What is the best way to combine base and super top-up health insurance policies?

A reader writes, “Can you please write an article on the best way to combine a normal (base) health insurance policy with a super top-up policy? That is, how much should the base insurance be and how much the super top-up policy?”

First let us point out some helpful resources for those looking to understand more about health insurance and how to buy one:

• Select the right health insurance policy with these free resources
• FAQ: Super Top up Health Insurance policy
• How to buy a Super Top up Health Insurance policy
• Are you aware of this restriction about super top up insurance policies?
• United India launches Super Top Up Policy with 95 lakhs sum insured

Now, we shall begin by appreciating that insurance is a game of probability. Why are super top-up policies less expensive than normal (or base) health insurance policies?

Top-up policies come with a deductible clause. They will not pay out if the expenses are less than or equal to the deductible amount.  Suppose the top-up policy had a deductible of Rs. 3 lakhs and a coverage of Rs. 5 lakhs.

For an expense of Rs. 6 lakhs,

• If you claimed Rs. 5 lakhs from a base policy, the top-up would pay Rs. 1 lakh
• If you claimed Rs. 3 lakhs from a base policy, the top-up would pay Rs. 3 lakhs
• if you did not have a normal policy, the top-up would pay Rs. 3 lakhs. For more examples, see the FAQ article linked above.

The higher the deductible, the lower the price (for the same amount of coverage). This is because the probability of an Rs. 5 lakh expense is much lower than that of an Rs. 1 lakh expense. Expenses here means hospitalization expense for the insured and potential payout or loss for the insurer.

So a top-up policy (in this article, top-up shall always mean super top-up). with an Rs. 1 lakh deductible and Rs. 10 lakh cover will cost more than one with Rs. 5 lakh deductible and Rs. 10 lakh cover.

Another key aspect of top policies is to be understood before we think of base + super top-up combinations.

• If the base and super top-up policies are from different insurers, we will have to pay the hospital bill and then claim from the top-up insurer. So there is little use in saying I have Rs. 1 crore super top-up unless you have that much in cash (liquid net worth)!
• Even if both policies are from the same insurer, the chance of reimbursement is high if the insurer has some doubt about the expense list furnished by the hospital. Of course, the sales guys would say they would “assist” during claims, but that is more of a sales pitch. You cannot bank on that.

Therefore ideally, the higher the base insurance, the lower the chance of using the super-top policy. This may seem strange to some. They would ask, “what is the use of a super top-up then?”

I see it the following way: Suppose you have an emergency fund of Rs. 1 lakh and an additional (liquid) net worth of Rs. 10 lakh. Small emergencies can be handed out without touching the net worth.

However, our goal is to ensure the net worth grows untouched as much as possible. So not only should we build a large emergency fund, but we should also feed it constantly.

So suppose you opt for an Rs. 5 lakh base policy and a super top of Rs. 50 lakh with an Rs. 5 lakh deductible, I would recommend gradually increasing the base policy each if you can afford it. It matters little if the base policy has a cover higher than the deductible.

How to combine base and super top-up health insurance policies

• Health insurance purchase (unlike term insurance) is all about how deep your pockets are.
• There is no right or wrong base + top-up combo. We have to make peace with what we can afford.
• If you buy a Rs 5L base + super top-up (Rs. 5L deductible, 50 L cover), increase the base policy by small amounts each year. The insurer may not hike the cover (that year) if you have made a claim the previous year. You can increase the super top-up coverage down the line. Do not increase the deductible, though.
• The above recommendation also applies to an Rs. 10 L base cover.
• If you can afford it, buy Rs. 25 L base cover (family floater or individual) with a super top-up of Rs. 1 Crore coverage (family floater) and a deductible of Rs. 10 lakhs from the same insurer (if possible). This will reduce the dependence on the super top-up policy (which is, anyway, quite inexpensive). At the time of writing, this seems like a robust combination. Medical inflation will hike these numbers a few years later.
• Most important: Try to invest a little extra for your financial goals. That extra can serve as an emergency medical corpus. See: Why we all need a corpus for medical expenses and how to build it.