Health insurance policies offered by non-life companies that are valid for two years instead of one year, which is the norm, are usually cheaper. By covering you for two years at a go, insurers save on logistic and administrative costs and that gets passed on to you. However, you can claim tax deduction only in the year in which you are paying the premium, that is once in two years of the policy term.
Usually a basic health insurance policy is an annual contract and needs to be renewed every year. In two-year policies, you need to pay the premium only once in two years, but the sum insured is available twice for the two years. For instance, on a two-year policy for a sum insured of Rs 5 lakh, you can make a claim up to Rs 5 lakh each in the first year as well as the second year. At the end of two years, you need to renew the policy for the next two years.
For instance, Apollo Munich Health Insurance Co. Ltd offers a discount of up to 7.5% for a two-year contract. Therefore, a 30-year-old opting for a sum insured of Rs 5 lakh will pay an annual premium of Rs 6,775 in a one-year policy. Assuming the premiums don’t get altered in the second year, the individual will have to pay Rs 13,550 for two years. However, in a two-year policy, the total premium payable once for two year would be Rs 12,534.
In an annual policy, you pay the premium every year and can claim a tax deduction every year. But in a two-year policy, you can claim tax deduction only in the year in which you pay the premium.
Buying a two-year term policy is a good idea if the premiums are up to Rs 15,000 since the limit of tax deduction under section 80D on health insurance premiums is Rs 15,000 for individuals below the age of 60 years. If the premiums are above Rs 15,000 for a two-year-term policy, then buying an annual policy may be more cost effective for those who are older or are opting for a huge cover or a floater cover.
For instance, if two 40-year-olds buy a floater cover for two years for a sum insured of Rs 5 lakh, the primary policyholder will have to pay around Rs 29,401 for a two-year cover. Factoring in a tax deduction of Rs 15,000, the effective premium would come to around Rs 24,766, assuming the policyholder is in the highest tax bracket. However, for a one-year cover for the two 40-year-olds, the premium will come to around Rs 15,892 per annum, assuming the premium remains unchanged in the second year, too. At the end of two years, factoring in tax deduction in both the years on annual premium amounts, your effective premium would be Rs 22,514, about Rs 2,252 cheaper than the effective premium in a two-year contract.