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What are top-up and super-top-up health insurance policies? Do you need either?

Posted on 24 Aug 2022
Author: Sayan Sircar

Tags: Health Insurance ; Insurance

12 mins read
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This article talks about deductible-based health insurance plans like top-up and super-top-up and shows which one you should buy and why.

What are top-up and super-top-up health insurance policies? Do you need either?

📚 Topics covered:

Background of the product
What is a deductible
The concept of the year
The Top-up policy
The Super-Top-up policy
What deductible-based plans are
What deductible-based plans are not
What is the correct type of health insurance policy to purchase?
What about tax benefits?
What to avoid

This article is a part of our detailed health insurance article series. Ensure you have read the other parts here:

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Background of the product

During the COVID-19 second wave in India, in the months of April-Jun 2021, many patients were given ECMO therapy using a form of an artificial lung.

Extracorporeal membrane oxygenation (ECMO), also known as extracorporeal life support (ECLS), is an extracorporeal technique of providing prolonged cardiac and respiratory support to persons whose heart and lungs are unable to provide an adequate amount of gas exchange or perfusion to sustain life. - Wikipedia.

The procedure is, therefore, very costly.

The cost of the ECMO procedure, excluding charges for skilled HCWs, for initial two days is around ₹1.75 lakh-₹3 lakh per day. And ₹80,000 to ₹1 lakh a day is charged thereafter. The charges vary according to hospitals. A few patients might need this treatment for up to a month or more - The Hindu, 20-May-2021.

Few health insurance plans cover ₹35 lakh+ claims in India. While ECMO treatment due to the COVID-19 pandemic is an extreme example, there could be cases where heart disease, cancer or accidents require treatments that cost 50 lakhs or more. These cases are unlikely, but if they occur, they will likely bankrupt or severely cripple the finances of most Indian families since health insurance, if that is at all there, will be insufficient.

The solution is to purchase a Super-top-up (STU) health insurance policy. Since insurance is a risk transfer mechanism, this policy is a cheap way to cover against an extreme risk event.

Since the event is unlikely, the premium is less.

The insurance company is essentially selling you a lottery ticket that both you and them hope that you never need to win.

However, to understand the STU and its close relative Top-up (TU) health insurance policy, we need to first understand the deductible concept.

What is a deductible

Deductibles work in conjunction with a health insurance policy. Deductibles are a minimum floor value above which claims will be paid for a health insurance policy. Hence a ₹5 lakh policy with a ₹50,000 deductible will always pay ₹50,000 less than the claim amount since the insured person is expected to pay that deductible amount out of their pocket.

Having a deductible makes health insurance policies cheaper. This is because actuarial science, a statistical discipline insurance companies use to price premiums, shows that more minor claims are more likely to occur than more expensive ones. Hence if the patient pays smaller claims out of their pocket, which is more likely, the insurance company will hardly get to pay out any claims. Due to this probability, the premiums of policies with deductibles are lower.

Both top-up and super-up policies are based on deductibles and are therefore very cheap. This fact automatically implies that if you have an ordinary health insurance policy, say corporate or family floater, that then plays the role of paying for the deductible. You can get the requisite protection for extreme claims at a low cost by getting a Super-top-up policy along with the base one.

For a healthy 35-year-old, a ₹10 lakh base policy might cost ₹15,000/year, while a ₹1 crore super-top-up may cost just ₹2,000/year.

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The concept of the year

Before getting into the details of the deductible-based policies, it is vital to understand the concept of the coverage year as well. Each health insurance policy, whether base, top-up or super-top-up, is valid for one year from the date of purchase.

It is therefore essential to align the start dates of the top-up or super-top-up policy with the base policy so that the claims are considered in the same period of twelve months. If you cannot align since you already have a base health plan, you might want to wait until the renewal of the base to buy the new one.

The Top-up policy

The Top-up (in contrast to a Super-top-up) is a deductible-based policy which applies only to the first claim made in a year.

We consider the following cases to illustrate the usage. In each case, we will assume a ₹10 lakh base cover and a ₹20 lakh top-up with a deductible of ₹10 lakhs:

Case 1: one claim in a year, any claim lower than or equal to ₹10 lakhs. The base policy pays; the top-up is not triggered
Case 2: one claim in a year, the claim is equal to ₹12 lakhs. The base policy pays ₹10 lakhs; the top-up pays ₹2 lakhs
Case 3: one claim in a year, the claim is equal to ₹32 lakhs. The base policy pays ₹10 lakhs; the top-up pays ₹20 lakhs; the insured person pays the balance of ₹32-30=2 lakhs out of pocket
Case 4: two claims a year of ₹9 lakhs and ₹5 lakhs: first claim of ₹9 lakhs paid by the base; the second claim of ₹5 lakhs is not paid by the top-up since top-up applies to only the first claim in the year which was lower than the deductible. The second claim is paid out of pocket (except the first 1 lakh, which is paid by the base)

The Super-Top-up policy

The Super-Top-up (in contrast to a Top-up) is a deductible-based policy which applies to all claims made in a year.

We consider the following cases to illustrate the usage. In each case, we will assume a ₹10 lakh base cover and a ₹20 lakh super-top-up with a deductible of ₹10 lakhs:

Cases 1-3 are the same as the top-up policy
Case 4: two claims a year of ₹9 lakhs and ₹5 lakhs: the first claim of ₹9 lakhs is paid by the base; the second claim of ₹5 lakhs is paid in two parts: first ₹1 lakh by the base and the remaining ₹4 lakhs by the super-top up
Case 5: two claims a year of ₹15 lakhs and ₹20 lakhs: the first claim of ₹15 lakhs is paid in two parts: first ₹10 lakhs by the base and the remaining ₹5 lakhs by the super-top up; the second claim is partly paid (10+20-10-5)=15 lakhs by the STU and last ₹5 lakhs out of pocket

Also read
Which are the Best Mutual Fund Categories for every Investment Horizon?

What deductible-based plans are

Both top-up and super-top-up plans are health insurance plans with the same features, due diligence requirement for purchase, and GST features as traditional health insurance policies.

We also get the usual individual or family-floater plans, waiting period for pre-existing diseases and tax deduction under 80D.

What deductible-based plans are not

These plans are not a replacement for the base policy. You cannot expect to save for the base policy by saving the premium in a health emergency fund. Two big claims in successive years will wipe out the fund without triggering the top-ups. Having a deductible-based policy, therefore, does not preclude having a base policy. In fact, unless you have any pre-existing complication that makes a base policy extremely expensive, you must also have a base policy.

If you find the base policy too expensive and are tempted to go deductible only, you should instead explore a sinking fund solely for premiums. This article shows how to do that: A health insurance premium fund: who needs it and why.

What is the correct type of health insurance policy to purchase?

If you have a choice between increasing the base cover vs taking a super top-up:

The right combination = Personal base + super-top-up

You should take:

a base policy of ₹20-30 lakhs for a 2-adult-and-1-child family as a floater plan. Individual plans should be at least ₹15-20 lakhs.
a super-top-up policy of ₹1 crore coverage
you should align the start dates of these policies
buy them from the same insurance company if possible
you should buy them from a trustworthy agent who will help with claims. If you have a ₹30 lakh claim, and recovering at home, the claim process needs to be absolutely flawless that you might not be able to execute without expert help

We are skipping the top-up plan entirely since there is always the chance of having to make multiple claims, which is higher in a floater covering various family members, in a year where a super-top-up is more effective.

Warning: If the insurance companies are different, the super-top-up claim may not be cashless. You must pay for that large sum out of pocket and then make a claim. Having sufficient liquid assets might not always be possible.

What about tax benefits?

Health insurance premiums, whether base, top-up or super top-up all offer tax benefits under Section 80D.

Section 80D deductions: up to ₹25,000 for self and ₹50,000 for senior citizens per year

If is also good to check, if you are thinking about 80D deduction a lot, if the new tax regime will save more tax in your case: : Which is the best tax regime to choose from April?

What to avoid

Nowadays some insurers are offering ₹1 crore base policies at cheap premiums that have the features of super-top built in. Before purchasing such policies check that:

there are no disease-wise sub-limits which means that the policy is effectively only up to that sub-limit and will never give full 1 crore coverage
if they are more expensive than a base + STU combination

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