Health Insurance: Meaning, Features, Importance, Examples, and Real-Life Applications

 

Definition of Health Insurance

Health Insurance is a financial contract between an individual (or group) and an insurance provider, where the insurer agrees to cover medical expenses—such as hospitalization, surgery, medicines, or preventive care—in exchange for a regular premium. It is both a financial protection tool and a risk management mechanism, reducing the economic burden of unexpected health costs.

Detailed Meaning of Health Insurance

Health insurance functions as a safety net. In today’s world, healthcare costs are rising rapidly. Without insurance, an individual may spend a large portion of their income or savings on treatments. Health insurance solves this by pooling risks: policyholders pay premiums, and the insurer uses that pooled fund to cover medical claims.

In economics and business terms, health insurance is a form of risk transfer and resource allocation, ensuring financial stability for households and reducing uncertainty for employers providing employee coverage.

Sub-Sections of Health Insurance

Types of Health Insurance

• Individual Health Insurance – Covers one person.

• Family Floater Plans – Coverage for the whole family under a single sum insured.

• Group Health Insurance – Offered by companies to employees.

• Critical Illness Plans – Covers life-threatening diseases like cancer or heart attack.

• Government Schemes – Public health insurance like Ayushman Bharat in India.

Key Stakeholders

• Policyholder – The person insured.

• Insurance Company – The risk bearer.

• Healthcare Providers – Hospitals, clinics, doctors.

• Regulators – Government authorities ensuring fair practices.

Formula/Calculation in Health Insurance

Health insurance is not a direct accounting term, but its premium calculation often follows actuarial formulas.

Basic Premium Formula:

$$Premium = (Probability \, of \, Illness \times Expected \, Medical \, Cost) + Administrative \, Costs + Profit \, Margin$$

Example Calculation

Suppose:

• Probability of hospitalization = 5% (0.05)

• Average cost of hospitalization = ₹1,00,000

• Administrative expenses = ₹2,000

• Insurer’s profit margin = ₹3,000

$$Premium = (0.05 \times 100,000) + 2,000 + 3,000$$
$$Premium = 5,000 + 2,000 + 3,000 = ₹10,000$$

So, the annual premium would be ₹10,000.

Key Features of Health Insurance

• Risk Coverage – Protects against unpredictable healthcare costs.

• Premium Payment – Fixed, periodic payments.

• Sum Insured – Maximum coverage available under the policy.

• Cashless Treatment – Direct settlement at network hospitals.

• Tax Benefits – Under Section 80D of the Indian Income Tax Act.

• Pre-existing Disease Coverage – Covered after a waiting period.

Importance and Role in Business

• Employee Retention – Companies offering group health insurance attract and retain talent.

• Financial Planning – Reduces risk of unexpected expenses for individuals.

• Corporate Social Responsibility (CSR) – Promotes employee welfare.

• Macroeconomic Stability – Lessens public health burden on governments.

Advantages of Health Insurance

• Financial security against medical emergencies.

• Tax-saving opportunities.

• Access to better healthcare facilities.

• Encourages preventive check-ups.

Disadvantages

• Premium costs may be high for older people.

• Complex terms and conditions.

• Limited coverage in basic plans.

• Claim settlement delays in some cases.

Usage of Health Insurance

• For individuals: Financial protection.

• For companies: Employee welfare benefit.

• For governments: Public health financing.

• For economists: Studying risk-pooling and healthcare demand.

Case Studies of Health Insurance

Case Study 1 – India: Ayushman Bharat Yojana

Launched by the Government of India, it provides health coverage up to ₹5 lakh per family per year for low-income households. Over 50 crore citizens are eligible, showing the macro impact of health insurance on social welfare.

Case Study 2 – USA: Affordable Care Act (Obamacare)

The ACA expanded health coverage to millions of uninsured Americans. This demonstrates how government regulations shape the health insurance market.

Practical Example

Mr. Raj, a 35-year-old, buys health insurance with a coverage of ₹5 lakh. He pays a yearly premium of ₹12,000. Later, he undergoes surgery costing ₹3 lakh. The insurer pays the hospital directly, and Raj saves his savings from depletion.

Common Mistakes or Misunderstandings

• Believing employer-provided insurance is sufficient.

• Ignoring waiting periods for pre-existing diseases.

• Choosing lowest premium without checking coverage.

• Assuming insurance covers every expense (e.g., cosmetic surgery is excluded).

Real-Life Applications and Legal Implications

• Personal Finance – Helps individuals manage medical risks.

• Corporate Sector – Employers use group health policies.

• Legal Requirement – In some countries, health insurance is mandatory.

• Economics – Plays a role in reducing poverty caused by healthcare expenses.

FAQs on Health Insurance

Q1. Is health insurance mandatory in India?
No, but it is highly recommended. Some states mandate certain insurance for workers.

Q2. Can I claim tax benefits on health insurance?
Yes, under Section 80D of the Income Tax Act.

Q3. What is cashless hospitalization?
When your insurer directly pays the hospital without you needing to pay first.

Q4. Does health insurance cover COVID-19?
Yes, most insurers now cover COVID-19 treatment.

Q5. Can I buy multiple health insurance policies?
Yes, and you can claim from both, subject to rules.

Expert Tip from Learn with Manika

When buying health insurance, don’t just compare premiums—analyze the claim settlement ratio, network hospitals, and exclusions. Always choose coverage that grows with medical inflation.

Related Terms

• Life Insurance
• Premium
• Deductible
• Risk Pooling
• Health Economics
• Actuarial Science
• Insurance Claim
• Copayment