Deductible

A deductible is the first slice of every claim, and the insured owns it. The workbook's definition: the portion of the claim that is paid by the insured person, after which the claim becomes admissible.

It does two jobs at once. It removes the administrative cost of settling trivial claims, and it lowers the premium — the insured is, in effect, retaining part of the risk instead of transferring it.

In motor insurance the workbook gives a live figure: car insurance in India has a compulsory deductible of Rs 1,000 for cars with an engine capacity of up to 1600 CC. On a claim ascertained at Rs 25,000, the insurer pays Rs 24,000.

In health insurance, the claim is payable only when the insured has paid the deductible amount — either from his own funds or from any other health insurance policy. That second route is what makes top-up architecture possible. The company is liable only if the claim exceeds the deductible.

Two kinds.

1. Compulsory deductible — fixed by the insurance company, or expressed as a percentage of the sum assured. The workbook's example: a compulsory deductible of Rs 30,000 against a hospitalisation bill of Rs 80,000 means the company pays Rs 50,000 and the insured bears Rs 30,000. Premiums are calculated after factoring the deductible in. Top-up and super top-up policies are designed with a fixed deductible amount, and their premiums are lower than a base plan of the same coverage.
2. Voluntary deductible — chosen by the insured according to affordability. The higher the deductible chosen, the lower the premium.

Top-up versus super top-up — where the deductible is applied. The workbook is precise, and this is the examinable distinction. Both pay above a pre-agreed threshold, also called a deductible. The difference is how the threshold is applied: in a top-up plan the threshold is applied to every claim; in a super top-up plan the threshold is applied to the total of all hospitalisation claims for the year.

That single difference decides whether a series of moderate claims is covered at all. A top-up with a Rs 5 lakh threshold pays nothing on four separate Rs 2 lakh and Rs 4 lakh claims, because no individual claim crosses Rs 5 lakh. A super top-up with the same threshold pays them, because the threshold is exhausted once, cumulatively.

The workbook's Chapter 20 case study, Question 6. Fahad has a base health policy of Rs 3 lakh and a super top-up of Rs 10 lakh with a Rs 3 lakh deductible. He faces three claims in the year: Rs 2 lakh, Rs 3 lakh and Rs 4 lakh — Rs 9 lakh in all.

The answer is nil out of pocket, and the reason is that the Rs 3 lakh deductible was satisfied across the year, not claim by claim, and was satisfied by payments made under another policy — the base plan.

Change one word and the answer changes completely. Make it a top-up instead of a super top-up. The Rs 3 lakh threshold now applies to each claim. The Rs 2 lakh claim is below it. The Rs 3 lakh claim does not exceed it. Only the Rs 4 lakh claim crosses, and only by Rs 1 lakh. The top-up would pay far less, and Fahad would be out of pocket for the balance once the Rs 3 lakh base was gone.

Why anyone buys the structure. A base plan of Rs 5 lakh plus a super top-up of Rs 10 lakh above a Rs 5 lakh deductible gives Rs 15 lakh of total coverage at an economical premium, because the super top-up premium is quite low. The workbook adds the honest caveat: a single Rs 15 lakh policy is not much more expensive, the small difference being the administrative simplicity of one policy — and super top-ups remain ideally suited to employees topping up an employer cover.

Chapter 1, section 1.4(f), defines it and splits it into compulsory and voluntary; Chapter 3, sections 3.1.1 and 3.2, apply it to non-life products and to the top-up versus super top-up table; Chapter 20, Question 6, is the computation. Expect the multi-claim super top-up case, and a conceptual question on where the threshold is applied — per claim or per year.

• Top-up: threshold per claim. Super top-up: threshold on the year's total claims. This one sentence decides most questions on the topic.
• The deductible may be met from another policy. A base plan's payments can satisfy a super top-up's deductible — which is the whole design.
• A deductible is a rupee amount; a co-pay is a percentage. Where both apply, the deductible comes off first.
• Higher deductible means lower premium, which is why a voluntary deductible exists at all.
• Rs 1,000 compulsory motor deductible applies to cars up to 1600 CC — the workbook gives that engine limit, so do not quote the figure without it.
• A deductible is not the sum insured, and it is not the co-pay. Three different numbers in the same policy schedule.
• A deductible reduces what the insurer pays on every claim, so a large voluntary deductible bought for a cheap premium is a genuine retained risk, not a discount.