Weigh pros and cons of benefit-based products

While premium of these policies is constant, you could be left without a cover once their term expires

The Insurance Regulatory and Development Authority of India’s (Irdai) October 18 deadline for life insurance companies to stop selling indemnity-based health products has arrived. These companies can, however, continue to sell benefits-based products. Buyers should carefully weigh the pros and cons of such policies before buying one.

Two types of health insurance contracts exist: Indemnity and benefit-based. An indemnity contract refers to one where the insurer restores the insured to the financial situation in which he was before the event. A mediclaim policy falls in this category. When the customer files a claim, the insurer pays him for the actual expenditure incurred.  

In a benefit-based policy, if the conditions of the contract are met, the customer gets the entire sum assured, irrespective of actual costs incurred. A cancer benefit policy is an example of this type of contract. There is no correlation with the expenditure incurred. A hospitalisation cash benefit policy, where the insured gets a fixed sum for each day of hospitalisation, is another example.

As for why the regulator has stopped life insurers from offering indemnity-based products, Rahul Mohata, chief operating officer, Ideal Insurance Brokers, says: “The purpose is to reduce overlap between the product portfolios of life and non-life insurers.” Existing customers will not be affected by the change of rules. “Existing policies will continue till the end of their term. I don't expect any significant impact on quality of service either,” says Arvind Laddha, deputy CEO, JLT Independent Insurance Brokers.

Life insurers will continue to offer benefit-based products. “One benefit of these policies is that they are long-term contracts, so the premium remains fixed for the entire term of the policy,” says Laddha. In an annual renewal policy offered by non-life players, the premium varies according to the age band. The advantage that you get in benefit-based policies is also more clearly defined. “In an indemnity-based policy, there is less clarity about the reimbursement you will get. You may not get reimbursed for many things due to sub-limits, deductibles, etc,” adds Laddha.

The negative of benefit-based policies is that they have a specific tenure. “Once the policy's tenure ends, you may have to approach a general or health insurer for a cover. At a later stage in your life, you may not get a cover, or get it at a higher premium. You will also have to deal with the waiting period for pre-existing diseases,” says Naval Goel, CEO and founder, PolicyX. Nowadays, there are benefit-based policies where the payout depends on the severity of the ailment. “This gives some discretion to the life insurer on how much it will pay you,” says Mohata.

Many of these policies cover you only against one or two diseases. “The probability of incurring those very diseases against which you have bought protection is quite low,” says Goel. He adds that it may be more beneficial to opt for a critical illness cover that protects you against at least 10-15 diseases.  Broadly, experts suggest that you should go with a general or health insurance company for health insurance needs. Once you have boarded a health policy from them, the policies keep getting renewed and you get continuity benefits. Health and general insurance firms may also have better capabilities for claims processing, say experts.