Multi-year health insurance: Lock in premiums, but check exit rules first

Multi-year health insurance plans offer premium stability and upfront discounts, but buyers should weigh flexibility, portability and future healthcare needs

Multi-year health insurance policies, for which customers pay the premium for several years upfront, are gaining traction. Experts estimate that such policies now account for around 10 to 15 per cent of health insurance policies sold in the country. 

How these policies work 

A long-term retail health insurance policy is a standard individual or family health insurance plan bought for more than one year. The core product design remains identical to an annual policy. “Policy benefits work on a per-policy-year basis irrespective of the tenure chosen. The base sum insured resets at the start of each new policy year, regardless of the policy tenure,” says Vineet Gupta, head of  product development, ManipalCigna Health Insurance. 

Most insurers offer one-, two- or three-year policy tenures. “The three-year option is the most common in the market. Only a few insurers offer tenures of up to five years,” says Gupta. 

Why buyers go for them 

Insurance premiums have been rising steadily. “Customers are using multi-year policies to lock in premiums for a few years. This shields customers from annual rate revisions during the chosen tenure,” says Gupta. New pricing applies only when the policy comes up for renewal. 

 Customers also get a discount, especially when the annual increase in premium is factored in. The discount is offered only if the entire multi-year premium is paid upfront. “It does not apply if the customer pays the premium in instalments,” says Gupta. 

The discount varies from company to company, as there is no fixed industry standard. “There are no regulator-prescribed discounts for long-term health insurance policies,” says Kapil Mehta, co-founder, SecureNow Insurance Broker. 

A four- or five-year policy generally offers a discount of 10 to 12.5 per cent, according to Mehta. 

Flexibility lost

 

The biggest drawback of a multi-year policy is the restriction on porting before the term ends. “Porting can be done only at renewal,” says Gupta. 

Changes within the same plan also have to wait until the end of the term. “Benefits such as consumables, annual health check-ups and outpatient department (OPD) cannot be added mid-term,” says Siddharth Singhal, head of health insurance, Policybazaar. 

Policyholders can cancel their policy before the policy term ends. 

What happens on policy cancellation 

Under current regulations, the refund is proportionate if a policy is cancelled. “If a five-year policy has run for one year, the premium for the remaining four years would be refunded,” says Singhal. 

Policyholders should check the policy document or speak to the insurer for exact details on refund and deduction.

“No refund is applicable for the policy year in which a claim has been made,” says Gupta. Mehta cautions that the insurer will also adjust the refund for the discount given upfront. 

Who should buy 

A long-term retail health insurance policy is suitable for buyers seeking cost certainty and savings on their health cover. “Buyers should be committed to staying with the policy for the full term,” says Mehta. These plans may work well for individuals with stable cash flows and those who wish to avoid the administrative burden of annual renewals. They can also suit young adults and families looking to lock in premiums at lower age-bracket slabs. 

Who should avoid 

Buyers who expect their family situation to change should be careful. A single person planning to marry soon may need the flexibility to add a spouse later. A young customer planning maternity may need a plan with maternity benefit later.

“Senior citizens and individuals with fluctuating incomes may need to avoid long-term policies because a large lump-sum payment can strain liquidity,” says Abhishek Kumar, a Securities and Exchange Board of India (Sebi)-registered investment adviser and founder, SahajMoney.com.

 

Individuals planning to migrate abroad or switch insurers may find their capital locked up inefficiently. Customers should also avoid committing to a multi-year tenure if they expect to increase the sum insured during that period. “Those who may need to finance the lump-sum premium should also avoid this option,” says Kumar. 

Checks before you commit 

Customers should evaluate whether the policy suits their current and future healthcare requirements. “Existing policyholders should check whether their insurance cover is sufficient, given medical inflation and possible changes in age or health situation,” says Narendra Bharindwal, president, Insurance Brokers Association of India (IBAI). 

“Customers should analyse the exclusions, waiting period, sub-limit (especially the room-rent ceiling, if any), co-payment clause, and restoration provision before buying,” says Bharindwal. 

They should also consider useful add-on benefits before buying: Consumables, annual health check-up, OPD benefit, and maternity riders, if required. “Customers should choose an insurer with a high claim settlement ratio and a robust hospital network,” says Kumar.

 

What happens at renewal

 

New pricing applies only when the policy comes up for renewal at the end of the policy tenure. The renewal premium may change because of the customer’s age. As customers age, their propensity to claim rises, so premiums are structured to rise with age. Most plans increase premiums in age blocks of five years.

 

Health insurance premiums also increase because insurers revise rates to reflect medical inflation. “These revisions depend on the insurer’s portfolio performance, which in turn depends on the premium collected and claims paid,” says Singhal.

 

Bharindwal says customers should be ready to pay more at the time of renewal. “The increase could range from 5 to 7 per cent in some cases, and from 12 to 14 per cent in others,” says Singhal. 

How Section 80D applies 

The full multi-year health insurance premium cannot be claimed entirely in a single year under Section 80D. “The total premium must be claimed proportionately over the policy term, subject to the applicable annual Section 80D limits under the old tax regime,” says Kumar. 

Taxpayers under the new tax regime cannot claim this deduction. 

Avoid financing the premium 

Customers should avoid using high-interest equated monthly instalments (EMIs) to pay for a long-term policy. “Total interest charges and processing fees on a loan often surpass the 10 to 15 per cent upfront discount. Financing a long-term premium often makes the policy more expensive than buying a standard annual plan,” says Kumar.