Critical illness policy: Is it just a waste of your money?
“Excellent news! There is now a 10% chance that you will win Rs. 1 crore in a lottery!”
Makes you want to run out and buy as many lottery tickets as possible, doesn’t it?
The chances are great, aren’t they? It’s almost a sure thing…
Now what if you were to find out that above a certain age, there could be a 10% chance that you were to be afflicted with a critical illness, with expenses that would run up to Rs. 20 lakhs, or Rs. 30 lakhs, or more, and might require lifelong care and financial aid?
God Forbid this should ever happen, but the odds are the same as winning that make believe lottery. What now?
Sit for a minute and think – what’s your family’s health history?
Is everybody fit as a fiddle? If yes, that’s wonderful.
Chances are immediately lower that you will get any of the critical illnesses. Or have your parents, or grandparents or great grandparents ever had cancer, or suffered from a stroke or a heart attack? Hmmm…that makes things a bit different.
We all know how important life (pure or term) insurance is. It protects our loved ones (our financial dependents) in case of our untimely demise. But the truth is that there are higher chances of coming down with a serious illness and surviving, than of dying before one’s retirement age. The average age of making a claim for a critical illness in fact is 47 years.
So in this case, as the earning member of the family, you need to be able to not only substitute your income so that your family’s expenses are met (know your Human Life Value using our HLV Calculator), but also you need to be able to pay your own medical bills.
So if we take life insurance, why don’t we automatically take critical insurance as well?
Well, there are a couple of reasons.
Firstly, we do not consider it important enough. But with the above argument, this should be out of the way. Secondly, it can be expensive. It definitely is more expensive than a term plan.
Sum Assured (Rs)
Critical Illness (Rs)
Term Plan for 15 years (Rs)
|10 L||20 L||50 L||10 L||20 L||50 L|
Thirdly, we all like to sometimes avoid ugly truths. But the fact is, critical illness insurance may just come in handier than your life insurance plan, and by that very simple logic, is probably more important than a life insurance plan, which we all know is sacrosanct.
Remember, insurance is all about probabilities. In almost all cases, the probability is 50:50. It may happen or may not happen. You have to be prepared for the eventuality.
There are things you need to know about Critical Illness Insurance
1. What’s the most important thing to do before taking a critical illness policy?
Check what illnesses it covers and what features it offers. Different insurers come out with different plans, each with its own set of features, even different ways of settling claims. Read up and arm yourself with thorough knowledge before going out and buying the first policy that comes to hand. Buy a policy that covers the maximum number of illnesses common to your family, because a lot of these illnesses tend to be hereditary.
2. How is it paid out?
Upon diagnosis of a critical illness, after taking the policy. You will receive a lumpsum payment within a specified number of days i.e. between a few days and 3 months from the illness being diagnosed and you making the claim. Commonly, the post diagnosis waiting period is 30 days, If you survive 30 days, you get the lumpsum pay out. If not, then there is no payout. The policy will then cease to exist. You can’t make a claim more than once, because on your first claim itself (provided the claim is accepted) you will receive the full Sum Assured. This money is then going to cover your expenses, depending on how you use it.
3. Can I take policies from more than 1 insurer?
Yes, if you want to. In case of an illness, you can make a claim to all your insurers and receive the total sum assured to you. This would also be useful in a situation where you have made a valid claim but for some reason, perhaps a technicality, it has been rejected from one insurer, you can get the amount insured of the second insurer, provided your claim is accepted. But remember, these policies are expensive. So think carefully before opting for this level of diversification.
4. What are the illnesses on the list?
- Heart Attack (the first heart attack)
- Multiple Sclerosis
- Coronary Artery Bypass Surgery
- Major Organ Transplant (heart, lung, liver, pancreas)
- Primary Pulmonary Arteria Hypertension
- Kidney Failure
- Aorta Graft Surgery
Different policies may include different diseases, read the policy document for exact details.
5. Do I need to take medical tests to get a critical illness policy?
It’s not really compulsory, but most insurers ask for it anyway.
This is to show that you are not already suffering from a critical illness.
6. What is the maximum cover I can get and up to what age?
Entry age for taking a critical illness cover is 6 years to 59 years (Bajaj Allianz allows the eldest entry age of 59 years). The maximum cover you can get is Rs. 50 lakhs.
7. Should I take it as a rider, or as a standalone policy?
If you take it as a rider, you need to take it at the time of taking your life insurance. If you take it as a standalone, you can apply for the insurance at whatever age, whenever you wish.
Also, if you take it as a rider, the amount of critical illness cover you can take is limited because the premium paid for your riders should not exceed 30% of the premium you are paying for the life insurance cover itself. This limits the cover you can get.
8. Do I get tax benefits?
Yes. Section 80D rules apply i.e. there is a benefit up to Rs. 15,000 of premium paid (by cheque) and Rs, 20,000 for senior citizens insurance.
9. Can I just take mediclaim instead?
No. You can take mediclaim as well.
Mediclaim will pay for your hospital expenses, but not leave you anything over and above on which you can live your life. A critical illness insurance policy gives you a lump sum payout of your Sum Assured. This will go towards hospital expenses, out of hospital medical expenses, and towards any other income replacement that you may need.
So remember, if something unfortunate were to happen by way of one of the critical illnesses and you were to survive the illness, that’s when the critical illness cover will really save your life – financially.
So speak to your insurance advisor and your financial planner to add critical illness insurance to your life and to your financial plan.
PersonalFN is a Mumbai based Financial Planning and Mutual Fund Research Firm.