What is Cash Deposit (CD) Balance in Health Insurance?

All about cash deposit balance.

Be it travelling for official purposes or personal reasons, outings with team members, or dinners with family, health concerns may arise at any time. However, if your employer covers you through a group health insurance policy, you need not worry about hospitalization expenses.

A group health insurance policy is provided as a prerequisite at the time of joining. However, have you ever wondered how the employer offers group health insurance coverage immediately after you join?

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Well, that’s the catch of cash deposit balance in health insurance policies. Now, let’s drill down into this cash deposit account and see how it affects you as an employee or employer.

What is a cash deposit (CD) account?

• Let’s start with how an employer’s group health insurance policy works. A company employs 50 employees and pays Rs. 10,000 as a group insurance premium for all employees.
• The amount mentioned above is paid for the existing 50 employees. But, some employees will leave every year, and some will join afresh. The concern is about those employees joining afresh.
• Suppose the company has already paid an insurance premium for 50 employees. In that case, it should further pay some extra amount to cover even the new employees joining the company shortly. The employee is not concerned about how the group insurance works. He/she is being given assurance of group Mediclaim health insurance as a prerequisite at the time of joining.
• Thus, the employer should ideally pay some extra or buffer amount to the insurance provider so that new additions of employees are already covered.
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The literal meaning of the words cash deposit is that some cash has been deposited in an account. However, the topic is related to the insurance sector, not the banking sector. So, we are discussing a cash deposit account in health insurance policies.

Hence, the cash deposit balance in health insurance is like a regular bank account maintained by the insurer for the employer-company.

How does a cash deposit account function?

In the first instance, the employer will periodically deposit some buffer amount in the cash deposit account. So, the cash deposit account maintained with the insurer will bear a credit balance.

However, such accounts are non-interest-bearing accounts. Hence, the employer does not receive interest on the funds lying with the insurer. Whenever a new employee joins, the insurance policy is purchased via endorsement. The premium amount gets debited from the cash deposit account after such endorsement. However, the employee’s health risk is covered from the first day of joining.

On the other hand, if an employee leaves the organization, the paid premium gets refunded to the cash deposit account. Hence, the motive of a cash deposit account is to hold a buffer amount as cash.
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Why is a cash deposit account required?

• The fundamental question should be, who has asked to maintain such a deposit account? Insurance is covered by the Insurance Act 1938. The insurance regulatory body has ensured that the no-risk stays uncovered.
• Thus, clause 64VB of the Insurance Act requires that insurers not assume any risk in respect of an insurance business until the policyholder pays the premium. Risk coverage should be ensured only after receipt of the premium.
• This section further states that if the premium can be estimated well in advance, the risk shall be assumed only after the premium is received. This means that the insurer should first obtain the premium amount, and then the coverage starts.
• Thus, a cash deposit in health insurance covers the lag between joining a new employee and the employee’s name registered with the insurance company.
• It is best for employees since they are covered from the first day of their job.
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What are the implications of a lower cash deposit balance in health insurance?

A lower cash deposit balance in health insurance means insufficient bank balance. What happens when you withdraw funds over the available funds in your savings account? The banker rejects it!

Similarly, suppose the employee is exposed to the risk and not yet covered by the group health insurance policy. In that case, the insurer may reject the claims for medical expenses of such an employee.

If things are unclear, the actual medical expenses may lie on the desk of the employer. Thus, a lower cash balance in such an account derails the company’s image and poses the risk of paying the entire bill. If the employer is harsh enough, it may deduct the medical expenses from the upcoming salary of the employee in a lump sum or through instalments.

In Conclusion

A cash deposit balance in health insurance is like a bank account. The insurer can cover the claims if it is sufficiently funded to cover the new employees. Hence, it is a standard practice to maintain at least 20% of the initial premium as a buffer amount in such a cash deposit account.

FAQ

Q. How is the amount required for the cash deposit balance calculated, and does it vary by company size or industry?

A. The amount for the cash deposit balance is usually estimated based on the anticipated number of new employees and the average cost of insurance premiums for the sector. It can vary by company size and industry, reflecting differences in employee turnover rates and insurance costs. Insurers and companies work together to determine an appropriate amount. This ensures the fund is sufficient to cover new additions without causing financial strain on the employer.

Q. What are the specific steps an employer needs to take to set up a cash deposit account with an insurance provider?

‍A. To set up a cash deposit account, an employer first negotiates with an insurance provider to agree on the terms. Then, the employer completes the necessary paperwork, providing details about the company and its workforce. After this, the employer deposits the agreed initial amount into the account. The insurance provider confirms the account's setup and provides access to manage and monitor the account. This process ensures the employer has a streamlined way to manage employee insurance coverages.

Q. Can an employer adjust the cash deposit balance over time based on changes in the number of employees, and if so, how is this managed?

‍A. Yes, employers can adjust the cash deposit balance as their workforce changes. This is managed through regular reviews of the account with the insurance provider. If the workforce expands significantly, the employer may need to increase the deposit to ensure coverage for all employees. Conversely, if the number of employees decreases, the employer can reduce the balance or apply it to future premiums. These adjustments are made through formal requests to the insurance provider, ensuring the account always reflects the company's current needs.