How Do Deductibles Work in Health Insurance

Introduction

Ram bought a health insurance policy with Rs. 10 Lakh cover for Rs. 15,000. His friend, Mohan, almost the same age, bought the same policy for just Rs. 12,000. 

Ram wondered why the same policy cost Rs. 3,000 less to his friend. Upon checking the details, he found out that Mohan added an aggregate deductible of Rs. 50,000 to his Rs. 10 Lakh, which reduced the premium.

Opting for a deductible reduces health insurance premiums considerably. So, is it wise to choose a deductible? If yes, how much should be the amount? Understanding deductibles is crucial, especially when choosing between base vs. top-up health insurance plans.

In this blog, you will understand what a deductible is and how it works. 

What Is a Deductible?

In health insurance, a deductible is the fixed initial amount of money you must pay out-of-pocket for an admissible claim before your insurance company starts covering the medical expenses.  

In the above scenario, Ram bought a base health insurance cover of Rs. 10 Lakh with no deductible. When Ram files an admissible claim, the insurer will fully cover the hospital bill up to the sum insured. 

Mohan bought the same coverage with an aggregate deductible of Rs. 50,000. When the claim arises, Mohan will have to pay the initial expenses of Rs. 50,000 out-of-pocket, before his policy starts covering the expenses in a policy year. If the total claim in a year is below Rs. 50,000, the insurer does not pay. 

A deductible often applies annually, i.e., it resets at each renewal. If you claim in the current policy year bearing the initial cost of deductible, a claim in the subsequent policy year will again require you to pay the deductible. Since a deductible demands you to pay the initial expenses before the insurance cover kicks in, it helps lower your premium. The higher the deductible amount, the lower the premium, and vice versa.

Deductibles are broadly of two types: voluntary and compulsory.

• Voluntary Deductible

Voluntary deductible is an amount you choose willingly at policy purchase. By opting for a voluntary deductible, you agree to pay a fixed amount of initial medical expenses out-of-pocket before the insurer steps in.

In return, the insurance company rewards you with a lower premium, since its risk of paying smaller claims reduces.

• Compulsory Deductible

Compulsory deductible is a mandatory deductible imposed by the insurer in some specifically designed health insurance plans such as top-ups and super top-ups. You cannot opt out of it, as it is an inbuilt policy feature. The deductible in such plans ensures that policy benefits only kick in for larger medical expenses.

Example: A super top-up plan with a deductible of Rs. 3 Lakh only covers expenses exceeding Rs. 3,00,000 in a year. You have to cover the deductible amount either from your pocket or through a base health insurance policy.

Per-claim Deductible vs Aggregate Deductible

A deductible can either apply to every claim or on aggregate basis to all claims combined in a policy year, depending on the policy terms.

A per-claim deductible applies every time you make a claim. For each hospitalisation, you must pay the initial deductible yourself before the insurance policy starts covering expenses. If you make multiple claims in a year, you will have to pay the deductible each time, which can significantly increase your out-of-pocket costs.

For example, (say) you have a policy with a Rs. 50,000 per claim deductible. Let’s understand what happens if you make multiple claims during a policy year.

• 1st hospitalisation: Bill Rs. 2,00,000 → You pay Rs. 50,000, insurer pays Rs. 1,50,000.
• 2nd hospitalisation: Bill Rs. 1,00,000 → You again pay Rs. 50,000, insurer pays Rs. 50,000.
• Total deductible paid by you in a year = Rs. 1,00,000.

This form of deductible is often seen in some basic or older health plans, and certain plans with global coverage.

An aggregate deductible applies once for the entire policy year, regardless of the number of claims. Once you pay the deductible, either in one or multiple claims combined, all further expenses are paid in full by the insurer up to the sum insured. This structure is far more cost-efficient for people who anticipate multiple hospitalisations in a year.

For example, you bought a policy with an aggregate deductible of Rs. 50,000 per year. Unfortunately, you had multiple hospitalisations during a policy year.

• 1st hospitalisation: Bill Rs. 40,000 → You pay Rs. 40,000 (deductible not fully met yet).
• 2nd hospitalisation: Bill Rs. 1,00,000 → You pay Rs. 10,000 (remaining deductible) and the insurer pays Rs. 90,000.
• 3rd hospitalisation: Bill Rs. 2,00,000 → Insurer pays full Rs. 2,00,000 (since deductible already met).

This form of deductible is common in super top-up health insurance plans in India.

Why Do Deductibles Exist?

A deductible in health insurance ensures that you have to cover a portion of the hospital bill when you make a claim. It goes against the core concept of insurance, i.e., transfer of risk to the insurer. So, why do deductibles exist?

Deductibles aren’t random policy features; they serve important purposes for both insurers and their customers.

• Risk-sharing

Deductibles ensure that the policyholder pays a part of the cost, discouraging unnecessary claims. If you have to pay a fixed amount of initial cost, you’re more likely to avoid unnecessary treatments. This helps in keeping the overall insurance system sustainable by reducing the volume of smaller claims significantly.

• Affordable Premiums

Deductibles reduce the insurer’s share of risk by making you pay the initial portion of your bill. Hence, policies with higher deductibles come with lower premiums and vice versa, making the plan budget-friendly for price-conscious consumers.

• Specialised Plans 

Deductibles are the foundation of top-up and super top-up health insurance plans. These plans are designed to cover expenses only when medical costs exceed a certain threshold, helping customers get a decent health cover at a much lower premium.

• Moral Hazard

Moral hazard is when people are aware that insurance covers the risk leading them to behave carelessly. They take more risks, or overuse services because their insurance policy pays the bills. For example, if everything was covered from the first rupee, patients and hospitals might over-utilise treatments since there’s no cost to the insured. 

Deductibles act as a check against over-utilisation, protecting the insurer against moral hazard.

Deductibles in Different Plan Types (Base Policy vs Top-up Plans)

A base health insurance policy is a standard health insurance plan that provides coverage for hospitalisation expenses. Usually, no deductible is applied. Coverage starts from the very first rupee of claim. 

For example, you have a policy with Rs. 5 Lakh sum insured. You make a claim, and your hospital bill is Rs. 3 Lakh. Your insurer pays your treatment cost in full without you having to chip in.

On the other hand, top-up and super top-up plans are supplementary policies designed to provide extra coverage at affordable rates. A compulsory deductible applies in such policies. The insurer pays only after your medical expenses exceed this pre-decided threshold.

A top-up plan imposes a per-claim deductible. You have to pay the deductible amount every time you make a claim. A super top-up plan applies an aggregate deductible, once for the entire policy year, making it more efficient if you have multiple hospitalisations. These plans are designed to handle large medical claims without costing as much as a base policy of the same size.

Comparing Deductibles with Copayments in Health Insurance 

Copayment in health insurance refers to a fixed percentage of every claim that you must pay, regardless of how many claims you make. This fixed percentage is pre-decided and mentioned in the policy terms. A copay clause ensures that the insurer always shares the cost with you on each hospitalisation.

For example, a 20% copay means you always pay 20% of the bill, and the insurer pays 80%. It is an ongoing cost-sharing arrangement that applies to every claim.

Deductible in health insurance is a fixed initial amount you must pay before the insurance coverage kicks in. It applies either once per policy year (aggregate deductible) or per claim, depending on the plan. After your claim exceeds the deductible, the insurer pays 100% of the remaining eligible expenses up to the sum insured.

Suppose you have a health insurance policy with Rs. 5 Lakh sum insured and Rs. 50,000 aggregate deductible. You are hospitalised with a bill of Rs. 2 Lakh. You pay the first Rs. 50,000 (deductible) and your insurer pays the remaining Rs. 1,50,000.

What happens during the next hospitalisation in the same year? The insurer pays the entire cost since the aggregate deductible is already met during the previous hospitalisation. A deductible is a one-time or per-claim threshold you need to pay every policy year. Once your medical expenses exceed that threshold, the insurer pays in full.

Quick Comparison Table

Drawbacks of Choosing A Deductible

Deductibles lower premiums making health insurance coverage affordable. A higher deductible leads to lower premiums and vice versa. But deductibles also come with certain drawbacks that every policyholder should be aware of.

• • High Out-of-Pocket Costs UpfrontSince you must pay the deductible amount before the insurer starts covering expenses, the initial burden is on you. This can feel heavy if you face a sudden hospitalisation.
    

    For example, with a Rs. 50,000 deductible, a Rs. 40,000 hospital bill will not be paid by the insurer at all. You’ll need to cover it entirely yourself. So, while premiums may be lower, your cash requirement during a medical crisis becomes higher. Additionally, in emergencies, arranging money to pay a large deductible amount can be stressful.

  • You Don’t Have a Base PolicyDeductible-based plans, like top-ups or super top-ups, are designed to work alongside a base health insurance policy. Without a base plan, you will need to pay the deductible amount from your pocket before the top-up policy starts covering expenses.
    

    Suppose you have a super top-up of Rs. 10 Lakh with a Rs. 3 Lakh deductible but no base policy. Your hospital bill comes to Rs. 4 Lakh. In this case, you must pay the first Rs. 3 Lakh yourself; the insurer pays the remaining Rs. 1 Lakh. This defeats the purpose of insurance as you have to bear a larger portion of the claim.

  • Not Ideal for Smaller Medical BillsDeductible plans are not suitable for people who expect frequent, smaller hospitalisations. If most of your medical expenses fall below the deductible, your policy won’t provide much benefit.
    

    For example, if the deductible is Rs. 2 Lakh but your typical medical bills are typically between Rs. 50,000 to Rs. 1 Lakh, you’ll end up paying out-of-pocket every time, making the policy less useful.

  • Can Create Confusion during ClaimsMany people do not understand how deductibles work, or a plan with a deductible is mis-sold to them. This lack of awareness or misunderstanding of policy conditions may lead to disappointment during claims, especially if they don’t realise that smaller claims won’t be covered. Hence, it is important to clearly assess your medical history, base cover, and risk appetite before opting for high deductibles.

Who Should Consider Deductible-Based Health Insurance Plans?

Deductible-based plans, like Top-up and Super Top-up policies, are not for everyone. They are designed with a specific type of policyholder in mind. 

Here’s a detailed breakdown.

Ideal for Individuals With:

• • Robust Base Coverage
    
    If you already have a base health insurance policy or corporate group insurance cover, deductible-based plans work well as an extension.For example, you have a Rs. 5 Lakh base policy and buy a Rs. 15 Lakh super top-up with a Rs. 5 Lakh deductible. Your combined effective cover becomes Rs. 20 Lakh. Smaller bills are handled by your base policy, and the super top-up kicks in only when large claims arise.
• • Healthy Lifestyle & Low Risk of Frequent Hospitalisation
    
    People who are generally healthy, young, and are likely to not require frequent medical care, benefit the most. Since the probability of small, recurring hospitalisations is low, paying a deductible occasionally can be manageable.In exchange, they get higher coverage at a much lower premium.
• • Financial Readiness for Upfront Costs
    
    Deductible-based plans require you to pay the deductible first. So, they suit people who have an emergency fund or a separate base policy to handle the initial burden.If you can comfortably arrange Rs. 2 – 3 Lakh in case of an emergency, a deductible plan can help you afford large coverage like Rs. 20 – 30 Lakh at a fraction of the cost.

Not Ideal If:

• • You Lack Any Base or Corporate CoverageWithout a base policy, a deductible-based plan leaves you exposed to high out-of-pocket expenses. That’s why a base policy is almost always necessary.
• • You’re Risk-Averse or Need Frequent Healthcare ServicesIf you are elderly, or have chronic health conditions, you can expect regular hospital visits. An insurance cover with a high deductible may feel burdensome for you. The recurring out-of-pocket costs could outweigh the premium savings. A comprehensive base policy with minimal cost-sharing is best suited for you.

Key Takeaways

Here are some practical tips for choosing the right deductible in health insurance.

1. Evaluate your healthcare needs. 
2. If you and your family are young and healthy, you likely need infrequent hospitalisations. A higher deductible might work for you, providing you cost-efficient coverage on rare and large claims.
3. If you are living with chronic conditions such as diabetes or heart ailment, which increase your hospitalisation risk, consider a low or no deductible plan.
4. If you have a robust base health policy, adding a deductible-based top-up can give you the right and cost-effective extension on your coverage.
5. You must understand that your deductible resets at each renewal. Also, make sure that you know if your policy imposes an aggregate or a per-claim deductible.

Choosing the right deductible is about striking the right balance. High out-of-pocket expenses during a medical emergency must not out-weigh reduction in premium. Choose your deductible in line with your base cover, financial cushion, and health risks.

Do you want personalised recommendations on health insurance cover for your family? Book a call with us and talk to an advisor now.