Home Truths about Health Insurance

Buy health insurance and gain peace of mind. It is not just ads from insurers that tell you this, but also folks dispensing financial advice. Young people looking to begin their investment journey are often urged to buy health cover first, before considering any other investment.

Medical emergencies can happen to anyone. Therefore, the need for financial protection against them is undeniable. But given the way health insurance works in India, you need to know that buying a health insurance cover doesn’t guarantee peace of mind. You may need to have a back-up plan for dealing with expenses that don’t get covered by the insurer. Here are some home truths about health insurance that first-time buyers should be aware of.

Bigger isn’t better

When you look to buy a health cover, agents and insurance companies like to talk in terms of worst-case scenarios. Did you know that the incidence of Non-Alcoholic Fatty Liver Disease (NAFLD) is shooting up and that a liver transplant can set you back by ₹20-25 lakh? Did you know that cancer treatment can cost ₹3-10 lakh for the surgery, ₹5-20 lakh for radiation therapy and another ₹5 lakh for immunotherapy?

Such factoids convince you that the higher the sum assured you get, the more ‘protected’ you are. First-time buyers often sign up for XXL covers thinking that in case of a medical emergency, having ₹50 lakh or ₹1 crore paid to them would be much more comfortable than payouts of ₹10 lakh or ₹20 lakh.

But this is not how health insurance works. Health insurance policies are indemnity policies (there are other types such as critical illness policies, but they are rare). They only reimburse you for actual costs that you incur on hospitalisation. If you are hospitalised for a surgery which costs ₹2 lakh, the insurer will reimburse only ₹ 2 lakh, assuming you can produce hospital bills for the entire sum. Whether your sum assured is ₹5 lakh or ₹1 crore won’t matter. The probability of getting your claim also doesn’t rise with higher sum assured. Data from the insurance regulator IRDAI’s annual report tells us that the average size of the claim paid by health insurers was just ₹31,154 in FY24.

The sum assured serves mainly as the upper limit on all your claims in a year. Therefore, extra-large covers are useful only if you expect hospitalisation for a major illness or expect to be hospitalised multiple times a year.

If you are subject to niggling illnesses that require you to often visit a doctor, the fees will not be covered by your health insurance. If you have chronic ailments such as diabetes, hyper-tension or hypothyroidism, which require you to be on life-long medication, those costs will not be met by the insurer. If you have health conditions requiring outpatient treatment without hospitalisation, these won’t be covered either.

Claims paid by the insurer are subject to other caveats too. If you are hospitalised for a condition arising from a pre-existing illness and your policy is in its waiting period, the bill will not be paid by the insurer. There can be other exclusions tucked away in fine-print. In cancer treatment, for instance, the cost of chemotherapy without hospital admission may not be reimbursed. Treatments such as stem cell therapy and immunotherapy may also be excluded by policy terms.

This argues taking for a sum assured that can reasonably cover likely hospitalisations in a year.

It’s seldom cashless

A second common fallacy about health insurance is that it allows you to avail of “cashless” treatment. If you get hospitalised for a health emergency or treatment, you need not break your fixed deposits, redeem your mutual funds or dip into your savings to meet your expenses, you are told. The insurer’s “cashless cover” will take care of it.

In real life, medical treatments are rarely “cashless”. Even in the case of planned surgeries and hospitalisation, the insurer usually reimburses only a part of your bill. You end up shelling out the remaining from your pocket. Insurers usually do not reimburse the cost of consumables (such as gloves, PPE kits etc) and fees and costs in excess of what they consider reasonable for a treatment. When your policy has a cap on room rent, all the other expenses you claim in the bill may be pro-rated (adjusted for this proportion) and paid only in part.

All this makes partial payment of claims quite a common occurrence. In FY24, insurers settled about 71 per cent of claims filed in terms of value, showing that 29 per cent of the bill value was met out of the policyholders’ pocket.

It is impossible to know in advance how much of the final bill the insurer will settle and how much will need to come out of your pocket. Data from the insurance regulator’s annual report show that in FY24, only 66 per cent of the health insurance claims were settled on a cashless basis. Therefore, you need to keep emergency funds handy, even if you have a health cover.

Premiums aren’t fixed

When it comes to choosing investment options, it is drilled into our heads that we should pay close attention to costs. Therefore, many first-time buyers choose their health insurance based on the premiums quoted by the insurer. However, in insurance, cheapest often isn’t the best.

When offering you a health policy, the insurance company is charging you a premium for the risk you represent in terms of filing claims. Insurers who price their policies too cheaply may plan to skimp on paying your bills later. It is best to choose insurers based on the coverage offered, exclusions and claims settlement record rather than cheap premiums.

The initial premium quoted by the insurer can be jacked up in the policy issuance stage, based on the medical conditions you disclose.

You should also be aware that the premium at which you have been issued a health cover, will not be the premium you pay lifelong. While Indian health insurers are mandated to renew policies once issued as long as buyers want it, the insurer is free to increase premium payments on every renewal. You need to budget for the fact that the premium you initially signed up for, may escalate 10-50 per cent on renewal. Insurers are barred from hiking premiums based on individual claims records. But they can increase premiums based on age thresholds or other risk factors that apply to an entire cohort of customers.

Therefore, if you are a young earner, do buy a health insurance policy. But don’t stretch your budget for an extra-large cover if you have good medical history. Don’t skip having an emergency fund, that you can tap at short notice, just because you have a health insurance policy.

Published on April 26, 2025

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