Health policies' sales outlook robust in Tier II and Tier III cities in FY26: Report

The health insurance policy outlook for FY26 looks strong for Tier II and Tier III India, particularly driven by first-time buyers.

The health insurance policy outlook for FY26 looks strong for Tier II and Tier III India, contributing 62 percent of all new policies sold as of November 2025, particularly driven by first-time buyers. Tier I cities contributed 38 percent of the overall sales in new policies, according to the latest data by Policybazaar.

The data revealed that nearly one in two policies in Tier II and III cities have opted for a sum insured amount up to Rs 10–15 lakh. Notably, over 40 percent of Tier III insured pay premiums through easy monthly installments (EMIs), though a large part of the premium is paid in a lump sum either yearly, in two or three years, depending on the tenure of the health insurance.

Source: Policybazaar

“Five years ago, metros dominated health-insurance purchases. Today, 62% of all new policies sold come from Tier II and III India, making the hinterland the sector’s new growth engine,” said Siddharth Singhal, Head of Health Insurance Department at Policybazaar.

The data further revealed that the sum insured amount of Rs 10-14 lakh opted by Tier II policyholders has surged by 47 percent from 27 percent in FY26, and those who have taken more than 15 lakh cover have increased by 13 percent. In contrast, the Tier II policyholders who have opted for a similar sum insured amount have grown by 49 percent from 29 percent in FY26, and those who have taken more than 15 lakh cover have increased by 14 percent.

“A shift from the older Rs 3-5 lakh plans to more than Rs 10 lakh comprehensive covers is now mainstream even in smaller towns, driven by medical inflation and post-Covid health awareness,” said Sehgal.

Add-on adoption sees remarkable growth

The data by Policybazaar noted a whopping surge in the adoption of add-ons in FY26. In Tier I cities, 76 percent of health insurance policies, with up to 10 lakh cover, saw add-ons adoption at 228 percent. It was followed by a 207 percent adoption by 60 percent of policies in Tier II cities. The adoption of add-ons stood at 179 percent across 63 percent of policies in Tier III cities.

Sehgal explained that the rise in adoption of add-ons— such as consumables cover, cumulative bonus, room-rent relaxation, and OPD —across health insurance policies is due to GST relaxation on health insurance premiums by the government of India. He reasoned that these add-ons were previously being purchased at extraordinary rates across the country.

“On average, each health policy carries 2.2 add-ons in Tier I, two add-ons in Tier II, and 1.7 add-ons in Tier III (by premium), indicating that even non-metro buyers are actively customising coverage rather than opting for base plans. Tier II and III customers are beginning to purchase add-ons like evolved metro customers, opting for richer, more comprehensive protection rather than low-cost plans,” said Sehgal.

Family floater plans lead the adoption in Tier II and Tier III cities

Meanwhile, family floater plan adoption across Tier I, II, and III cities stood at 57 percent, 69 percent, and 59 percent, respectively. In comparison, individual plans across these cities stood at 43 percent, 39 percent, and 41 percent.

“Family-floater adoption is highest in Tier II and Tier III, a trend driven by joint families and multi-member coverage needs. Families in these regions prefer comprehensive floater covers over individual plans - reflecting the multi-generational household structure in smaller towns,” said Sehgal.

Source: Policybazaar

According to Policybazaar data, 80.70 percent of insured in Tier II and Tier III cities have filed claims for hospitalization cases, indicating that health insurance in smaller towns is still predominantly used for inpatient care rather than routine medical expenses.

“On the other hand, OPD and day-care together account for nearly one-fifth of claims, indicating gradual expansion beyond only hospitalisation. The claims mix aligns with the rising preference for higher sum insured policies in hinterland markets. Comprehensive hospitalisation cover remains central to protection planning in Tier II and Tier III regions,” said Sehgal.