Home/ Money / Personal Finance/  Can a 5 lakh medical insurance cover take care of your needs?

Health is wealth, goes the saying. But a medical insurance policy is the need of the hour to meet any untoward treatment costs. Many of us buy it every year, not just for the said reason but also to take advantage of income tax exemption. Traditionally, a 5 lakh medical insurance policy has been the most common type of cover taken out by Indians working in the organized sector. Yet, experts often recommend a much higher cover. Mint looked at available claims data to see whether a 5 lakh policy is adequate or whether you need to buy a higher medical insurance cover.

The average claim for individual policies in India stood at 70,000 in 2018-19, as per the Insurance Information Bureau of India, a body set up in 2009 by insurance regulator Irdai. (More updated figures are not available currently). However, the Health Insurance Claim Information Report 2017-19 helps us identify the rate of inflation in such claims. This growth rate was 10.5% over eight years, from 2010-11 to 2018-19. Going by this data, the average claim today can be estimated at slightly over 1 lakh.

Graphic: Mint
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Graphic: Mint

Nikhil Apte, chief product officer (health insurance) at Royal Sundaram General Insurance, said less than 1% of health insurance claims today are worth more than 3 lakh. Thus, it is safe to conclude that most insurance claims are well below the standard limit of 5 lakh.

However, financial advisors and industry experts still make a strong case for a higher insurance cover. They argue that rising inflation adds to the medical costs each year, while your policy cover remains static at 5 lakh. Assuming an inflation rate of 11%, today’s average claim of 1 lakh will become 4.78 lakh in 15 years—almost hitting the 5 lakh threshold. Then, there is the tail risk. This implies that certain health issues can put you in the top 10% of patients in terms of medical expenses incurred. In such a situation, your 5 lakh cover will fall well short. Another reason advanced by experts is that health insurance is cheaper when you are young. So, a 1 crore cover will not cost 20 times as much as a 5 lakh cover. Finally, insurers mostly are reluctant to provide a cover as you grow older in view of pre-existing diseases like diabetes and other conditions associated with elderly people.

So, how much money should you spend on health insurance? That depends on various factors. For instance, are you looking for an individual policy or a family floater plan. In the case of a family, you must consider factors like the size of family, the location of your residence—metro, tier II or tier III cities, age of insured members, etc.

Raghavendra Rao, chief distribution officer of Future Generali India Insurance, said, “A 5 lakh sum insured depends on age, family size, profile, demography, etc. This need may change every two-three years depending on your financial situation." For instance, if you have dependents or significant debt, you may need coverage of more than 5 lakh today than if you are single and debt-free.

Suresh Agarwal, MD & CEO of Kotak Mahindra General Insurance, said, “It is always recommended to buy health insurance early. The younger the age, the lesser the premium. Also, you are more likely to be fit and disease free when you are young. In the long run though, going for a higher sum insured is recommended, given the increased cost of quality healthcare. But if you are starting out in life, a 5 lakh policy can be a good option."

However, one must also understand that the primary objective of health insurance is to offer sufficient financial protection to an individual or their dependents in case of unforeseen events, such as major accidents, surgeries, disabilities, critical illnesses, etc. It is essential to assess one’s insurance needs periodically and ensure that coverage is adequate based on current circumstances.

Apart from medical insurance, some experts also encourage you to buy critical illness cover (this is a set amount issued by life insurance companies if you are diagnosed with certain serious ailments like cancer. In other words, these plans help you provide a lump sum, up to the sum insured limit, to cover the exorbitant medical expenses for such critical illness diseases).

Sumit Ramani, Actuary and co-founder of ProtectMeWell.com said, “I have a 10 lakh base policy and a 90 lakh super top-up. I also have critical illness coverage and accidental disability cover from a life insurance company worth 1 crore each. All these cost me just 52,000 per annum. From today’s perspective, I might be over insured but given medical inflation; this approach ensures that I would be appropriately covered when the actual claim happens, i.e. 20-30 years hence. One might want to take an alternative approach and wait for a few years before increasing cover, but there is no way to guarantee that I won’t be diagnosed with a critical illness the following month and if that happens, there will be no coverage"

Increased health coverage: Insurance experts say that given the rising medical costs, buying coverage that exceeds your risks might be a good practice. They also suggest that rather than buying a higher sum insured policy, which could lead to expensive premiums, it is better to go for a reasonable sum assured policy with a good top-up plan so that the premium rates are affordable.

Apte said, “You should buy a super top-up policy at a young age to lock in a low premium. I would suggest a cover of at least 25 lakh for an individual." A super top-up plan is a type of health policy that provides cashless reimbursement at network hospitals for cumulative medical expenses over and above a deductible amount. It is typically different from a regular health policy. It covers all the hospitalisation expenses only after your regular health policy sum insured gets exhausted.

Vishal Dhawan of Plan Ahead Wealth Advisors said, “Opt for a policy depending on your location, and the type of hospital and treatment that you would prefer. Big hospitals may be more expensive than small nursing homes, in which case you may not find a 5 lakh cover enough. A super top-up may be ideal."

Mint take: Most claims made today are well within the 5 lakh limit. However, buying a top-up plan makes sense. Medical costs are almost certain to rise and the 5 lakh limit will be outdated soon. The size of the cover, though, is an individual decision dependent on your circumstances.

Do note that under Section 80D, you can claim tax deduction for medical insurance premium payments of up to 25,000 (including 5,000 for a medical check-up). If you pay premiums for your senior citizen parents, you can claim another 50,000 in tax deduction.

Before you zero in on a health insurance policy, consider including features such as pre-existing diseases, critical illnesses, hospitalization expenses, etc.

It is also essential to carefully review the terms and conditions, including exclusions, waiting periods, and co-payments, to understand the coverage provided by the health policy.

Navneet Dubey
Navneet Dubey is a personal finance writer and artist. Over the past decade, he has written feature stories on insurance, financial planning, lending and borrowing.
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Updated: 23 Mar 2023, 01:31 AM IST
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