Health insurance is an indispensable part of financial planning, especially with the rising healthcare costs in India. It is a type of insurance that offers financial protection to individuals against medical expenses incurred due to an illness, injury, or disability. It is an agreement between the insured and the insurer, wherein the insurer pays for the medical expenses incurred by the insured.
As per the National Health Accounts Estimates, healthcare expenses in India are expected to reach 10.2% of the GDP by 2025. The COVID-19 pandemic has also highlighted the importance of health insurance, as medical expenses for hospitalization and treatment can be a significant financial burden. Thus, having a
health insurance policy in place can provide individuals and their families with peace of mind.
This beginner’s guide to health insurance will cover the basics of what health insurance is, the different types of health insurance policies available in India, the benefits of having health insurance, and how to choose the right policy.
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What is Health Insurance?
Health insurance is an agreement between an individual (the insured) and an insurance company (the insurer). The individual pays a premium to the insurer, and in return, the insurer covers the medical expenses incurred by the insured due to an illness or injury. Health insurance can cover hospitalization expenses, pre and post-hospitalization expenses, ambulance charges, and other medical expenses, depending on the policy.
Types of Health Insurance Policies
There are several types of health insurance policies available in India. The most common types of policies are:
● Individual Health Insurance: As the name suggests, this policy covers only one individual. The premium for an individual policy is generally lower than a family floater policy.
● Family Floater Health Insurance: This policy covers the entire family under a single policy. The sum assured can be used by any family member covered under the policy. The premium for a
family floater policy is generally higher than an individual policy.
● Group Health Insurance: This policy is offered by an employer to its employees. The premium for the policy is generally borne by the employer.
● Senior Citizen Health Insurance: This policy is specifically designed for senior citizens. The premium for this policy is generally higher than a regular policy due to the higher healthcare risks associated with aging.
Benefits of Health Insurance
Having a health insurance policy provides several benefits, including:
● Financial Protection: Health insurance provides financial protection against unforeseen medical expenses, reducing the financial burden on the insured and their family.
● Cashless Hospitalization: Many health insurance policies offer cashless hospitalization, wherein the insured can avail of medical treatment without paying cash upfront.
● Tax Benefits: Premium paid towards health insurance is eligible for tax deductions under Section 80D of the Income Tax Act.
● Peace of Mind: Health insurance provides peace of mind to individuals and their families, knowing that they are covered in case of a medical emergency.
Choosing the Right Health Insurance Policy
Choosing the right health insurance policy can be a daunting task, given the many options available in the market. Here are a few factors to consider when choosing a policy:
● Coverage Amount: The coverage amount should be adequate to cover medical expenses for the insured and their family.
● Network Hospitals: Choose a policy that has a wide network of hospitals for cashless hospitalization.
● Premium: Compare the premium of different policies to choose a policy that is affordable and provides adequate coverage.
● Exclusions: Read the policy document carefully to understand the exclusions and limitations of the policy.
The life insurance sector expects a demand surge for products
The country’s life insurance industry expects insurance products in the savings and investment category to see a surge in demand after the government’s decision to remove long-term tax benefits for debt funds.
Life insurers feel they would derive benefits from the change in taxation norms of debt mutual funds, as investors are likely to move money from mutual fund debt schemes to insurance products in order to avail tax benefits.
“The opportunities created by recent government decisions are a welcome development. Life insurance companies will benefit from the decision to change the tax treatment on debt funds. A shift is expected from mutual funds debt schemes, which will no longer have indexation benefits, towards ULIPs of less than Rs 2.5 lakh. This would be advantageous for the life insurance industry,” IndiaFirst Life Insurance deputy CEO Rushabh Gandhi told FE.
A person allocates his/her investment portfolio among different investment instruments, such as equity, fixed income, insurance, gold and real estate, among others. The allocation towards life insurance is expected to increase at the cost of some other fixed income investment options.
“ULIPs with premium below Rs 2.5 lakh and traditional policies with premium below Rs 5 lakh are expected to see a surge in demand,” Gandhi added.
With this change in taxation norms of debt mutual funds, there is “parity across all debt instruments” and a level playing field is being created, an insurance industry expert said.
According to him, traditional life insurance products in the savings and investment category fulfill the need for planning and saving towards long-term financial goals such as buying a house, funding one’s child’s education and planning for retirement, among others. The term for such plans is usually in the range of at least 10-40 years.
“Looking at the current scenario where premiums over Rs 5 lakh will be taxed, we can conclude a few things — firstly, for a life insurance policy, the tax would be applicable only on maturity; secondly, with a life insurance plan, there is no risk of reinvestment; also, the IRR for traditional savings plans is relatively higher in comparison to other instruments such as Debt MF,” the person said.
Notably, individuals investing less than Rs 5 lakh in traditional policies would be able to continue availing the tax benefit as before.
The government, in the Union Budget for FY24, proposed to tax income from all non-ULIP products i.e. par and non-par where aggregate insurance premium paid in a year exceeds Rs 5 lakh. The proposal will come into effect from April 1, 2023.
Interestingly, insurance companies are not likely to witness any impact of the removal of long-term tax benefits for debt funds in terms of their investments in debt mutual funds. Insurers typically invest in short-term maturity debt-funds for their short-term cash management requirements.
“Typically, insurance companies invest in short-maturity debt funds and that too typically is for their short-term cash management requirements. So, our investments will not be there in these funds for more than a few weeks or months. In any case, we are not taking advantage of long-term capital gains even earlier. So, nothing changes for insurance companies because we will still continue with the same kinds of investments. Because these investments are basically for cash management and not for long-term holding. So, from investment point of view, nothing much changes as such,” Bajaj Allianz General Insurance chief investment officer Amit Joshi told FE.
On whether the insurance companies will continue to invest in debt funds for short-term cash management after the government’s decision to remove long-term tax benefits for such funds, Joshi said, “For short-term cash management, the tax treatment remains the same. It has not changed. What has changed is that long-term capital gains will not be available if you hold these funds for three years. But for us, in any case, it was not there because we were not holding for three years. We were holding for few weeks or months. So, for us it does not make any difference.”
In conclusion, health insurance is an essential component of financial planning in India. With rising healthcare costs and the COVID-19 pandemic, having a health insurance policy can provide individuals and their families with peace of mind. By understanding the basics of health insurance, choosing the right policy, and considering the benefits it provides, individuals can ensure that they have adequate financial protection against medical expenses. It is important to research and compare different policies to find one that meets individual needs and budget. With the right health insurance policy in place, individuals can focus on their health and well-being, without worrying about the financial implications of medical emergencies.