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How to help your clients choose the ideal sum insured for their health insurance plan?

The importance of health insurance has been reiterated with the advent of the pandemic in the year 2020. Some of your clients may have seen its relevance up close and personal, with some hospitalizations within friends and family. So, now the bigger question is, how much health insurance coverage does your client need? Or, as an expert in this domain, how do you help your clients choose the ideal sum insured after analyzing their health insurance requirements?

Let us understand with an example:
Rohan, a 48-year-old IT professional plans to take a health insurance plan for himself, his wife (46 years), and 2 children (ages 15 and 12 years respectively). He has a corporate health insurance plan but had never opted for an individual one before.

Now, Rohan would have multiple aspects to consider before opting for a health insurance plan such as age, his and his family’s health condition and lifestyle as well as his family’s medical history. Also, health insurance coverage is linked to the family’s lifestyle and income. 

The rising cost of healthcare expenses has pushed inflation to about 15%6 in India. There is also a possibility that Rohan might not be able to opt for a high sum insured, especially if he has already contracted any serious ailment.  With the rising healthcare expenses, it is necessary to factor in these situations while recommending the ideal sum insured.

Thumb Rule of Health Insurance Coverage:

Although there is no fixed rule for health insurance coverage, it is advisable to opt for at least 50% of your annual income as your Health Insurance coverage. If affordability is the concern, he can look towards EMI payments as an option for the same.

The basic thumb rule7 of health insurance coverage:

  1. A minimum sum insured for a middle-class family of 3 or 4 members should be Rs 5 lakhs
  2. In Tier 1 city, the minimum sum insured for a young family of 40 years or less should be at least Rs 10 lakhs
  3. Super Top Up plans with a deductible of the base amount, wherein the benefit kicks in only after the base plan is exhausted, can be chosen to enhance coverage
  4. Opt for a plan with a low waiting period for pre-existing diseases, if any and no sub-limits (this complicates the entire claim procedure and ends up compromising on the treatment)

In fact, Tata AIG8 has come up with a formula to help one decide on health insurance coverage which is:
Health Insurance cover = 50% of Income + 100% of last 3 years’ expenses on health (hospitals).

This would mean if Rohan’s annual income is Rs 20 lakhs and the medical expenses he has incurred for himself and his family in the last 3 years is Rs 5 lakhs, then his minimum health insurance coverage should be Rs 15 lakhs. 

Factors that determine health insurance coverage:

Some of the basic factors would be:

  1. Age and Location:
    The premium increases depending on the age of the oldest member of the family. Also, it depends on your location. For example, the premium for Tier 1 cities is usually higher as the hospitalization expenses are more.

    What should he do?
    Opt for a base health insurance plan and then increase the coverage with a top-up plan. Just ensure that all information about age and location is accurately filled in so that there is no ambiguity later at the time of claim!
  2. Pre-existing diseases:
    If he or his wife or children has any illness which has been diagnosed and is being treated before the inception of the policy, it is considered as a “pre-existing disease” or a PED. The most common PEDs in India are diabetes, hypertension, heart ailment, kidney, liver or lung conditions.
    Usually, a comprehensive health insurance plan covers any PED after a certain waiting period of 2 to 4 years of continuous renewal.

    What should he do?
    If he has any PED, he needs to opt for a health insurance plan with a low waiting period.
  3. Family’s medical history:
    If anyone in Rohan’s family has a history of heart attack or a lung condition or cancer or any other terminal ailment, his risk would be higher. Also, it might affect his premium or coverage, especially for critical illness plans. Even Rohan’s requirement for sum insured would be higher in this case as he would have a higher risk of inheriting that condition.

    What should he do?
    Rohan should opt for the maximum coverage he is eligible for and then tries to increase it with super top-up plans (wherein the additional premium for an increase in coverage is quite low as compared to the base plan).
  4. Income and Lifestyle:
    Rohan’s income and lifestyle also determine his health insurance coverage. This is because, based on his income and lifestyle, he would opt for the type of hospital and room. Luxury hospitals with private cabins would be more expensive than treatment in a regular hospital.
    Also, if someone’s lifestyle can afford international treatment, his coverage should also be adequate to provide for the same. Else, he would have to shell it out from his pocket!
    Also, the premium is directly proportional to the coverage. So, if Rohan opts for higher coverage, he would have to pay a higher premium for the same as well.

    What should he do?
    Rohan needs to decide the type of hospital and the type of room he would like to get admitted to if he needed hospitalisation. Based on the average rent of the room, he would be required to choose his coverage amount and features that are absolutely necessary.

Risk of critical illness is a reason to opt for a higher sum insured:

Affordability and lack of awareness are the primary causes for the prevailing under insurance of health in India. However, if there is a history of critical ailment in the family, the need for higher coverage is inevitable.

Underinsurance is not beneficial to the insured or the insurer.  According to the 75th NSS (National Sample Survey)1, about 85.9% of the rural population and 80.9% of the urban population do not have any form of health insurance in India.

According to the NSS data, the average cost for hospitalization costs Rs 38,222 in urban areas and Rs 27,347 in rural India1. In private hospitals, the average cost of hospitalisation2 can be summarised as:

IllnessSeriousnessCost of Treatment
Heart Attack25% of deaths before the age of 70 in India occur due to cardiovascular diseasesAverage treatment for CVD costs INR 1-6 lakhs based on cities
Kidney Related IllnessAround 17 out of 100 people in India suffer from kidney-related ailmentsThe average cost of dialysis is INR 12K to 20K, based on the condition of the kidney
CataractVery common mostly in older peopleThe cost of surgery can range from INR 10K to INR 1L
Gall Bladder SurgeryCaused by stress and lifestyle issuesLaparoscopic Cholecystectomy cost ranges from INR 21.8K to INR 2.1L based on city and type of hospital
CancerLung and Ovarian cancer are the 2 most popular types of cancer in IndiaThe average cost of treatment is Rs 3 to 4.5 lakhs 
Covid-19The ongoing pandemic of CoronavirusThe average cost of 10-day treatment is Rs 80,000 and for ventilator support, the cost islakhs5 

In fact, Indians pay about 78%3 of the entire medical expenses from their own pocket. The rising health expenses keep pushing the poor people below the poverty line. In the year 2011-12, about 50.6 million4 people have been pushed into poverty only because of the rising healthcare costs. So, the importance of having high health insurance coverage is quite well-known and understood. 

However, is the corporate cover enough?


Most corporates provide for a certain fixed amount of coverage as long as your client is employed with that organisation. But, there is no guarantee that the employer would choose to continue the same level of coverage forever. Also, there is no possibility of customisation and lifelong renewal with group health insurance plans, as the corporate decide on the same. The employee has no role to play.  Also, there is no guarantee that your client would choose to continue his job or he would remain employed forever. He might opt to start his own business or take a different job. In such a case, his coverage would cease to exist.

In all such cases, it makes sense to opt for an individual health insurance plan over and above his corporate health coverage, which he can customise and continue forever. This would also guarantee lifelong coverage for his post-retirement life when health insurance would actually play an important role! Alternately, he can choose a super top-up cover over the corporate cover in case he doesn’t want to invest in a personal cover now.

Takeaway

Last but not the least, you need to encourage your clients to stay fit and healthy. However, even then they might incur medical expenditure as it is unprecedented. The top reasons that contribute to lifestyle diseases are sedentary lifestyle, obesity, food habits, stress, too much screen-time or technology aggravating mental health conditions, and lack of physical activity and proper sleep.

With the rise in mortality, it has been seen that even medical expenses have gone up, especially in older age. Improvement in medical sciences has ensured people live longer but need medical assistance. Thus, with a rise in disposable income and lifestyle especially with the urban Indians, the demand for better medical facilities have risen. This has led to a shortage of good medical facility, which in turn has increased the overall cost of treatment in India. This is why your role is crucial in helping your client choose the appropriate sum insured for himself and his family.

Reference:

  1. https://www.downtoearth.org.in/news/health/over-80-indians-not-covered-under-health-insurance-nsso-survey-72394
  2. https://www.icicilombard.com/blog/health-insurance/hi/know-the-costs-of-various-treatments-in-different-indian-cities#:~:text=Lung%20Cancer%20Treatment%20which%20costs,higher%20side%20of%20the%20range
  3. https://timesofindia.indiatimes.com/india/Indians-pay-78-of-medical-expenses-from-their-own-pocket/articleshow/7270363.cms
  4. https://countercurrents.org/2020/05/out-of-pocket-healthcare-expenditure-covid-19-and-impoverishment-in-india/
  5. http://timesofindia.indiatimes.com/articleshow/78610372.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
  6. https://www.hdfcergo.com/blogs/health-insurance/how-much-health-insurance-do-you-require
  7. https://www.livemint.com/Money/1WMKPK9oxCYBW4Mi0silzH/How-much-health-insurance-cover-should-you-buy.html
  8. https://www.tataaig.com/knowledge-center/health-insurance/how-much-health-insurance-do-i-need


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