How does top-up insurance work?

Raghav's day started off bright and cheerful, till that phone call came. As he drove to office Raghav was thinking about how lucky he had been to land that job.

Flexi timings, handsome salaries and perks, comprehensive family health insurance, leave travel allowance, foreign travel and all that came with the MNC job, Raghav was quite happy and content with the way his life was headed.

He and Rajini, their two children and both Raghav's and Rajini's parents lived a good life as an extended family.

The call was from Raghav's colleague and friend from college, Rajiv, who needed some cash for an emergency.

Rajiv's father had taken ill couple of weeks back and had had to be hospitalised. He had undergone a surgery but was recuperating and about to be discharged that day.

Raghav withdrew cash from his bank and rushed to the hospital. What could have been the emergency, his thoughts meandered and he feared the worst.

Rajiv looked harassed and upset. When he saw Raghav he quietly handed over some sheets of paper which was the hospital bill for Rs 5.25 lacs and a faxed letter from the insurance company saying that they would pay up only Rs 2 lakhs.

Rajiv explained that their group medical insurance covered parents only up to a maximum of Rs 2 lakhs and that he has to shell out the rest from his pocket. Hence this short term borrowing.

Raghav started worrying. His parents were over 70 and so were his in-laws. He hadn't realized this shortcoming in their health cover and the thought of digging into his retirement savings in case of an emergency, made Raghav shudder.

He immediately called his financial planner and explained his apprehensions. Their conversation went as follows:

Financial planner: Suggest that you take a top up health insurance for your family.

Raghav: And what is that?

FP: A top up health insurance is an extra safety net that provides additional health insurance over and above any existing insurance available.

The benefits of the policy are the same as that of any normal health insurance policy -hospitalisation and domiciliary expenses reimbursement, certain exclusions etc. But they are to be used in case the claim amount is large - exceeding a certain threshold limit.

The maximum one can claim from the policy is the sum insured of the policy. However any claims made in any other policy or any other reimbursements received will be deducted from the maximum claimable amount in this policy.

Raghav: Can you please explain in simple terms?

FP: Okay, say for example my employer covers me for Rs 2 lakh. I have a top up insurance for Rs 5 lakh with a threshold of Rs 2 lakh. In case I am hospitalised and have to pay Rs 4 lakh, the top up insurance would pay Rs 2 lakh (Rs 4 lakh claim – Rs 2 lakh threshold limit).

I will be able to claim Rs 2 lakh from my employer provided insurance. But, in case I incur an expenditure of Rs 8 lakh due to hospitalisation then the maximum I can claim is Rs 7 lakh (Rs 5 lakh from the top up insurance policy and Rs 2 lakh from employers' insurance policy).

Raghav: But why not just take a fresh insurance for Rs 8 lakh. That way I don't have to service two different policies and can make my life simpler.

FP: Taking a top up insurance is better than taking a fresh policy for a higher sum insured for the following reasons:

Cost - A top up insurance would cost far lesser than a fresh insurance policy for a higher sum insured. In your case, if you had to take a new policy for your father for Rs 8 lakh the premiums would be in the range of Rs 25,000 – Rs 40,000. But a Rs 5 lakh top up insurance with a Rs 2 lakh threshold would cost only Rs 4500 approximately.

By taking a new insurance policy replacing the old one, you would have to go through extensive medical tests, lose out on the no claim bonuses accumulated and also give up cover for pre-existing diseases (assuming the existing policy is at least 4 years old)

I would recommend that you have more than 1 policy - one for a smaller sum insured and another for a higher sum insured. This would come in useful when you have to make small claims.

In case of a few thousands claim for a minor problem, say a cataract operation, you could use the small policy so that you would not lose out NCB in the higher sum insured policy

Raghav: Okay, sounds good. But how does it work for the insurance companies? How are they able to cover such high risks for low costs? Something fishy here...

FP: Actually no, it is the most logical thing. Most number of health insurance claims is for small amounts. Health insurance is classified as low impact, high volume insurance.

Hence the probability of a claim arising for a higher sum insured (exceeding the threshold limit) would be very less for the insurance company. Based on this experience, insurance companies offer very attractive premiums for top up insurance policies.

Raghav: Oh! Interesting. I thought I would need additional insurance only for my parents. Can I take top up insurance for all my family members? You never know what might come up.

FP: Yeah sure. You can take individual as well as family floater top insurance policies.

Raghav: Which insurance companies offer this product? What is the fine print?

FP: There are 2 types of policies - top up and super top up. The top up policy provides reimbursement for extraordinary expenses arising from one single illness. Whereas, a super top up policy covers all illnesses during the year put together.

If the total expenses are over and above the threshold limit, they are eligible for reimbursement subject to the sum insured in the policy.

Therefore, a super top up policy provides better cover as it covers expenses arising from a series of moderately expensive illnesses as well as just one expensive illness. Right now, only United India Assurance Company provides top up insurance policies if entry age is over 60.

Raghav: Okay great. This we will do on priority. Can you please send in the relevant papers?

FP: Sure. I believe actually getting the policy might not be so easy. But trust me to persist and do my best.

Raghav: Sure, I know you would. Thanks.

Raghav relaxed a bit and returned to his cheery mood. This time he was thinking about how lucky he had been to find his financial planner.