Lower premiums come at a cost

Sharing the claim burden with an insurer makes sense in auto insurance

Consider this: You want to buy a health insurance plan with a sum insured of Rs 10 lakh but the premium rates are high. The insurer offers to lower it, provided you are willing to share the burden when a claim arises. This way, you get a higher cover that can take care of rising medical costs, and the insurer’s outgo is also lower in case a claim arises.
 
While such arrangements have existed in auto insurance for some time, many companies in the health segment have also started offering them. “The average claim size in auto insurance is smaller than in health, so it makes sense for those with expensive cars to opt for sharing the claim burden. In mediclaim, one needs to do a thorough cost-benefit analysis to see if the difference in premium will actually convert into savings despite claims,” says Neeraj Gupta, head of motor insurance at Policybazaar.com.
 
Auto insurance
 
In auto insurance, companies offer customers plans both with and without a deductible. If a person opts for the latter, he has to contribute a fixed amount from his pocket in case of a claim. The insurer pays anything above it. Most insurers provide four options: Rs 2,500, Rs 5,000, Rs 7,500 and Rs 15,000. If you choose, say, Rs 5,000 as deductible and there’s a claim of Rs 20,000, the insurer will pay only Rs 15,000.
 
In cars that cost below Rs 5 lakh (ex-showroom), the difference in premium with and without the deductible is low. It increases as the price of the car rises. It also makes sense to opt for deductible  from second year of the policy. The annual insurance premium for Maruti Swift LXI in the second year, for example, comes to around Rs 10,570 in Mumbai. If you opt for a Rs 5,000 deductible, the premium will be Rs 8,259 — a difference of Rs 2,311. You only benefit from this arrangement if you have only one claim in two years.
 
In case of a luxury car like Ford Endeavour 4x4 XLT, the second-year premium is Rs 31,883. If you opt for a Rs 5,000 deductible, the premium comes to Rs 26,341 — a difference of Rs 5,542. Your cost is recovered in the first year itself. Those who opt for a plan with deductible do not usually approach the insurer for claims of smaller amounts. This helps in getting a no-claim bonus, which is a significant amount.
 
Another type of customer can also opt for a policy with deductible. “Many car owners buy insurance because it’s mandatory, but don’t want to spend much on it. Getting a third-party policy is not easy. Agents don’t sell it due to lack of commission. Such individuals can opt for a policy with the highest deductible, which will bring down their premium drastically,” says Mahavir Chopra, director-health, life and strategic initiatives, Coverfox.com.
 
Health insurance
 
You can lower your health insurance premium either by opting for the co-pay option, or by going for a fixed deductible, as in auto insurance.
Co-pay: Here, the policyholder has to pay a percentage of the claim. Insurers always had mandatory co-pay for older customers. But nowadays they also offer co-payment as an option to younger customers who wish to lower their premium. Some insurers offer fixed percentages while some, like Bajaj Allianz General and Cigna TTK Health, ask customers to choose from three options: 10, 20 or 30 per cent. Higher the co-payment, lower the premium.
 
If a 40-year-old man opts for a Rs 5.5 lakh cover under Cigna TTK Health Insurance’s ProHealth Protect Plan, the premium comes to Rs 7,131. With a 20 per cent voluntary co-pay, it reduces by 15 per cent to Rs 6,061. In case of Bajaj Allianz General Insurance Health Guard, the difference is around 20 per cent.
 
“Customers who have coverage from their employer or those willing to take some financial risk may opt for co-pay. But we recommend that they read the terms and conditions carefully to understand the maximum possible out-of-pocket expenditure and weigh it against the premium discount,” says Sanjay Datta, chief underwriting claims and reinsurance, ICICI Lombard.
 
Co-pay also makes sense if your sum assured is low, or else your finances could go haywire. Say, you save Rs 2,000 a year on premiums. In 10 years you save Rs 20,000. If there’s a Rs 2 lakh claim and you have a 20 per cent co-pay, you will end up spending Rs 40,000. 
 
Deductible: In health insurance these policies work more like super top-up plans. A person decides the amount he will pay before the insurer steps in. Royal Sundaram General Insurance Lifeline Classic, for example, offers 36 per cent discount on premium if a 40-year-old seeking a Rs 5 lakh cover opts for a Rs 3 lakh deductible. In this case, the company will take care of expenses incurred between Rs 3.01 lakh and up to Rs 8 lakh
 
Nikhil Apte, chief product officer at Royal Sundaram General Insurance, explains that such a plan makes sense for someone with an employer’s group cover. After he leaves the company, he can convert the deductible plan into a regular policy and get full claim settlement. “In the meanwhile, he would have collected a significant amount as no-claim bonus,” says Apte. Adds Shreeraj Deshpande, head of health insurance, Future Generali: "These plans also make sense for the wealthy, who want a high amount of coverage and have the financial wherewithal to pay a few lakh in case a claim arises.”