Most health insurance policies come with additional benefits in addition to the basic coverage for the policyholder.
The two add-ons to the sum assured are No Claim Bonus and Recovery Benefit. These features help enhance health insurance.
But should you rely on no-claims bonuses and reinstatement benefits instead of larger high-limit health insurance?
In order to better understand the current issues and make informed decisions, it is important to understand how these two features work and whether they can be relied upon entirely to provide adequate coverage to policyholders in all circumstances.
When no claim bonus may not be paid
Most health insurance policies offer a no-claims bonus of up to 10% of the basic sum assured for each claim-free year. However, there are limits on the amount of the no-claims bonus.
So, for example, if your health insurance cover has a sum assured of Rs 5 lakh and it provides 10% no-claims bonus for every claim-free year, you will get an additional Rs 50,000 at the end of the first policy year. At the end of the second year, you will get a bonus of Rs 1 lakh (Rs 50,000 plus Rs 50,000) and so on. However, insurance companies limit the maximum limit for non-cumulative bonuses in health insurance policies, which is usually 50% of the basic sum insured, but can also be as high as 100%. In the above example, at the end of the fifth claim-free year, you will get a cumulative bonus of Rs. 2.5 lakh, which is 50% of the basic sum assured.
Therefore, your total sum assured will be Rs. 7.5 lakh (Rs. 5 lakh plus Rs. 2.5 lakh).
But if you make a claim in the sixth year, most health insurance companies will proportionally reduce the no-claims bonus. So, your basic cover in the seventh year will be Rs 5 Lakhs and the jackpot will be Rs 2 Lakhs only, making a total of Rs 7 Lakhs. One more claim was made and the jackpot was reduced to Rs 1.5 lakh.
Therefore, you cannot permanently claim the total cover of your policy of Rs 7.5 lakh after five years of no claims as each subsequent claim will reduce the bonus applicable in the next year.
Another aspect to note is that if there is a limit on the room rental allowed in the basic policy – for example, 1% of the sum assured; then the accumulated bonus will not be added to calculate the one percent figure. So, in the above example, if the room rent is capped at 1%, then it will be 1% of Rs 5 Lakhs and not Rs 7.5 Lakhs.
Restoration benefits, not useful in all situations
Reinstatement benefits will supplement the sum assured in the health insurance policy when the sum assured is exhausted after a claim. But there are some nuances.
Most insurance companies only allow one top-up in a policy year, usually 50-100% of the basic sum insured. However, top-ups are only allowed if the entire basic sum assured is exhausted in a single claim. For example, suppose your policy amount is Rs 15 lakh and you make a claim of Rs 10 lakh. Restoration benefits will not be triggered. Also, if you make another claim of Rs 7 lakh in the same year, you will have to pay Rs 2 lakh from your own pocket and the balance of Rs 5 lakh in the policy will be paid by the insurance company.
Furthermore, recovery benefit cannot be claimed in case of subsequent hospitalization during the policy year due to previous hospitalization and claim-related illness.
Recovery benefits in most policies also do not apply to critical illness. Additionally, if you transfer your health insurance policy to another provider, the coverage is not transferable.
What should health insurance policyholders do?
While no-claims bonuses and recovery benefits are great add-ons because they add comfort by supporting your base, they are not a replacement for the sizable base itself.
As you can see from the above examples, both features have drawbacks, and relying on them all the time can be counterproductive.
You should buy a policy that’s large enough (or a floater if you’re adding family members) to meet your needs and treat these features as merely useful add-ons. Coverage must be reviewed periodically to increase the amount insured. If needed, super supplemental health insurance can be purchased to enhance your overall coverage.