Do top up health insurance plans make sense ?

To cater to your medical expenses, one can either use a simple health insurance policy, commonly called mediclaim or use a different type of policy called top up health insurance plans. In this article, we try to understand what a top up health insurance policy is and whether it makes sense to have one.

Healthcare costs in India are rising at an astronomical inflation rate, around 15% – 20% each year. If you are hospitalized in a decent hospital for a week or so, you can easily run up bills to the extent of Rs 1 -2 lakhs on room rent, doctor’s fees, operations and medicines. The general mediclaim cover that most of the people take is around Rs 3 lakhs approximately for their entire family. That is sufficient as long as the ailment is a minor one or not all the members in the household are falling sick and getting hospitalized.

If you run up to bills like Rs 5 lakhs or more and if your mediclaim policy does not cover you for that amount, you will cough up that money from your investments which will jeopardize your future goals like retirement and children’s marriages/higher education.

So what do you do when the hospitalization goes beyond your basic health insurance cover and you need to cover your family for a larger amount but don’t want to pay a huge premium at the same time. Enter top up health insurance plans.

What are top up health insurance plans ?

The most common knee jerk reaction to solve the above problem would be to increase your cover under the same policy that you have or to buy another new health insurance plan. That looks like a no brainer. The only problem is that the deal you could cut would be expensive for you.

To make it lighter on your wallet, you should go for a top up health insurance plans. Top up health insurance plans are a very easy and cheap way to add more cover to your basic health policy. However, as you might have guessed it right, there is a caveat.

The top up cover that you buy can only be utilized after or beyond a basic minimum amount – in short, these policies pay your expenses over and above a certain amount. This amount is called the ‘deductible’ or ‘threshold’.

From a top up health insurer provider’s side, it does not care who pays for the deductible – either the policy holder or some other insurance company but this needs to be paid first before the top up health insurance plans can be invoked for re reimbursement.

You need to be aware of the fact that top up health insurance plans apply the deductible to each and every hospitalization in a year of policy contract and not to the sum total of all the hospitalizations. So if you have a top up policy of Rs 5 lakhs with a deductible of say Rs 2 lakhs, then the top up medical cover will not pay anything if each and every hospitalization is say for Rs 1.90 lakhs.

It is expected that the basic mediclaim policy will reimburse each hospitalization. So, even though in one year you can easily run up bills of any amount across multiple hospitalizations, as long as the deductible is not breached in hospitalization expenses, the top up policy will not pay.

This is where Super top up health insurance plans comes in. While in a simple top up policy, the expense for  single claim needs to be over the deductible for payout, in a super top up health insurance policy, all claims in one year can be considered to go over the deductible for the claim to be made.

How do top up health insurance plans work ? Example

Ajay is a salaried individual with a group mediclaim that his employer offers to him for Rs 1.5 lakh. However, Ajay is a smart investor and has also taken a top up medical cover for Rs 5 lakhs which has a deductible of Rs 1.5 lakhs.

Suppose he meets with an accident and runs up bills worth Rs 2.5 lakhs. In such a case, first the group mediclaim will settle bills works Rs 1.5 lakhs as that is the maximum covered under his employer. Then the top-up medical policy kicks in and since the compulsory deductible of Rs 1.5 lakhs has already been met by the employer, it will pay out another Rs 1 lakh. Had he not got the top-up medical policy, he would have to pay the differential of Rs 1 lakh from his pocket.

Now, suppose Ajay were not employed (so he has no mediclaim) and he runs up a bill of Rs 1 lakh on a hospitalization. In this case, the top up policy will not pay for this 1 lakh as it is below the deductible of Rs 1.5 lakh. In the same year, if Ajay comes up with another hospitalization of say Rs 1.4 lakh, again the top up medical cover will not kick in as the deductible is still not breached.

So though in a year the total expenses were 2.4 lakh, the top up health cover could not be utilized. But if Ajay had gone for a Super top up plan, he could have used the cover and got a total of Rs 2.4 lakhs – Rs 1.5 lakhs (deductible) back.

Points to note

1. Buy from anywhere – You can buy a basic mediclaim policy and a top up policy from different insurers. They do not have to be same.
2. Cheaper – A top up plan is cheaper as long as the deductible is higher. Don’t buy a plan with a cheap premium. Buy a cover with the right combination of basic mediclaim and top-up medical policy.
3. Family Floater – Top up health insurance plans are also available in the family floater versions.
4. Exclusions – Many policies will not cover parents, only spouse and children.
5. Exclusions, Exclusions – Do the due diligence that you would do when buying mediclaim – check after how many years will pre-existing illnesses will be covered; pre and post hospitalization expenses; limits on illnesses among others. Generally, there is a waiting period  of 4 years to cover pre existing illnesses.
6. Cheap – Experts say that you can easily save to the extent of 20% – 35% by going for top up health insurance policies than a new health insurance policy or mediclaim.
7. Riders – Do not confuse top up health insurance plans with Riders of life insurance policies and general insurance companies. A top up medical cover is same as a mediclaim with a very high deductible.
8. Age Restrictions – Most insurers will not ask for a medical check up till 55 years of age. For mediclaim, that age is much lower for medical tests, usually 45 years.
9. Income Tax Benefits – The top up policy provides Income tax benefits under Section 80D.
10. Be Smart – You can buy a top up medical cover without having a basic mediclaim policy but that would not make much sense – if the top policy were to reimburse you, then you would need to pay from your own pocket first an amount equal to the deductible.

Conclusion

Rather than being saddled with multiple health insurance polices, it might make sense to buy a single mediclaim policy and then add top up health insurance plans to it. It is easy on the pocket and can be used to make reimbursements in case of higher expenses.

Just note that this is still an indemnity policy much like a mediclaim. Do not make the mistake of skipping a mediclaim policy and buying just a top up health policy – that would be sacrilege. What are your thoughts on this ?