With the rising cost of healthcare, insurance companies are now coming up with innovative products.  Recently, two insurers, United India Insurance and Star Health & Allied Insurance, have introduced a top-up mediclaim policy that insures a person for larger sum, at much lower cost.  Even ICICI [Get Quote] Lombard has filed for a similar product with the Insurance Regulatory Development Authority (Irda).

These policies are targeted t towards persons who have an existing medical policy (ground policy). If the cost of hospitalisation exceeds the ground policy cover, top-up health insurance takes care of the extra amount.

This product is targeted at people who have an existing policy provided by the employer. These employees can take a top-up, which is 30-40 per cent cheaper, than buying an additional policy said K K Rao, deputy general manager, United India Insurance.

Let's understand the workings with an example. Suppose, a person has a medical policy of Rs 3 lakh from employer or has bought it himself, he has the option of purchasing a top-up of Rs 7 lakh. Now he has a total health insurance cover of Rs 10 lakh.

But it is from two different companies. In an emergency, if this person is hospitalised and the total expenses incurred are Rs 5 lakh the ground policy insurer will pay Rs 3 lakh and the remaining liability of Rs 2 lakh will be borne by the top-up insurer.

For United India Insurance, the policies are available in top-up and super top-up varieties. In the former, the company covers hospitalisations due to only one illness. In the latter, the company covers multiple hospitalisation for different ailments within the policy tenure. Star Health just has one policy, which is similar to United India's top-up.

The top-up policy is cost effective for both users and companies.

Let's compare the top-up policy with the regular medical insurance offered by United India Insurance. For a 35-year old, a regular policy would cost Rs 3,444 for Rs 3 lakh cover. If you add a top-up another Rs 3 lakh, the charges are just Rs 1,400. This is 60 per cent cheaper.

Even a top-up of Rs 7 lakh (Rs 2,500 premium) is 28 per cent cheaper than a regular policy that provides a cover of Rs 3 lakh only. If someone splits its insurance policy in two, the top insurance can help customer to save money, said Rahul Aggarwal, CEO, Optima Insurance Brokers.

For companies it is cheaper because there are very few claims in this segment. The higher the cover, lower is our risk, said RS Nayak, zonal manager, Star Health & Allied Insurance.

According to statistics with United India Insurance, annually out of 1,000 policyholders, the majority of the claims are for covers below Rs 2 lakh. A miniscule 3-5 persons file for claims of over Rs 3 lakh. And around 50 claim Rs 2-3 lakh.

However, top-up insurance policies have restrictions as well. The person can avail a top-up, if it consists of spouse and children only. Parents are not covered in a top-up insurance plan. This is because there is a higher propensity for older people to file claims.

Also, the policies have an exclusion period of three years for pre-existing diseases. But United India still provides a cover of Rs 1 lakh during its exclusion period no matter what is your sum assured.

The terms and conditions of both the policies differ. For instance, United India covers a policyholder for 30-days pre-hospitalisation and 60-days post-hospitalisation periods. Star Health & Allied has a cap on post-hospitalisation charges.
They pay either 7 per cent of the sum insured or a maximum of Rs 30,000. As far as premiums go, Star Health & Allied has a uniform premium for all age groups (for the same sum assured). For United India, the premium rises with the age of the policyholder.

According to financial planners, given that the cost of healthcare is on the rise, top-up insurance is a good option for everyone.