Healthcare costs in retirement: why one policy isn't enough

The cost that rises fastest

Most retirement plans treat healthcare as one line in the monthly budget. It behaves differently from every other line. It tends to rise faster than general prices, it rises as you age rather than staying flat, and it arrives in lumps: a quiet year followed by a hospital stay that costs more than a year's groceries.

A single health insurance policy is a good start, but it was rarely designed to carry all of that. This post looks at why, and how retirees usually layer cover so that one medical event cannot force them to sell investments at a bad time.

Why the standard policy falls short

Group cover ends with the job. Many salaried people rely on their employer's group policy and never buy one of their own. That policy usually ends on the last working day. Buying a first personal policy at 58 or 60 means higher premiums and fresh waiting periods for conditions you may already have.

Waiting periods restart. A new policy typically covers pre-existing conditions such as diabetes or hypertension only after a waiting period. IRDAI's 2024 rules cap that period at three years, and a claim cannot be rejected for non-disclosure once you have held the policy continuously for five years (the moratorium period). Both clocks run from the date you first buy, which is the strongest argument for buying well before retirement.

Sum insured that looked large becomes small. A ₹5 lakh family floater bought at 35 may cover one serious hospitalisation at 70, not two in the same year, and medical costs keep rising while the cover stays the same unless you increase it.

The fine print bites hardest for older policyholders. Policies sold to senior citizens often carry:

• Co-payment, where you pay a fixed share of every claim, commonly 10 to 30%.
• Room-rent caps, where choosing a costlier room reduces the payout on the whole bill, not only the room charge.
• Sub-limits on specific treatments such as cataract surgery or knee replacement.
• Exclusions, including most outpatient costs: consultations, tests and regular medicines, which are a large and steady part of older people's healthcare spending.

Premiums rise with age. IRDAI now requires insurers to consult it before raising premiums for senior citizens' individual health policies by more than 10% a year, which limits sudden jumps. The direction is still upward, and a retirement budget has to allow for it.

Layering cover

Retirees usually build health protection in layers, each doing a different job.

A super top-up is often the most efficient purchase. Because it only pays above a deductible, its premium is a fraction of a base policy with the same cover, and it protects against the large, rare event that would otherwise empty a corpus.

The medical reserve

Insurance does not pay for everything. Regular medicines, diagnostic tests, consultations, dental work, physiotherapy and home care mostly fall outside it, as do co-payments and room-rent deductions. These costs are predictable in kind if not in amount.

A separate medical reserve, sized to a few years of these costs plus your policy's co-pay on a large claim, keeps them away from your investment corpus. Funds held for this are meant to be available at short notice and stable in value. Over the ten years to 1 October 2026, the median liquid fund with a 10-year record returned 6.12% a year and fell no more than 0.2% at its worst, across 30 Direct Growth plans. That is a reserve's job: be there, not grow fast.

The reason to keep it separate is timing. If a hospital bill arrives during a market fall and you pay it by selling equity, you lock in the loss. A reserve lets equity recover. This is the same logic as keeping the next few years of spending out of equity in a systematic withdrawal plan.

Tax and cost

Under the old tax regime, premiums for a policy covering a senior citizen qualify for a deduction of up to ₹50,000 a year, and another ₹50,000 for premiums you pay for parents who are 60 or over. A senior citizen without any policy can claim actual medical expenses within the same limit. Our guide to section 80D and the section 80D calculator cover the details. Under the new regime, which is the default, none of this applies.

Since 22 September 2025, individual health insurance premiums are exempt from GST, which removed 18% from what policyholders pay.

What to do before retirement

1. Buy a personal policy while still employed and healthy, even if you have group cover, so waiting periods are over by the time you need it.
2. Read the co-pay, room-rent and sub-limit clauses of any policy you hold, and know what it will not pay.
3. Add a super top-up rather than a second base policy to raise cover cheaply.
4. Build a medical reserve outside the retirement corpus, and include healthcare as its own fast-rising line when you work out how much corpus you need.
5. Never let a policy lapse. Continuity is what keeps waiting periods and the moratorium working for you.

Health insurance is protection, not an investment, a distinction worth keeping clear when products try to blur it; see why insurance is not an investment.

This post is for education only and is not investment, insurance, tax or financial advice. Policy terms vary; read the policy wording before buying. Past returns do not predict future returns.