Bhumil Haria

Purchasing Health Insurance in India

Published December 23, 2020

I recently went through a research exercise in order to purchase a good health insurance cover for parents. It took a long time for me to go through it and make up my mind, so I thought I should write the process and observations down for anyone else who might be looking to do this.

The intent of this document is to provide a simple list of actionable steps to help you buy your policy (instead of vague, theoretical gyaan).

I’ll include some basics (only practical notes, not theory) so people who have absolutely no idea can get started as well.

This post does not recommmend what to buy, only explains concepts and talks about how to go about making a decision

Insurance Basics

What is Insurance?

Simply put, Insurance is a mechanism to transfer the risk of an undesirable event from you (policy holder) to an insurance company.

Why would a company take risk on my behalf?
The way it works is that the insurance company collects an annual fee (“premium”) from you (and thousands of other customers like you), in order to include you under it’s protection. The idea here is that since it’s unlikely for thousands of individuals to face the same event at the same time, the insurance company expects that it will collect a lot more premiums than it has to pay out, thereby making a profit.

Another way of thinking of insurance is that you’re converting a potential, large, unknown expense into a series of predictable, affordable annual payments.

Health insurance is simply a type of insurance that covers you in the event of any medical problems that require hospitalization (which is increasingly expensive).

Do I need Insurance?

The short answer is yes for most people. The basic questions to ask yourself are that, in the event of an unfortunate medium to large medical expense: (a) would you be able to afford it, (b) would it otherwise throw a wrench into your well-planned life? (c) would you be able to afford it 10-20 years from now, adjusting for inflation?

On how to quantify a medium/large expense, see the How much base SI do I need section below.

My employer already provides insurance!

Can not emphasize this enough: If money isn’t a major concern, please do not depend on your employer’s insurance to cover your family. Especially your parents. Here are some things that can happen:

  • You may lose your job (layoff / market conditions / fired / etc)
  • You’re joining another company but need emergency hospitalization before you join
  • You decide to startup / freelance / start your own small business and suddenly are left without cover

The more you delay getting insurance, the older your parents get, and the worse off their policy terms will get.

If money is a concern, you can either get a policy with a lower sum insured, OR you can get a super top-up policy which can be optionally converted to a base policy after a few years. (If these terms are new to you, read on, they’re defined below).

What are my rights?

This is a great question. Insurance in India is a very regulated space, with a lot of rules favoring the consumer. While I’m sure there are many, I’m not an expert and don’t know all of them. Below are a few that I do know (as on Dec 2020) and I think are very relevant to our purchasing decisions:

  • If you already have an insurance policy with a certain some insured, the insurance provider is bound to renew it (within the confines of the policy terms) as long as you’re paying your premiums (and no fraud etc). This is great because it means that if after years of paying insurance premiums you contract something major (heart diseases/cancer/etc), the company can’t refuse to renew just because it anticipates payouts.
  • One concern I had was what happens if the company (that I’m paying premium to for years) becomes loss-making and has to shut down. IRDA (insurance regulator) is stringent on this. By Indian regulations no insurance company can just “shut down”, it needs to be merged/absorbed into another insurance company, who will continue to provide the same/better benefits as the dying company.

Terms

  • Policies and Claims

    • Claim: When you ask the insurance company to cover for an expense, it’s called a claim.
    • Cashless Claims: Sometimes, insurance companies will directly settle the bills with the hospital so you don’t have to pay out of your pocket. This is called a cashless claim. Whether a claim is eligible to be cashless or not depends on whether the policy supports it, whether the insurance company has a tie-up with the hospital, etc.
    • Reimbursement Policy: Some policies require you to pay the hospital bills yourself first, and submit the original bills to the insurance company for processing. Such policies are called reimbursement policies. These are less preferred because you have to shell out money from your own pocket.
    • Individual vs Floater plans: Individual plans are insurance policies that cover only one individual. On the other hand, Family Floater plans cover multiple people in your family under the same policy. This can be cheaper and more convenient if selected correctly (more on how to select between them later)
    • Base Policy: Standard health insurance policy. It’s often called “Base” to differentiate it from Top-up/Super Top-up plans (explained below)
    • Top-up / Super Top-up Plan: These are a special type of insurance policies that kick in only after you or your base plan have paid a specific amount of money for your claims (called deductible). These policies are significantly cheaper because they don’t start paying until a certain amount has already been paid. More detailed explanation about these policies is here. Note: If you’re buying these, you should only opt for super top-up (not top-up) unless you very well understand the limitations involved and are consciously choosing them.
    • Deductible: The amount of money that you need to pay from your pocket before the insurance will pay anything. These are present in top-up / super top-up plans. (I don’t know if there are base policies with deductibles, but if you see one run away)
    • Co-payment: There are some policies where you’d pay a percentage of the expenses and the insurer pays the rest. For example you bear 10% of the expenses, and insurer pays 90%. Sounds okay in percentages but in the event of a 5L claim you don’t want to shell out 50K. Ideally you should not take these unless there is no other alternative possible (e.g. senior citizens might not have policies with 0 deductibles).

  • Benefits and Constraints

    • Pre Existing Diseases (PED): Any diseases that you already have at the time of purchasing the policy
    • Waiting period: There are some claims which are not payable for a certain amount of time after purchasing a policy. This duration is called a waiting period. Standard waiting periods for PED are 2-4 years. Policies might have a few years waiting period before they cover maternity expenses. A new addition these days is that some policies often have 15-30 days waiting period before they cover COVID related expenses.
    • Sum Insured (SI): The maximum amount of money which the insurance company will cover in the event of a claim. This is per policy period.
    • No Claim Bonus (NCB): Many insurance policies give you “bonus” benefits if you don’t make any claim in the entire year. As you can imagine, this is beneficial for the insurance company (no claims!), but it’s a great benefit for the consumer as well! NCBs are often provided in the form of an increased cover amount (on top of the Base Sum Insured).
    • Restoration of cover: Some policies offer this cool feature where (in simple terms) if you had to make a claim that depleted your entire SI, the company gives you some more coverage for free. This is a great feature, but there are some conditions attached to this, please understand the policy carefully before purchasing. This is not a replacement for your base SI (e.g. don’t think you can just take a lower SI if you have restoration anyway, they’re not the same thing)
    • Room Rent Cap: Some policies (at least ones with lower SI) add an upper limit on the room rent that they will pay out. NEVER EVER take a policy with this limit, pay more if you have to. Because while you might think that you can pay the difference in room rent, the fact of the matter is that your ENTIRE hospital bill will have a “proportionate deduction” and you might end up paying a significant amount.

Getting Started - Steps

Most blogs / news posts I came across basically asked to “identify your health needs and choose a plan accordingly”. This sentence, while technically correct, is patently unhelpful. I don’t even know what my needs are, give me something useful to work with! Who wakes up one day and thinks “okay these are all my desires for medical insurance” ?

I think it might be far more useful to provide you with a set of “defaults” and explanation of what to tweak when.

The “defaults” recommended below are for people like me:

  • Age group 25-35
  • Small family (either nuclear family or living with parents)
  • All in good health and no major pre existing diseases
  • Living in a large metro city
  • Decent income

Here are the list of questions you need to answer before you start searching for a plan (and straight-forward steps/formulas to answer them):

1️⃣ Should I take an Individual plan or a Family Floater?

Thumb rules

  • Floater plans charge premium based on the oldest member covered in the policy, so only put in similar-aged people in a floater. Do NOT add your parents and yourself in the same policy. Only exception here is children below 18 years who can’t get a policy in their own name.
  • If someone in the family has health issues and is at the risk of requiring frequent hospitalization/care, then exclude them from the floater and get a separate policy for them.
  • As long as you keep the above two points in mind, floater plans turn out to be cheaper than individual plans.

Steps

  1. For your parents: If both are healthy, get a floater for the two of them. If one of them has health issues that may require recurring care, get an individual policy for each of them.
  2. For yourself: If you’re married, get a floater with your spouse. Else individual.
  3. Siblings: If they’re below age, they should be added to parents' policy. Else get their own (same rules that apply to you also apply to them).

2️⃣ Should I take a policy with co-payment or deductible?

Straight away no.

If and only if there are absolutely no other policies that can cover you, you should consider these (for example if parents are senior citizens).

3️⃣ How much coverage do I need?

  • Step 1: Estimate coverage amount you need today Make a rough calculation of how much that would cost in a good hospital in your location. The factors that affect this answer are (a) prevailing rates, (b) hospital quality, (c) location. For example, in good hospitals in Mumbai in 2020, I estimate that

    • an ordinary hospitalization would cost somewhere between 50K to 1.5L
    • a hospitalization for medium severity (surgery, etc) could cost up to 5L
    • the worst case scenario is some random, MAJOR hospitalization, and there’s no real upper bound for that in Mumbai’s private hospitals 🙄 But for the sake of sanity let’s conservatively assume 10L.

  • Step 2: Understand why your policy SI should be more than the number you just came up with

    Based on the above, the common sense thing to do here would be to take a 10L SI policy - this would be the wrong thing to do.

    Keep in mind that (a) you should purchase insurance for what you might need many years from now, and (b) you will not be able to buy new insurance if your health situation changes significantly (e.g. imagine you got cancer – companies can refuse to sell you new policies in anticipation of higher payouts)

    Remember your right to be able to renew a policy forever (within policy terms) if you’ve already taken it? That’s relevant here. If you buy for an amount you’ll need way later, the insurance company will continue to honor that policy forever as long as you’re paying premiums on time.

  • Step 3: Calculate coverage you need a few years from now

    So how do we calculate what’s a good coverage ? Decide what Coverage (not SI) you want today (Cov0), how many years you’re planning to look for coverage (N), pick a % number for inflation, and put it in the formula below

      Coverage = Today's Coverage * (1 + inflation)^N

    For example, for my parents, I used

      Today's Coverage = 10L
  N = 30 (considering up to age ~85-90)
  Inflation (assumed) = 6% = 0.06

    Using the formula, required coverage after 30 years comes to 57.4L. This number sounds insanely high, but that’s because we’re thinking in today’s terms and we’re not great at intuitively factoring in inflation. This is probably the reason for the recent increase in popularity of 50L and 1Cr policies.

  • Step 4: Finally, arrive at the needed SI

    We now know that the coverage needed is around 57L. You could just buy a base policy an SI close to this number and be done. If you can afford it and do not want further hassle, it’s ok to stop here.

    However, that might be expensive (and inefficient). Remember that you want to optimize between cost and coverage.

    We can use some basic principles to reduce cost:

    • No Claim Bonus: most good plans provide upto 100% of SI as NCB in a few years. If you think (and this is a pure guess, but a statistically likely one) that you’ll not make claims every year, then you could take a lower SI and let the NCB cover the rest. Obviously here you’re taking on a risk because if for some reason you don’t have NCB when you have a large expense, then you might end up paying a lot.
    • Restoration: If the policy provides restoration, that can be considered as well. However there are catches. In some policies, restoration is only applicable from the second claim; in some, it does not cover the same illness twice, etc. I would not depend on restoration too heavily. Though this logic is probably more relevant for floater policies - if two people get claims in the same year, it is slightly more reasonable to depend on restoration.
    • Base vs Super top-up: The other trick up your sleeve that can significantly reduce cost is to split your desired coverage between a Base Policy with a lower SI and a Super top-up that covers the rest. In the example above, you could buy say a 10-20L base policy along with a 50L super top-up. Please note that your NCB/Restoration will depend on your base SI (10-20L), and you need to ensure that the features and networks of both policies are compatible and acceptable to you.

    How I’d approach it:

    • For parents: I would consider going with a decent 15-20L base plan with a super top-up covering the rest
    • For yourself: the base plans themselves might be cheap enough to not worry about top-ups and accompanying hassle.

4️⃣ What other benefits do I need?

This one is more subjective than others, but listing down my thoughts/opinions below. I segregate them in order of importance

Must Have:

  • Room Rent Cap: There should be NO CAPPING of room rent whatsoever.
  • Room Category: You should decide on what room category you would opt for if hospitalized (e.g. Single AC room), and ensure that the policy covers that.
  • Day care procedures: Pick a policy which has all/most of these covered
  • Permanent Exclusions: Please check the policy for permanent exclusions

Important:

  • NCB: should be upto 100%, not lesser. Some policies get to the 100% by giving 10% for 10 years, I’d avoid them. Some policies reset the NCB (i.e. it becomes zero) for any year with a claim in it and you start over. I would avoid those policies as well.
  • Pre Existing Diseases (PED): Most policies cover these after 2-4 years. Lower is better.
  • Maternity: If you’re considering having kids in a few years, consider opting for a policy that covers this. Do take note of the waiting periods involved.
  • Organ transplant / Organ donor coverage: I consider this a useful feature (covers the procedure for the organ donor). Don’t know about likelihood etc.
  • Alternative medicine / AYUSH: If you’re more of a Ayurveda/Homeopathy person, you might want to prefer a policy that pays for it (not all of them do).

Good to have:

  • Higher number of days covered pre/post hospitalization is better.
  • Daily cash allowance for hospitalization (can’t hurt to get more money 🤷)

5️⃣ Which insurance companies are good / which ones should I opt for?
Unfortunately this one I’ve struggled with myself, so I’ve depended on recommendations from friends. I don’t have a good answer here, except the usual “check the Claim Settlement Ratios”.

That’s it, that’s all the answers you need before you go hunt for a plan! I’d suggest search and compare plans on online websites, shortlist a few, and then talk to an agent.

Resources / More Reading

Health Insurance for parents

Base vs Top-up