Concept of Deductible and Co Payment Under Insurance [FCS Deepak P. Singh]



Dear friends,

We have discussed on various occasions the importance of an insurance cover and its benefit to keep us financial viable in case of occurrence of any insured peril. Insurance is a valuable method of transfer and reduction of risk. We generally transfer our risks to the insurance companies on the basis of payment of a small consideration called premium.

An insurance policy is a contract between the insured and the insurance company and should be based on good faith and according to prudent business practices. The insulated is required to disclose all information required truly and the insurance company will also required to disclose the benefits of products and the terms and conditions associated with it.

The insurance companies to fix liability on the insure to behave utmost care impose some conditions and restrictions in the insurance policy according to approved regulations by the IRDAI.

These conditions to the some extent force insured to take care ,act safely and in prudent manner against the insured peril and take care of himself or insured interest  in the same way as if he has not taken insurance.

LET’S CONSIDER WHAT ARE DEDUCTIBLE & CO-PAYMENTS;

DEDUCTIBLE : is the amount that a policy holder has to pay before the insurance company starts paying up. In other words, the insurance company is liable to pay the claim amount only when it exceeds the deductible. If the deductible of your policy is Rs 30,000 and the claim by the insured is Rs 40,000, then the insurance company is liable to pay only Rs 10,000.

However, if the claim amount is less than the deductible, the insurer is not liable to pay any amount. For high deductible policies, the premium is lower while the low deductible policies have a higher premium.

SIGNIFICANCE OF DEDUCTIBLES IN HEALTH INSURANCE: Deductibles prevent people from making trivial claims or go in for unnecessary treatment and hospitalisation just because they have insurance cover. Policies with high deductibles mean that you pay a lower premium which is a benefit for you over the years. You do not file unnecessary claims for small amounts and receive a No Claim bonus. The cumulative bonuses help to increase the coverage amount in the long run. The flip side of a deductible is your insurance cover is practically useless if your treatment costs do not exceed the minimum specified deductible.

CO-PAY CLAUSE IN HEALTH INSURANCE: A co-pay is a fixed amount that the insured has to pay for a covered medical service and the insurer takes care of the rest of the amount. The co-pay amount depends on the nature of the treatment and medications. If your policy has a co-pay clause of 10% and your claim is Rs 50,000, then you will have to pay Rs 5,000. The remaining amount will be covered by the insurer.

DEDUCTIBLE & CO-PAYMENT NOT TO REDUCE THE SUM INSURED

In a case whether the admissible amount is more than Sum Insured , a question may arise about sequence of application of two clauses -Sum Insured and deductible.

LET’S CONSIDER Mr. X has a policy having Sum Insured of Rs. 3.00 Lakhs and a deductible of Rs. 0.25 Lakhs. He was hospitalised and his admissible claim was of Rs. 3.50 Lakhs. There are two ways of dealing this matter;

1.     Apply deductible first- as follows

Total admissible claim- Rs. 3.50 Lakhs

Less: deductible           - Rs. 0.25 Lakhs

Net admissible claim.-  Rs. 3.25 Lakhs

Balance Claim payable – Rs. 3.00 Lakhs ( the net claim Rs. 3.25 Lakhs or sum insured of Rs. 3.00 Lakhs  whichever is less). In this case Mr. X will bear Rs. 0.25 Lakhs out of his pocket.

2.     Apply Sum Insured first-

Total admissible claim- Rs. 3.50 Lakhs

Less: Sum Insured        - Rs. 3.00 Lakhs

Net  Claim payable – in this case the maximum claim will not exceed Sum Insured.

If we employ deductible then net claim payable will be =Rs. (3.00 -0.25) Lakhs =Rs.2.75 Lakhs and hence Mr. X will bear Rs.( 3.50-2.75) Lakhs=Rs. 0.75 Lakhs out of his pocket.

The IRDAI to remove above difficulty standardised the definition , stating that a Deductible Clause shall not reduce the Sum Insured. It means , the Deductible Clause should apply first. Thus the correct method is first apply deductible from the net amount of claim payable and them apply condition of Sum Insured. The first method applied in above example if the right method.


PLEASE NOTE THAT: if your insurance claim amount is less than deductible specified in insurance policy then nothing will be payable by the insurance company. In above example suppose admissible expenses will be Rs. 0.20 Lakhs ,then in this case nothing is payable to Mr. X from the insurance company. The deductible will be applicable on each and every claim by the insured during the year.

CO-PAYMENTS; the co-payment is the conditions in which insured has to pay certain amount of each claim lodged by him. Suppose in insurance policy of Rs. X there is co-payment conditions of 10% then Mr. X has to pay @10% of Rs. 3.00 Lakhs i.e. Rs. 0.30 Lakhs out of his pocket in first case.

CONCLUSION: The purpose of co-pay clause is to discourage people from making trivial or unnecessary claims and also to reduce burden on the insurers. If people have MEDICAL INSURANCE, they assume they can undergo treatment at the most expensive hospitals. Co-pay acts as a deterrent. Whether one needs to opt for a deductible or co-pay insurance depends largely on several factors - present and past medical condition, lifestyle, pre-existing illness, good physical condition etc.

Both  deductible and co-pay are intended to make the insured a stakeholder in how the Hopitalisation expenses are incurred , so that some some element of cost saving happens in selection of health care provider. These clause discourage insured to lodge frequent claims for smaller amount. The insured is also become responsible and take care to protect insured interest and also insurance companies save their time and resources in handling small amount of claim lodged.  

It is advisable to go through these clauses while applying for insurance.

DISCLAIMER: the above article is only for information and knowledge of readers. It is advisable to consult with your insurance advisor for more clarity and information on above mentioned clauses.

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