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How to select health insurance: Practical tips to protect against catastrophic costs

Anurag, a 33-year-old sales executive, was returning home on his motorcycle after a long day’s work. Distracted by his mobile phone, he failed to see a pothole and crashed into an electric post, suffering severe head and neck injuries. He underwent emergency neurosurgery at a tertiary hospital. After a long stint in the ICU and hospital wards, he was discharged home alive, but in a paralysed state. Anurag had no health insurance, and the hospital bill was huge. The family had to borrow money and also lost their income, which pushed them into poverty.

Catastrophic medical expenses are unexpected and extraordinarily large medical costs that can be financially devastating. These costs are much higher than usual hospital expenses like treating food poisoning, appendicitis, or childbirth.

For the middle class, catastrophic expenses might include a motor vehicle accident resulting in prolonged hospitalisation, a cancer diagnosis requiring certain types of treatments, pneumonia needing prolonged ICU care, or organ failure requiring transplantation. Such situations demand substantial financial resources that are beyond the reach of most households.

In India, millions of families are pushed into poverty each year due to the overwhelming cost of medical treatments, perpetuating a cycle of poverty and poor health. For those without health insurance, large out-of-pocket expenses often wipe out savings, leading to debt.

This article covers preventive health strategies, practical advice on choosing the right health insurance at the right time, and tips to avoid insurance claim denials.

Prevention is better than cure
While health insurance coverage is crucial for surviving catastrophic medical expenses, adopting specific preventive strategies and a healthy lifestyle is equally important.

The impact of road accidents is huge in India. In Kerala, roughly one out of 700 people who use the road suffer an injury every year, which is an alarmingly high rate. Many individuals are left permanently disabled or paralyzed, leading not only to recurring medical expenses, but also loss of earnings. Some of these injuries result in death—in approximately one in 7000 individuals a year. The risk is higher for two-wheeler users and pedestrians. Following safe and disciplined road behaviour will reduce one’s risk of such outcomes. Preventive strategies were discussed earlier about general road safety, night driving and driving in the rain.

Another major cause of catastrophic expense is cancer. Avoiding tobacco and alcohol are among the most impactful health decisions for cancer prevention. Even small amounts of alcohol can increase cancer risk. There is no safe lower limit according to updated guidelines.

However, cancer prevention is not easy in the real world. Although a large number of cancers are related to tobacco and alcohol use, cancer also can sometimes occur among people who do not use these products. Healthy eating and an active lifestyle reduce the risk of many illnesses including cancer, but they do not guarantee complete protection.

Thus, preventive measures early in life not only safeguard health but can also significantly reduce the risk of catastrophic medical costs later on. While prevention is vital, unexpected medical emergencies can still occur. This is where health insurance becomes important.

Is health insurance the solution?
In India, many people, especially in the middle class, either lack health insurance or have insufficient coverage to manage large hospital bills. Some avoid buying health insurance because they find it unaffordable or fail to see its importance when they are healthy. Rising premiums, exclusions, medical inflation and claim denials further weaken the financial security that health insurance is meant to provide.

What is the right age to buy health insurance, for those on a limited budget?
Ideally, everyone should have adequate health insurance. But in the real world, for those starting their careers on a tight budget, a common question arises: should the limited money available be spent on health insurance premiums or invested for the future?
This concept is known as opportunity cost. When all available money is directed toward high premiums early in life, it reduces the opportunity to invest and benefit from the power of compounding over time.

To illustrate, consider two theoretical scenarios:
1. Paying Insurance Premiums Early: A 30-year-old person pays Rs 2,500 monthly for family health insurance, with premiums rising 6% annually on average.
2. Investing for the future: Another 30-year-old invests these exact amounts monthly, earning an 8.5% annual return.

If no claims are made until age 50, the outcomes are:
Scenario 1: by age 50, the accumulated wealth is zero because all the money went to the insurance company.
Scenario 2: by age 50, the investment has grown to Rs 24 lakh at 8.5% returns. If invested in equities with a conservative annual return of 12.5%, the amount grows to Rs 36 lakh by age 50 and an incredible Rs 5 crore by age 70. The rise becomes even steeper in later years, surging to an astonishing Rs 56 crore by age 90, showing how wealth can grow dramatically over time. This is called the power of compounding.

This simplified example shows how wealth accumulation becomes impossible if all funds were allocated to paying high premiums and other expenses early in life. It also provides an indirect estimate of the substantial profits insurance companies generate from young customers who join early.

Clearly, investing and health insurance should not be an either-or choice. The example illustrates the importance of balancing risks, investments and insurance. It is not an argument against health insurance but rather a reminder for thoughtful financial planning. Understanding opportunity costs and making age-appropriate decisions can ensure both financial security and adequate health protection.

The importance of age
As we get older, the need for health insurance becomes more pressing. Health insurance premiums increase with age. The rise is gradual until around age 45, after which insurance companies raise premiums steeply. This is due to the significantly higher risk of health issues beyond this age. In the above example, the equation will be different if the starting age was 50 instead of 30. At that age, health insurance is undoubtedly a higher priority than investing because the risk of hospitalization is much greater than for someone in their 30’s.

Although the chance of a major illness is low in early adulthood, at least basic health insurance should be obtained. This is particularly important if there is no emergency fund available. While it may seem tempting to skip health insurance when young, starting early also means lower premiums in the long run.

The following example highlights the importance of obtaining health insurance early:

Swati purchases health insurance at the age of 39. At 48, she suffers a heart attack but survives. Despite this significant medical event, the insurance company is legally prohibited from increasing her premium beyond the usual annual adjustment. As a result, the heart attack does not create an additional financial burden in the future.

Now, imagine if Swati delayed purchasing health insurance until the age of 49. By this age, her prior heart attack would categorize her as a high-risk customer, forcing her to pay significantly higher premiums.

For those employed, many companies provide affordable group health insurance plans, which have several advantages over individual plans. They also have certain disadvantages. Vulnerable groups, such as those below the poverty line, may be eligible for government schemes like Ayushman Bharat.

Regardless of the situation, it is unwise for anyone to remain without sufficient health insurance coverage, especially after entering their forties.

Useful tips while purchasing individual health insurance
1. Tailored purchase: The decision to purchase a health insurance policy should be tailored to factors such as age, medical history, lifestyle, risk factors, individual needs, financial circumstances and place of living. For instance, in large metros, hospitalisation costs tend to be more, and greater coverage may be required. The maximum amount that the company will pay per year is called sum assured. Plans where the sum assured increases over time are preferable, as healthcare expenses invariably go up.

2. Look before you leap: It is unwise to blindly buy insurance policies just because it was recommended by a friend or a relative. Insurance agents get a substantial commission for selling policies. While many are experienced and dependable, some might only be doing it part-time. Not all sellers will have our best interests in mind or make an earnest effort to understand our specific needs and explain the policy’s limitations. Comparisons of insurance plans shared by individuals on social media may sometimes be biased, one-sided, or promotional.

3. Cheaper need not always be better: Buying the health insurance policy online, that is directly from the company is cheaper. However, lower premiums often mean less coverage. For example, some cheaper policies set limits on room rent, which also implies reduced coverage for related treatments. Policies also reduce costs by excluding non-medical expenses, capping coverage for specific illnesses, or requiring copayments or deductibles. These limitations can result in significant out-of-pocket expenses when settling hospital bills. Thus, what appears to be an attractively discounted premium at the time of purchase could translate to reduced benefits, potentially making the policy more expensive during a claim. It is crucial to understand all the terms, conditions, and limitations before buying.

4. Know your riders: There are several riders (extra features that can be purchased) that can be used to customise personal health insurance, family floater and group plans. While some riders such as those covering non-medical expenses (e.g. gloves, syringes) are useful, there are others that are unnecessary and needlessly increase the yearly premium.

5. Super top-up: For those looking to increase coverage beyond a basic policy, a “super top-up plan” is an option. It adds extra coverage at a relatively low premium. For example, a person who has a basic policy of Rs 5 lakh, purchases a ‘super top-up’ for Rs 25 lakh coverage. Most hospital bills stay within Rs 5 lakh, which is covered by the basic policy. However, if an unexpected medical expense of Rs 20 lakh occurs, the super top-up will cover the extra Rs15 lakh after the first Rs 5 lakh is used, providing protection against high medical expenses at a relatively low additional cost.

6. Reload or Restore: Many policies now offer a “reload” feature, which restores the sum insured if it gets fully used. For example, if someone with a Rs 5 lakh cover spends it all on a hospitalisation in February, the insurer will again provide upto Rs 5 lakh coverage for any future claims later that year. Without this feature, the person would need to pay out of pocket for any additional hospitalisation.

7. Critical Illness Cover: Another method to cover for catastrophic expenses is to purchase critical illness insurance. This works more or less like a life insurance policy. The company will pay a fixed amount upon diagnosis of a critical illness such as cancer or heart attack. It is not the same as health insurance, where the company only covers actual expenses incurred.

8. Accident insurance is cheap: Young adults must consider purchasing basic accident coverage—particularly if they are two-wheeler users. This is available from the India Post Payments Bank (IPPB) for just Rs 299 per year. The base policy pays Rs 10 lakh in case of a road accident-related death or disability. Government-backed plans are available for as little as Rs 20 per year that provide coverage of Rs 2 lakhs.

9. Lifestyle matters: Leading a healthy lifestyle from a young age not only helps prevent or postpone the onset of several diseases, but also facilitates discounts while renewing healthcare insurance. Besides promoting good health habits among the customers, it also indirectly reduces the eventual number of claims and therefore, thecompany’s expenses.

Insurance claim denials
One of the major challenges patients face in hospitals is the denial of insurance claims. Claims may be rejected for several reasons, such as failure to disclose pre-existing conditions (PEDs), claims made during the waiting period for certain conditions, hospitalizations deemed unauthorized or unnecessary, incomplete or incorrectly filled forms, and specific exclusions or limitations outlined in the insurance policy.

For instance, if a person with diabetes develops diabetic cellulitis (severe skin infection) just six months after purchasing a health insurance policy, the claim may be denied due to the typical waiting period of three years for pre-existing conditions. However, if the same complication occurs four years after buying the policy, the claim will be covered as it falls outside the waiting period. On the other hand, if the individual did not disclose a previously known history of diabetes at the time of purchasing the policy, the claim would be rejected, regardless of the waiting period.

The following are a few recommendations on how to reduce insurance claim rejections:
1. Disclose pre-existing conditions: While starting an individual health insurance policy, all pre-existing conditions must be disclosed. These are health problems we already had before buying insurance. Failure to inform the insurer about a pre-existing condition is the commonest reason for denial of claims later on - especially if a complication arises as a result of that condition. For instance, if someone does not inform the insurer about a prior angioplasty, any future claims related to a heart attack may be rejected.

It is a fact that insurance companies charge higher premiums and include a waiting period when these conditions are made known. This is one reason why some individuals try to hide their medical history while buying a policy.

After the waiting period, any complications related to the condition will be covered. In other words, having a pre-existing condition does not necessarily mean that the claim will be rejected. But it needs to be disclosed at the time of purchasing the policy. It is often possibleto reduce this waiting period by paying an extra amount.

Why do companies deny claims? There is a perception that some insurance companies deny a significant number of medical claims. This is partly true, but there are two sides to the story. Some doctors who have worked in the insurance industry believe that companies do not deliberately try to deny claims. It is important to remember that the doctor working with the insurance company does not physically see the patient. They can only go by the paperwork submitted. Claims may be rejected if pre-existing conditions were not disclosed, hospitalisation was deemed unnecessary, or if the documentation lacked sufficient detail about the severity. Therefore filling up insurance forms during hospitalisation must be done diligently.

For instance, if a patient was admitted because of vomiting and dehydration, this must be mentioned in the claim - without which the company doctor will not understand the need to admit the patient. If this is not clearly described in the claim, the insurance company doctor might conclude that the treatment could have been done as an outpatient, and proceed to deny the claim.

Many insurance companies now use automated systems to process claims quickly. If forms are incomplete or contain mistakes, they might be flagged for denial. Complaints can be raised with the insurance company’s grievance cell, insurance ombudsman or the IRDAI. The insurance ombudsman’s office provides assistance with claims that are unfairly denied by companies.

2. Know the fine print: A health insurance policy is a legal agreement with the company, so it is important to read it carefully before signing. Once signed, it means we have accepted all the terms and conditions. We cannot claim afterwards that we did not understand certain technical terms. For instance, failing to renew on time will result in denial of claims that occur after the policy has lapsed.

In summary, catastrophic medical expenses pose a serious and unpredictable challenge. While cardiovascular disease and cancer mainly affect adults in middle age and beyond, road accidents are a leading cause of catastrophic costs among younger adults. Investing early in personal health and safe use of the road will reduce the risk. Careful financial planning early in life, combined with securing health insurance tailored to individual and family needs, can mean the difference between financial stability and financial ruin. Transparency and diligence while purchasing health insurance coverage will help reduce the risk of claim rejections.