Basic Definition
Definition: Health insurance is a contract between an individual (policyholder) and an insurance company that provides financial coverage for medical and surgical expenses incurred by the insured person.
In simple terms, health insurance is a financial safety net that protects you from the high costs of medical care. When you have health insurance, you pay a regular fee (called a premium) to an insurance company. In return, the company agrees to pay for most of your medical expenses when you need healthcare services.
What You Pay
- ✓ Regular premium (monthly/annually)
- ✓ Deductibles (if applicable)
- ✓ Co-payment (percentage of costs)
- ✓ Non-covered expenses
What Insurance Covers
- ✓ Hospitalization expenses
- ✓ Doctor consultations
- ✓ Diagnostic tests
- ✓ Medicines and treatments
Health Insurance Explained {#explained}
The Risk Pooling Concept
Health insurance works on the principle of risk pooling. Here’s how it works:
- Many people contribute: Thousands of people pay premiums into a common pool
- Insurance company manages the pool: The insurer collects all premiums and invests them
- Few people claim: Only some people will need expensive medical care in any given year
- Pool pays for claims: The collected premiums are used to pay for medical expenses of those who need care
This system allows everyone to be protected from catastrophic medical expenses by sharing the risk. Instead of one person bearing the full burden of a ₹5 lakh surgery, thousands of people contribute small amounts to cover such expenses when they arise.
Types of Coverage
Indemnity Coverage
The insurer reimburses actual expenses incurred, up to the sum insured. Most health insurance policies in India work on this principle.
Benefit Coverage
The insurer pays a predetermined fixed amount when a covered event occurs (e.g., critical illness policies that pay lump sum on diagnosis).
Key Terminology {#key-terms}
Premium
The amount you pay to the insurance company to keep your policy active. Can be paid monthly, quarterly, or annually.
Example: You pay ₹15,000 per year to maintain a ₹5 lakh health insurance policy.
Sum Insured (Coverage Amount)
The maximum amount the insurance company will pay for covered medical expenses during the policy period.
Example: A policy with ₹5 lakh sum insured will cover medical expenses up to ₹5 lakh in a year.
Deductible
The amount you must pay out-of-pocket before insurance coverage begins. Less common in Indian health insurance but may apply to some policies.
Example: With a ₹50,000 deductible, you pay the first ₹50,000 of medical bills, and insurance covers expenses above that.
Co-payment
A percentage of the claim amount that you must pay from your own pocket. Common in senior citizen policies.
Example: With 20% co-payment, if hospital bill is ₹1 lakh, you pay ₹20,000 and insurance pays ₹80,000.
Waiting Period
The time period after purchasing the policy during which certain treatments are not covered.
Example: Most policies have a 2-4 year waiting period for pre-existing diseases.
Cashless Treatment
Treatment at network hospitals where you don’t have to pay from your pocket. The hospital bills the insurer directly.
Example: You get admitted to a network hospital, and the hospital settles the bill directly with the insurance company.
Reimbursement
You pay for treatment first, then submit bills to the insurance company for repayment of eligible expenses.
Example: You pay ₹2 lakh for surgery, submit bills to insurer, and receive reimbursement within 15-30 days.
Network Hospital
Hospitals that have agreements with the insurance company to provide cashless treatment to policyholders.
Example: Max Healthcare, Apollo Hospitals, Fortis are common network hospitals for most insurers.
The Insurance Contract {#contract}
When you purchase health insurance, you enter into a legal contract called an insurance policy. This document outlines:
Your Obligations
- Pay premiums on time
- Provide accurate health information
- Disclose pre-existing conditions
- Inform insurer before planned treatments
- Submit required documents for claims
Insurer’s Obligations
- Pay eligible claims promptly
- Provide policy documents clearly
- Maintain network hospitals
- Offer customer support
- Process renewals smoothly
:::warning[Important Note] Always read your policy document carefully. It’s a legal contract that defines what is covered, what is excluded, and the terms and conditions of your coverage. Don’t rely solely on marketing materials or verbal promises. :::
Parties Involved in Health Insurance {#parties}
1. Policyholder (Insured)
The person who purchases the health insurance policy and pays the premium. This can be an individual buying for themselves or a family member.
2. Insurance Company (Insurer)
The organization that provides the health insurance coverage and pays for covered medical expenses. Must be licensed by IRDAI (Insurance Regulatory and Development Authority of India).
3. Healthcare Provider
Hospitals, clinics, and doctors who provide medical services to the insured person. Network providers have agreements with insurers for cashless treatment.
4. Third Party Administrator (TPA)
Companies that handle claim processing and cashless facility on behalf of insurance companies. They coordinate between hospitals and insurers.
5. Insurance Agent/Broker
Professionals who help you understand and purchase health insurance policies. Agents work for specific companies; brokers compare multiple companies.
Next: Learn How Health Insurance Works
Now that you understand what health insurance is, learn about how it works in practice, including the claims process and different types of coverage.