Last Updated on October 8, 2021 at 7:31 am
Health insurance is a tricky business. Unlike life insurance, a health insurance policyholder is likely to make multiple claims over a lifetime. This means health insurers have to be careful about who they insure else profits would suffer. However, if they are too strict, then again profits would suffer.
The alternative is to share the risk with the insured (that is, the buyer). The most popular way to do this is by imposing (or offering ) a co-payment clause (option).
For example, if the insurer comes across an insurance application with pre-existing diseases (PED), then they can do one of the following:
- Reject the application.
- Offer the policy but permanently exclude the PED.
- Offer the policy but impose an additional waiting period for PED-related claims.
- Offer the policy with co-payment. This can apply to PED-related claims alone but is usually applied to all claims. Some companies offer this option is available for all policyholders.
- Offer a voluntary deductible option. Some companies offer this option is available for all policyholders.
What is co-payment
You agree to share a percentage of every hospitalisation bill with the insurer. For example, suppose you make two claims per year. One for Rs. one lakh and another for Rs. Two lakh.
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Claim amount here means total “medical expense” and not the entire hospital bill. About 10-20% of each bill will have “non-medical expenses”, which will not be covered.
So for the first claim, the insurer will pay Rs. 90,000 and you pay Rs. 10,000 (10%). For the second claim, the insurer will pay Rs. 1,80,000 and you will pay Rs. 20,000 (10%). This, of course, assuming the total cover is higher than the sum of both claims paid. So the 10% co-payment clause applies to every claim made in a coverage year. Also, the cost we incur will increase each year due to inflation.
What is a voluntary deductible?
Suppose your total cover is Rs. 5 lakhs. You tell the insurer that out of this total cover, you will pay the first Rs. 10,000 (or a higher amount). So in the above example, for the first claim, you pay Rs. 10,000, and the insurer pays Rs. 90,000. For the second claim, the insurer pays the total amount of Rs. Two lakh.
How is this beneficial?
- A voluntary deductible sweetens the deal for the insurer, especially in applications with PED. Not all insurers may offer this option in the application form. However, if you provide your willingness to opt for this in writing with the application, the underwriters may view it favourably.
- It is a simple way to reduce premium costs and opt for higher coverage. Why? Suppose your total cover is Rs. 5 lakh, and you opt for a voluntary deductible for Rs. one lakh. The premium will be lower because the probability of incurring an Rs. one lakh claim is much higher than a claim of, say, Rs. Two lakh. Insurance is a game of probability. Not just the insurer, we can also play it with reasonable odds.
- You can choose any affordable deductible amount. For example, a person earning one lakh a month can easily afford to pay Rs. 10,000 a year if there are hospitalisations in exchange for a lower premium each year. You can gamble that there will not be hospitalisations every year. Those earning several lakhs a month can opt for a much higher voluntary deductible. Naturally, there are risks like losing our income, but the odds here are reasonable, and we cannot combat every risk in life.
- In principle, the deductible amount can be claimed from another insurance like a corporate cover (the paperwork can be a pain, though).
- The amount we pay remains the same over time. Thus if our income increases, this would look smaller (in addition to devaluation by inflation).
One of the biggest advantages of a voluntary deductible is the possibility of getting a higher base cover. Many buyers make the mistake of buying a small base cover (say Rs. 5 lakhs) and a large super top-up cover (say Rs. one crore).
Considering that super top-up claims will be in reimbursement mode (unless both policies are offered by the same insurer), having a one crore cover is of little use if you do not have that much cash to pay first! See: Are you aware of this restriction about super top-up insurance policies?
With a voluntary deductible, one could opt for a much bigger base cover to reduce the probability of invoking the super-top policy. Please recognise that super top-up policy paperwork can be a real pain. Sure an intermediary can help, but you have to put in at least half the effort too and that is wishful thinking.
A voluntary deductible seems like an “expense”. It is a possible expense compared to a guaranteed higher premium each year. Sometimes you have to roll the dice to get stuff done!
A few weeks ago, I had conducted a poll in the Facebook group Asan Ideas for Wealth asking if members would accept such a voluntary deductible. The majority said yes, even though I failed to mention that the deductible is applied per policy year on the total sum insured and not for each claim.
I was made aware of this feature by Deepak Mendiretta of plancover.com when I approached him for an additional cover for my wife and son: See: Why we purchased a 2nd set of base & super top-up health insurance policies.
In summary, a voluntary deductible in health insurance is a way to reduce premiums, increasing the possibility of getting coverage or increasing the base cover. It is a superior option to co-payment (if there is a choice) as it applies to the total cover and not each hospitalization. The deductible amount can be selected as per what our means would allow. Not all insurers offer this option, but we can indicate our willingness in writing in the application form for the underwriters’ purview.
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