should be good enough to cover most health contingencies, with the number going up to Rs 10 lakh in your 30s and 40s.

Citing the sky-rocketing costs of healthcare and the fact that you are likely to contract more illnesses as you grow older, insurance sellers urge you to buy a Rs 50 lakh-Rs 1 crore cover in your 20s or 30s, so that you get a cheap cover and do not get turned down by insurers later in life. This pitch is blatantly wrong.

You can’t lock into low premiums

When buying life insurance, investors are urged to start early because this helps them lock into low premiums for a fixed sum assured for life. Product sellers are now extending the same pitch to health insurance. Citing the sky-rocketing costs of healthcare and the fact that you are likely to contract more illnesses as you grow older, they urge you to buy a Rs 50 lakh-Rs 1 crore cover in your 20s or 30s, so that you get a cheap cover and do not get turned down by insurers later in life. 

This pitch is blatantly wrong. Health insurance policies, unlike term life plans, do not lock you into a single premium for life. They cover you for an initial period of 1 year (sometimes 3 years) and are renewable at the end of this period. Whenever you renew your health policy, the insurer has the complete discretion to hike your premium. 

Your premium can be hiked for many reasons: 

  • One, you may have just moved into an age bracket that is more prone to certain illnesses. Usually, health policy holders report sharp jumps in premiums when they cross critical age thresholds such as 35, 40, 45, 50 etc. 
  • Two, insurers also jack up premia when new life-threatening illnesses like Covid crop up or hospital costs shoot up, upsetting their underwriting calculations. 
  • Three, your renewal premium is also hiked if you developed changes in your health conditions the previous policy year. Each time your health policy is renewed, you are required to disclose any change in your health status or illness contracted. Not doing so will amount to misrepresentation and lead to claim repudiation at a later date. 

While the extent by which your health insurer can hike your premiums is supposed to be capped by IRDA, this rule is flouted quite freely. These articles from moneycontrol and policybazaar show how some health policyholders saw a doubling of premiums this past year. 

If they think the premiums on your policy are unremunerative, health insurers also discontinue the plan you signed up for and offer to switch you to a new plan that charges more.   

The other argument that is made to nudge younger folks to sign up for large covers at the outset is that health insurers may reject their insurance proposals if they contract chronic ailments in later years. But the health insurer’s decision to renew your policy each year is also based on a renewed assessment of your health risk. If the insurer thinks that you make for a poor risk as you grow older, your policy premiums are likely to witness steep hikes that may make you voluntarily drop out!  

All this should make it amply clear that signing up for a Rs 50 lakh- Rs 1 crore does not really protect you, either from healthcare inflation or a deterioration in your own health at a later stage. 

To protect against higher risks of hospitalisation as you age or to protect your family, you should review your cover every year based on your situation. If you acquire a family by your 30s, you can add a Rs 10 -15 lakh floater cover through a super topup plan.

Given that insurers in India are ever wary against fraud and cooked up bills, larger health insurance claims are likely to be put under the microscope irrespective of your sum assured.

You don’t escape fine print

If you imagined that buying a large health cover exempts you from exclusions and fine print, you’d be mistaken there too. When we checked out the policy terms and conditions for Rs 50 lakh to Rs 1 crore covers, we found that there aren’t any material concessions on these plans compared to their standard policies.  

HDFC Ergo’s Koti Suraksha health plan for instance, has a 48-month waiting period for pre-existing diseases, a 20% co-payment clause for certain kinds of policyholders and sub-limits of Rs 75,000 for surgical procedures involving benign tumours, cataract, hernia and the like. These apply to its much smaller covers too. Aditya Birla’s Activ Assure Diamond Plan, which covers sums assured of anywhere between Rs 2 lakh and Rs 2 crore, similarly has a 4-year waiting period for pre-existing diseases and co-payment at 20% for policyholders signing up after 60 whatever the sum is assured.   

In fact, given that insurers in India are ever wary against fraud and cooked up bills, larger health insurance claims are likely to be put under the microscope irrespective of your sum assured. 

Yes, most Rs 1 crore covers do offer benefits like no room rent capping, no claim bonus, coverage of day-care procedures, automatic restoration of cover after claim, coverage for domiciliary treatment and pre- and post-hospitalisation expenses. But then, these are offered on many standard policies too.

Frills you don’t need

To sweeten their deals, insurers offering super-sized health plans throw in freebies such as covering ambulance costs, monthly newsletters, webinars on fitness and stress management, a health coach (a digital chat service on fitness, nutrition etc), discounts on their in-house pharmacies, free medical check-ups and the like. But you need to evaluate how much you are really likely to be able to, these services can easily be bought off-the-shelf too. 

Some Rs 1 crore covers throw in a global coverage where you can claim reimbursements for treatment incurred abroad. But such policies come with many strings attached. They set short deadlines for completion of treatment, exclude jurisdictions like the US or Canada, have co-pay clauses and cover specified treatments.  

To summarise, unlike term plans, it is difficult to use a formula to arrive at the ideal size of the health cover one must opt for at different ages. The size of health cover you need will depend on your own health and fitness, your family’s history of health conditions and your lifestyle. However, the following suggestions will hold for most folks. 

  • Unlike term insurance, you can start small with a hospitalization policy and add to your cover as you age or acquire a family.
  • Given the costs for treating serious illnesses in India, a Rs 5 lakh base plan is a good start in your 20s, going up to Rs 10 lakh in your 30s and 40s.
  • Review your health cover every year based on your evolving health conditions and family size. Expand your cover through super top-up plans. A super top up of Rs 10-15 lakh on a base plan of Rs 10 lakh should cover you against most health emergencies. 
  • Health insurers often pay only a part of your claim. They only cover hospitalization expenses and have many exclusions. Mediclaim policies don’t protect you fully against healthcare inflation. All this calls for you to not depend solely on your hospitalization cover to meet all your health expenses.  
  • Buy a critical illness plan and an emergency fund to cushion you from spillover expenses as you age.

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