How Does Health Insurance Work?

The health insurance sector in India is a multi-billion-dollar industry. Despite that, 73% of Indians still lack personal health insurance, according to a report by the National Insurance Academy. The Union Budget for 2025 has directed increased investment into the healthcare sector to promote health insurance penetration. Yet, there is a huge knowledge gap regarding health insurance in India. 

(So, we thought that it’d be appropriate for us to attempt to bridge that. )

This article sheds some light on how using health insurance actually works and gives you an overview of the Top 5 best health insurance plans in India in 2025. Time to dive in!

Heads up! We know that health insurance can be overwhelming – but it doesn’t have to! Our IRDAI-certified advisors at Ditto assess your healthcare requirements and can help you pick the right policy. And the best part? We don’t spam or pressure you to buy.

What is health insurance?

A health insurance is a financial, medical, and legal contract between the insured and the insurer that states the coverage scope, limitations, and exclusions in the policy. The person purchasing the policy (policyholder/insured) pays a predetermined sum (premium) to the insurance company at regular intervals. At the same time, the latter promises to pay the insured's hospital bills and other medical costs up to a certain limit in case they undergo hospitalisation. The concept transfers financial risk from the insured to the insurer(insurance company). 

Key Terms to Understand Health Insurance

• Sum Insured / Coverage: The sum insured/coverage is the maximum amount of money an insurance company will pay if the policyholder makes a claim. Your base coverage resets to the original sum insured after every policy year. Although there is no hard and fast rule when choosing the cover amount, selecting a sum insured that aligns with your medical needs and lifestyle while offsetting the rising cost of healthcare in India is generally recommended.  
• Premium: The premium is the sum of money you pay periodically to your insurer to avail of the health insurance benefits. It’s the money in exchange for which the insurance company promises to cover your medical expenses. Although a higher sum insured almost always leads to a higher premium, the latter also heavily depends upon factors such as age, location, lifestyle, BMI (Body Mass Index), and other medical conditions that you may have. Premiums can generally be paid annually whereas a few insurers offer other frequencies as well.
• Insurer / Insured: The insurance company issues the health insurance policy and takes on the financial risk of future medical expenses. It also sets the policy terms that the insured must follow to make a claim. The insured refers to the person or people covered under the policy. It is important to distinguish between the proposer and the insured/policyholder - the proposer buys the policy and yet may/may not be a part of the plan (for example, a son buying a plan for his parents or vice versa), but a policyholder implies an individual covered under the plan. 
• Claims: A claim is a monetary request made by the insured to the insurer to cover the medical expenses as per policy terms. Claims can either be settled on a cashless or a reimbursement basis. Documents such as hospital bills, discharge summaries, diagnostic reports, and prescriptions may be required for claim approval.
• Exclusions: Health insurance exclusions fall into permanent and PED-based categories. Permanent exclusions cover lifestyle-related illnesses, elective procedures, unproven treatments, and high-risk activities like self-harm, substance abuse, and professional adventure sports. PED exclusions vary by insurer—severe conditions like cancer may lead to coverage denial due to high claim risk, even if it is already in remission.
• PED: A pre-existing disease (PED) condition is any medical condition diagnosed by a physician or for which treatment was recommended or received within 36 months before purchasing health insurance. However, we strongly suggest that you disclose any medical conditions you may have been diagnosed with since birth, including congenital disorders. 
  
  PEDs impact insurance in two ways: insurers typically impose a waiting period before coverage begins and may apply loading charges to increase premiums. In cases of severe conditions like cancer, insurers may even reject the application to mitigate risk, as individuals with PEDs have a higher likelihood of making claims. Some insurers might offer add-ons or design specific policies which immediately cover these conditions.
• Specific Illness: Specific illnesses are conditions with a mandatory waiting period, regardless of whether the insured has them at the time of policy purchase. These slow-progressing diseases, such as cataracts, benign lumps, tonsillitis, and kidney stones, allow for delayed treatment, prompting insurers to impose waiting periods that vary by provider (generally for 2 years).

How does health insurance work?

Now that we know the frequently used terminologies in the health insurance domain let’s take a look at the steps that one would have to follow while making a claim:

STEP 1: You choose a credible health insurance provider. 

Selecting the right insurance provider is crucial for a smooth claim settlement experience.

1. Look for insurers with a Claim Settlement Ratio (CSR) =>90%, indicating that most submitted claims are being approved. 
2. Check that the Incurred Claim Ratio (ICR) is between 55%-80%, which reflects the company’s financial stability and pricing structure. 
3. Coming to complaint volume - this metric records the number of complaints filed per 10,000 claims. A low complaint volume naturally means that the customers are satisfied and the claim processing mechanism is efficient. 
4. It is also important to choose a provider with a large network of hospitals to ensure quick access to cashless treatments. You also need to check hospitals in your locality or frequently travelled areas. 
5. Read reviews about the company, break down the policy jargon, check the time they take to respond to queries and assess how transparent the company is about policy terms.  A provider with a history of fast and fair claim settlements, along with accessible customer support, will make your health insurance experience significantly smoother.

STEP 2: You opt for an affordable and comprehensive health insurance policy

Choosing the right policy is essential to ensure adequate coverage without financial strain. Here are the key features to look for:

• Co-Payment: Policies with co-payment clauses require you to pay a percentage of the claim amount. Avoid them as much as possible. A zero co-payment policy ensures full financial protection during hospitalisation.
• Room Rent Restrictions: Do not opt for a policy with room-rent restrictions, as you may have to pay a significant chunk of the hospital bill out-of-pocket if you choose a higher room than what is allowed in your policy. 
• Disease-Wise Sub-Limits: Choose a plan without disease-wise sub-limits to avoid restrictions on claim amounts for specific illnesses.
• Restoration Benefit: Opt for a policy that offers restoration of the base cover multiple times per policy year and for any illness, ensuring that your coverage does not run out.
• Pre and Post-Hospitalisation Coverage: A good policy should cover medical expenses at least 60 days before hospitalisation and 90 days after discharge to manage the costs associated with hospitalisation.
• Daycare Coverage: Ensure coverage for treatments requiring less than 24 hours of hospitalisation, such as chemotherapy and dialysis, which can be costly.
• Domiciliary Coverage: Check if the policy covers home hospitalisation when a hospital bed is unavailable or the patient cannot be moved to a hospital.
• No-claim Bonus: Policies with a no-claim bonus increase your sum insured over time, potentially doubling or tripling your coverage if you don’t make claims.
• AYUSH Coverage: If you prefer alternative treatments like Ayurveda, Yoga, Unani, Siddha, or Homeopathy, choose a policy that includes AYUSH coverage.

When selecting a plan, considering key features like co-payment, room rent restrictions, etc. is important. Apart from this, paying attention to the purchase process, including proposal form filling and KYC requirements, is also crucial. Understanding these aspects ensures a smooth experience, not just at the time of purchase but also during renewals and claims.

STEP 3: Two cases 

1. CASE 1: If you are admitted to a network hospital: If you are covered under a health insurance policy that comes with cashless treatment at network hospitals, the claim process becomes extremely easy. However, the process changes based on whether it is an emergency hospitalisation or a planned treatment. 

• In case of an emergency: For emergencies such as a heart attack, stroke, accident or severe trauma, immediate medical care takes priority. No insurer approval is needed prior to life-saving solutions. However, the hospital’s insurance desk or TPA helpdesk must be notified as soon as possible. Most insurers require intimation within 24 hours of admission. Delayed notification can lead to a denial of a cashless claim. This may force you to pay out of pocket and later seek reimbursement. Once notified, the hospital usually initiates a pre-authorisation request and upon approval, the treatment continues according to the cashless facility.
• In case of planned surgeries/treatments: For elective procedures such as knee replacement, cataract surgery, or bariatric treatment, approval is mandatory before the operation. You must inform the insurer 3 to 7 days before admission through a medical request. Approval usually takes 24 to 48 hours, after which the treatment may proceed in a cashless manner. During discharge, the insurer can settle the bill, excluding non-medical expenses. 

2. CASE 2: If you are admitted to a non-network hospital

• In case of an emergency: Emergency hospitalisations at non-network hospitals require you to pay the full bill upfront. You can later file a reimbursement claim, submitting hospital bills, reports, prescriptions, and the discharge summary. Most insurers mandate claim submission within 7 to 30 days post-discharge.
• In case of planned surgeries/treatments: For planned treatments at non-network hospitals, cashless treatment is not available. You must first verify if the treatment is covered, bear the costs, and submit a reimbursement claim with all supporting documents. Approval may take 2 to 4 weeks, and the final settlement depends on policy limits, exclusions, and sub-limits.

(P.S. Cashless Anywhere is a new initiative by the regulator which enables the insured to seek cashless medical services even in a non-network hospital. The timeline for emergency hospitalisation intimations to the insurer, in this case, too, is within 24 hours of being admitted. However, getting a cashless claim settled in such cases, under emergency situations, might prove to be a bit problematic, considering that this initiative is still a new endeavour and yet to be streamlined at the best possible degree.) 

STEP 4: The Restoration of your coverage (depending on the type of restoration your plan has)

After making a claim, the restoration benefit replenishes your sum insured in different ways. If your policy allows 

• partial exhaustion, restoration happens immediately after a claim; 
• with complete exhaustion, it is activated only when the base cover is completely used. 
• Some policies restore coverage for any illness, while others limit it to different illnesses, meaning you may not be covered for the same condition twice in a year. 

Additionally, restoration may be available once per year or for an unlimited amount of time, depending on policy terms. 

STEP 5: Renewal

Timely renewal is crucial to avoid lapses in coverage. Renewing on time helps maintain continuity benefits like waiting period reductions, accumulated no-claim bonuses, and uninterrupted coverage for pre-existing conditions. If you don’t renew your policy in time, it will move into a 30-day ‘grace period’ during which you’ll lose coverage. If you don’t pay the renewal premium even after the lapse of 30 days, your policy will lapse and insurers won’t offer any scope for revival. 

What are the Top 5 Health Insurance Plans in 2025?

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Conclusion

Understanding how health insurance works is key to choosing the right policy and the right provider for you. Moreover, knowledge about the claim settlement process will prevent you from feeling lost and confused when you make a claim. You can maximise your coverage benefits this way. If you would like additional information, consider booking a free 30-consultation with our advisors. We don’t pressure you to make a purchase and give you authentic, factual information. Stay insured, stay protected!