We were recently reviewing the health insurance portfolio of a couple with two children. Their family health cover was only ₹5 lakh, while the annual premium was around ₹30,000.

As financial planners, we felt that the cover was grossly inadequate. However, increasing health insurance cover usually means paying a higher premium. So, we explored an alternative.

We recommended increasing the cover to ₹50 lakh while opting for a deductible of ₹1 lakh. In simple terms, the family would bear the first ₹1 lakh of medical expenses in a policy year, and the insurance company would cover expenses beyond that, subject to policy terms.

The logic was straightforward. The family was comfortable handling smaller medical expenses from their own resources. Their real concern was a major hospitalization or a large health-related financial shock.

Interestingly, the annual premium remained almost unchanged at around ₹30,000.

Why do insurance companies often offer higher cover with deductibles at similar or even lower premiums?

1. Every claim starts from zero, so a deductible reduces the insurer's claim outgo.

2. Policyholders tend to avoid filing smaller claims.

3. Large claims occur far less frequently than small claims.

From a risk management perspective, the principle is simple:

Insure against large, financially damaging risks. Retain small, manageable risks.

Unfortunately, this option is not always discussed by insurance agents and intermediaries. The reason is often economic. Higher-premium policies generally generate higher commissions. Solutions such as deductibles and super top-up plans can provide substantially higher cover at relatively lower premiums, making them less remunerative for intermediaries.

At Naveen Rego Capital, a fee-only financial planning firm and a SEBI Registered Investment Adviser, our compensation comes directly from clients and not from insurance companies. This allows us to evaluate insurance solutions solely from the client's perspective.

The next time you review your health insurance, ask yourself:

Are you protecting yourself against a major health expense, or are you simply buying a policy that maximizes someone else's earnings?

The choice is always yours.

Happy Financial Planning!

Naveen Julian Rego – CFP®

MD & Principal Officer

Naveen Rego Capital

SEBI Registered Investment Adviser

Reg No: INA000019211

BSE Membership ID: 2178

Disclaimers:

1. Investment in the securities market is subject to market risks. Read all the related documents carefully before investing.

2. Registration granted by SEBI, membership of BSE and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

3. Financial products recommended by us which are under the jurisdiction of other regulators are beyond the scope of SEBI’s grievance mechanism.