A health insurance policy is a yearly contract: you pay the insurer a premium, and the insurer promises to pay hospital bills up to a limit — the sum insured — if you fall sick or have an accident. That is the whole product. Everything else is detail.
Why it matters: a single hospitalisation in a private Indian hospital can cost a few lakh rupees — often more than a family saves in a year or three. Health insurance moves that risk from your savings to the insurer for a premium that is a tiny fraction of the bill. Skipping it to "save money" is the most expensive saving there is.
How a policy actually works
You pick a sum insured — say ₹5 lakh or ₹10 lakh for the family — pay the yearly premium, and the insurer pays eligible treatment costs up to that limit in the policy year. Two ways to claim:
- Cashless — the insurer settles the bill directly with a network hospital. You pay little or nothing at the counter. Since the 2024 IRDAI rules, the insurer must decide a cashless request within one hour of receiving it.
- Reimbursement — you pay first, then file the bills. The insurer must settle or reject within 30 days of receiving the last necessary document (45 days if an investigation is needed), and pays penal interest at 2% above the bank rate if it delays.
The fine print that decides your claim
Three words to check before buying:
- Waiting periods — claims in the first 30 days are generally limited to accidents; named diseases like hernia or cataract typically wait 1–2 years; and pre-existing diseases are covered after a waiting period that IRDAI capped at 3 years (36 months) in April 2024. Many policies now offer shorter or even day-one PED cover.
- Moratorium period — after 60 months of continuous coverage, the insurer cannot contest a claim on grounds of non-disclosure or misrepresentation (proven fraud excepted). Your waiting-period credits carry forward on renewal, porting or migration.
- Room rent and co-pay sub-limits — a cheaper policy that caps the room category or makes you pay 10–20% of every bill can quietly gut a large sum insured. Read these two lines before the price.
You also get a free-look period of 30 days from receiving the policy document to return it if the terms don’t suit you, and a grace period (15 days for monthly premium modes, 30 for yearly) to pay a renewal without losing credits.
The tax angle: Section 80D
Premiums qualify for a deduction over and above the ₹1.5 lakh 80C limit — but only under the old tax regime. From FY 2026-27 the rule lives in Section 126 of the Income-tax Act, 2025; the numbers are unchanged.
| Who is covered | Deduction |
|---|---|
| Self, spouse, dependent children | ₹25,000 |
| Same, if any insured person is 60+ | ₹50,000 |
| Parents (separate bucket, any age) | ₹25,000 → ₹50,000 if senior |
| Preventive health check-up (within the limits above) | ₹5,000 |
Maximum combined: ₹1,00,000 a year (senior self + senior parents). Payment must be non-cash, except the check-up. If a senior citizen has no policy at all, their actual medical expenses count instead, within the same bucket.
How much cover is enough?
A common planning rule: cover at least 50% of your annual income, and no less than ₹10 lakh for a family in a metro, because a serious illness (cardiac, cancer) in a good hospital can cross ₹10–15 lakh across surgery and follow-ups. Top-up plans let you add large cover cheaply once the base is in place.
Health insurance and an emergency fund solve different problems: the fund handles deductibles, non-covered costs and income gaps during recovery; the policy handles the big bill itself. You need both. And just as a credit score prices your loans (see What is a credit score?), your claims history and disclosure honesty decide how smoothly your policy pays out.
Confused about which policy?
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Message IFI on WhatsApp →Quick recap
- Health insurance swaps a possibly huge hospital bill for a small yearly premium.
- Sum insured is the yearly payout cap; cashless means the insurer pays the hospital directly.
- IRDAI 2024 rules: cashless decision in 1 hour, claims settled in 30 days, pre-existing diseases covered within 36 months, and no contesting claims after 60 months of continuous cover.
- Premiums save tax under Section 80D / Section 126 — old regime only, up to ₹1,00,000 with parents.
- Aim for at least ₹10 lakh of family cover, and keep an emergency fund alongside.
Frequently asked questions
What is the difference between a premium and a sum insured?
The premium is what you pay the insurer every year to keep the policy alive. The sum insured is the maximum the insurer will pay for treatment in a policy year — for example a ₹15,000 premium might buy ₹5 lakh of cover.
What is the difference between cashless and reimbursement?
In a cashless claim the insurer pays the network hospital directly, so you pay little or nothing upfront. In reimbursement you pay the hospital first and file the bills with the insurer afterwards, within the policy timelines.
What is the moratorium period in health insurance?
After 60 months of continuous coverage, an insurer cannot contest a claim on grounds of non-disclosure or misrepresentation, except for proven fraud. Waiting periods and no-claim credits carry forward when you renew, port or migrate the policy.
How much tax deduction does health insurance get?
Under Section 80D (Section 126 of the Income-tax Act 2025 from FY 2026-27), the premium for self and family gets up to ₹25,000, rising to ₹50,000 if any insured person is a senior citizen; a separate ₹25,000 to ₹50,000 bucket covers parents. The deduction is available only under the old tax regime.
Is employer-provided group health cover enough?
Group cover is a good free base but usually has modest sum insured, may end the day you change jobs, and often does not cover parents without extra premium. Many advisers suggest treating it as a supplement to a personal policy you control, not a replacement.