A health insurance policy can promise Rs 25 lakh in cover and still leave a family paying a hospital bill largely out of its own pocket. The problem lies in the conditions attached to that headline figure — and in the incentives of the person selling the policy. When commissions influence which products are recommended, a family may end up with substantial cover on paper but inadequate protection when it needs it most.

In this Q&A, Pavan Choudhary, Chairman of the Medical Technology Association of India (MTaI), explains how commission structures can contribute to mis-selling, why top-up policies require particular care, and how insurers and regulators can ensure that sales incentives serve the interests of policyholders. “The incentive for a top-up, or any variant built on top of a base policy, must never be designed so insensitively that it becomes a reason for the seller to compromise the buyer’s interest for his own gain,” says Choudhary.

Why is health insurance so easy to mis-sell?

Buyers naturally rely on agents, brokers and bank staff to explain the schemes. The trouble is that the person explaining the policy is usually paid by the insurer whose policy they recommend. The adviser and the seller are often the same person.

What is a top-up and why can its headline cover be misleading?

A top-up is an additional policy that pays only the portion of a hospital bill above a specified deductible. It is relatively inexpensive because it pays only after that threshold has been crossed. Suppose you have a Rs 5 lakh base policy and a Rs 20 lakh top-up with a Rs 5 lakh deductible. Together, they are sold as Rs 25 lakh of cover. But if a family member is hospitalised and the bill is Rs 3 lakh, the top-up pays nothing because the bill has not crossed the Rs 5 lakh threshold. Only the base policy helps.

The difference between a top-up and a super top-up becomes important when there are multiple hospitalisations in a year. If two hospital bills are Rs 3 lakh and Rs 2.5 lakh, an ordinary top-up assesses each bill separately. Neither crosses the Rs 5 lakh deductible, so neither triggers a payout. A super top-up adds the eligible bills together. The total comes to Rs 5.5 lakh, so it pays the Rs 50,000 above the deductible, subject to the policy terms.

Top-ups are not bad products. They can be a smart, low-cost way to guard against very large hospital bills. But buyers need to understand their limitations. A top-up depends on the base policy to cover expenses below the deductible. If the base policy lapses, the family must fund those expenses from its own savings. A new top-up may also have its own waiting periods for pre-existing illnesses, even if those illnesses were declared under the base policy. And the two policies may have different room-rent limits, exclusions or hospital networks, so a bill accepted under one may be restricted under the other.

The problem is selling a conditional product on the strength of its headline cover rather than explaining how that cover works.

How can a policy holder redress grievances?

When an insurer’s own grievance process fails, a policyholder can approach the Insurance Ombudsman, a free, independent forum for eligible insurance disputes of up to Rs 50 lakh. According to the Council for Insurance Ombudsmen’s annual reports, complaints against health insurers rose from 25,873 in 2022–23 to 32,655 in 2024–25, with claim rejection identified in the interview as the biggest single reason.

What would better consumer protection look like?

The Consumer Protection Act, 2019, rests on a simple idea: people should make informed choices, not merely receive technically correct information. IRDAI’s Customer Information Sheet is a useful step. The next question should not be whether information was disclosed, but whether it was understood.

That need not mean more paperwork. A deductible can be explained through three claim scenarios, and a co-payment can be translated into rupees. Before recommending a top-up, a distributor could complete a short needs assessment covering existing insurance, family size, medical history and affordability of the deductible. The distributor should also confirm that the base policy is adequate and active.

Each recommendation could come with a one-page note explaining why the product was suggested and its three biggest limitations. On the proposal form, agents should ask specifically about past diagnoses, medicines, surgeries and tests rather than simply asking whether the person is healthy.

A simple “teach-back” question could help most. Instead of asking customers to tick a box confirming that they understand the deductible, ask: “If the hospital bill is Rs 3 lakh and the deductible is Rs 5 lakh, how much will the top-up pay?” This establishes whether the customer understands the policy before the sale, rather than leaving the family to discover the gap in the hospital.

Insurance sold through banks needs particular care. Customers carry their trust in the bank over to the insurance sold at its counter. RBI already requires such purchases to be voluntary and bars linking them to banking services. Customers should be told plainly that refusing insurance will not affect the loan, deposit or locker they came for.

What is the overall fix?

Insurers and regulators could track warning signs for each distributor, including free-look cancellations, policies that are not renewed, needless replacements, mis-selling complaints and upheld grievances. Where serious mis-selling is formally established, commission could be clawed back. For top-ups, remuneration could be linked to the base policy remaining in force, so that no one profits from selling the upper floor while the ground floor crumbles.

Getting there requires insurers, hospitals, IRDAI, consumer authorities and the Insurance Ombudsman system to work together. There must also be a concerted public-awareness effort so that other aggrieved policyholders know these safeguards are available.

The Indian Express