You have been getting regular calls from sales department of an insurance company. The sales executive has pushing you to purchase a Critical Illness Insurance plan. A Critical Illness Insurance Plan pays a lump sum amount to the policy holder if she is diagnosed with a critical illness as specified under the plan. You already have adequate term insurance comprehensive health plan for Rs 10 lacs. However, at some level, the sales pitch rings a bell. Last year, one of your neighbours had to undergo cancer treatment, which cost Rs 15 lacs. You are wondering, if such a thing were to ever happen to you, you regular health plan may not be able to cover all the treatment expenses. You may have to dip into your savings to fund the treatment.
A Critical Illness Insurance plan can be an answer to your worries. A critical illness plan pays a lump sum amount to the policy holder if he/she is diagnosed with a critical illness. Thus, a critical illness insurance plan can cover both hospitalization and non-hospitalization expenses too and may also provide much needed cash flow during the recovery period. Alternatively, you can go for a higher health cover as a regular health cover provides a much wider coverage.
Let’s find out more about Critical Illness plan, what it offers and whether you should purchase such a plan.
Critical Illness Insurance Plan is a defined benefit product
A critical illness insurance plan is a defined benefit policy. On diagnosis of a specified critical illness, the insurance company pays the Sum Assured to the policy holder. The amount is paid irrespective of whether she chooses to undergo the treatment or not. The policyholder can choose to use the amount as she wishes. For instance, if the Sum Assured under the plan is Rs 10 lacs, on diagnosis of the critical illness, the insurance pays Rs 10 lacs in lump sum to the policy holder and the policy ceases.
This is in sharp contrast to regular health insurance plans, which are indemnity products. The insurance plan covers your hospitalization expenses, pre and post hospitalization expenses and certain specified day care procedures. Under indemnity products, the insurance only compensates to the extent of actual expenses incurred subject to the ceiling of Sum Insured. For instance, if the Sum Insured is Rs 10 lacs and your hospitalization bill was Rs 5 lacs, the insurance company will pay only Rs 5 lacs and the policy continues.
Sum Assured and Sum Insured
Notice the usage of terms. Sum Assured and Sum Insured. For defined benefit insurance products such as term plans and critical illness plans, Sum Assured is used. On the occurrence of insured event e.g. death in case of life insurance, Sum Assured is the guaranteed amount payable to the policy holder or her nominee, as applicable.
Under indemnity plan, you are compensated for loss or damage on occurrence of insured event. Non-life insurance products such as motor, health and home insurance are mostly indemnity products. The compensation from the insurance company is subject to the ceiling of Sum Insured.
A few critical illness plans I browsed through used Sum Assured while the others used Sum Insured. As I understand, both the terms were used interchangeably in the plans. However, that does not change the nature of a critical illness plan.
Salient features of a Critical Illness Plan
You get a lump sum amount on diagnosis of a critical illness. The policy terminates after payment of such Sum Assured. The number of critical illnesses covered varies across policies. Some of the illnesses that feature across policies are cancer, heart attack, Coronary Artery Bypass Graft, kidney failure, repair of heart valves, coma, major organ transplant, multiple sclerosis, permanent paralysis and motor neuron disease. The insurance companies can cover more illnesses in the plan as per their discretion.
As per IRDA guidelines, all plans provide lifelong renewability. However, premium can increase over a period of time.
Termination of the policy:
The policy automatically terminates after payment of Sum Assured on occurrence of first Critical Illness. In such a case, no subsequent renewals in the policy shall be allowed. If you want critical illness cover in the future, you will have to purchase a new policy (from the same or a different insurer). Please note risk underwriting exercise will be repeated in this case. Hence, the new policy may have a waiting period for the critical illness (you were diagnosed with earlier) and may also have a much higher premium.
Regular health plans do not terminate after a claim. You can keep making claims for the same illness/disease year after year. Claims based loading is not allowed by IRDA. Hence, your annual premium will not increase just because you made a claim under the plan. Regular health insurance plans score heavily over critical illness plans on this parameter.
A few policies such as ICICIPru Crisis Cover have sub-limits for each critical illness. They pay only such amount (sub-limit) on diagnosis of the illness and the company’s liability in the future goes down by such amount. The policy ceases if the entire base Sum Assured has been paid. For instance, total cover is Rs 20 lacs and there is sub-limit of Rs 5 lacs for kidney failure. On diagnosis of kidney failure, the insurer will pay Rs 5 lacs and the company’s liability towards all the future claims will reduce to Rs 15 lacs.
Survival Period Clause
A policy holder needs to survive for a period of at least 30 days after diagnosis of critical illness before she can make the claim. So, if the policy holder dies 20 days after the diagnosis of a critical illness, insurance company will not pay anything. This is beyond me. I couldn’t really understand the rationale behind such a clause. If you have an answer, please leave a comment.
In fact, the same critical illness plan may have different survival period for different illnesses. Apollo Munich Optima Vital has survival period of 30 days for Cancer and 90 days for major organ transplant.
Critical Illness Insurance Rider or a Standalone Insurance Plan?
A number of insurance companies give an option to include critical illness rider with the regular life/health insurance plans for extra premium. A rider is likely to be cheaper than a standalone plan since there are be lesser administration costs. Both approaches work in a similar way. There are a few minor differences.
Under a rider, the cover may be linked to the Sum Assured/Sum Insured under the base plan. Under a separate plan, you will have flexibility to choose cover.
Under a rider, your rider will automatically get renewed when you renew the base plan. In case of a standalone plan, you will have to renew the base plan every year. As far as premium is concerned, premium for the separate plan can change every year. As far as the rider is concerned, it will remain constant for a few years but can change subsequently. I found this text about critical illness rider on ICICI Prudential website.
The premium for this benefit is guaranteed for five years only from the date of commencement of policy. The Company reserves the right to carry out a general review of the experience from time to time and change the premium as a result of such review.
Between rider and a separate plan, a separate critical illness insurance plan gives greater flexibility.
How critical is “Critical”?
Your definition of a critical illness may be very different from the definition used by the insurance company. For instance, kidney failure is covered by all critical illness policies. You might feel if a kidney fails, the critical illness policy should make the payment. However, let’s consider this definition of kidney failure as provided in the HDFC Ergo Critical Illness Insurance plan.
Kidney Failure Requiring Regular Dialysis
End Stage Renal Failure presenting as chronic irreversible failure of both kidneys to function, as a result of which either regular renal dialysis (haemodialysis or peritoneal dialysis) is instituted or renal transplant is carried out. Diagnosis has to be confirmed by a specialist Medical Practitioner
Or the definition of Heart attack
First Heart Attack of Specified severity
The first occurrence of myocardial infarction which means the death of a portion of the heart muscle as a result of inadequate blood supply to the relevant area. The diagnosis for this will be evidenced by all of the following criteria:
- a history of typical clinical symptoms consistent with the diagnosis of Acute Myocardial Infarction (for e.g. typical chest pain)
- new characteristic electrocardiogram changes
- elevation of infarction specific enzymes, Troponins or other specific biochemical markers
The following are excluded: 1. Non-ST-segment elevation myocardial infarction (NSTEMI) with elevation of Troponin I or T; 2. Other acute Coronary Syndromes 3. Any type of angina pectoris.
To be honest, I don’t know what this means. But you get the idea. What you might feel is a kidney failure or a heart attack may not be kidney failure (or a heart attack) as per the insurance company. There is severity attached to every condition. Please note this is the standard definition of kidney failure as per IRDA guidelines. You will find the same definition of kidney failure in all the critical illness policies.
To be fair to insurance companies, they need to define the covered events exactly in order to under write the risk properly. Ambiguous definitions will also lead to unnecessary claim disputes. However, if you are planning to purchase a critical illness cover, this is something you should be aware of.
A point to note: If these conditions are so severe that you require hospitalization, your regular health cover will anyways cover the expenses.
I have picked up critical illness plan premium for a 35 year old for a cover of Rs 10 lacs. You can see the number of illnesses covered varies across policies. Please note that the premium is not guaranteed and may change every year or after a fixed number of years.
You can see that the premium is not a big strain on the pocket.
Enhanced health cover vs. Critical Illness Insurance plan
A regular health insurance plan has a much wider coverage than a Critical Illness plan. One of the alternatives to buying a Critical Illness plan is to enhance your health cover by a good margin. I have picked up plans from two insurance companies. You can see there is not much difference in terms of premium for
- Separate health cover (10 lacs) and Critical Illness Plan (Rs 10 lacs)
- Health cover of Rs 20 lacs
So, by increasing your regular health cover (instead of purchasing a separate critical illness plan) you get a much wider coverage. There is no significant difference in cost either.
Please note I have compared only plans from two insurance companies. Plans from other insurance companies may show different results.
You can argue that a regular health plan typically covers only hospitalization expenses. That’s not entirely true. A number of day care procedures are covered too. Most plans also cover pre-hospitalization and post-hospitalization expenses for a limited period. Moreover, given the focus on severity in policy wordings, you might actually have to get hospitalised if you are diagnosed with a critical illness. In such a case, you can anyways claim under a regular health insurance plan.
You can also argue that critical illnesses may have a long recovery period and a potential loss of income during the period and a Critical illness plan can help bridge the cash flow gap. However, for such exigencies, most financial planners would recommend an emergency corpus and not an insurance plan.
Should you buy a Critical Illness Insurance plan?
I have a strong opinion on many insurance matters. For example, you must never purchase traditional life insurance plans. Purchase a pure term cover to meet your insurance needs.
However, in this case, I do not have a black and white answer. There is nothing wrong with the idea of a critical illness plan per se. If you have a family history of such critical illness (assuming there is a genetic disposition to the illness), it makes sense to spend some money to guard against that illness. And yes, do make full disclosures while purchasing the policy.
There are certain limitations too due to restrictive nature of definition of various illnesses and the survival period clause. However, the biggest drawback is that the policy ceases once the company pays Sum Assured on diagnosis of a critical illness. Regular health plans continue as long as you keep paying the premium (irrespective of whether you make a claim or not). Hospitalization for all the critical illness will likely be covered under your regular health plans.
You have a number of options:
- Continue with the existing health cover. Do not purchase a fresh critical illness plan.
- Continue with the existing health insurance plan and purchase a fresh critical Illness Plan.
- Do not purchase a Critical Illness plan. Go for an even higher health cover; say Sum Insured of Rs 20 lacs in place of Rs 10 lacs. You will have to shell out additional premium. We have already seen there is not much difference between enhancing your Sum Assured. Ensures much wider coverage. This option is essentially an extension of option (1).
- Go for a super top up health cover over your existing health cover.
- Purchase adequate health cover. Instead of buying a critical illness plan, keep adding to a medical emergency fund. Do not touch the corpus except in the event of a medical emergency.
None of the above options will be a financial blunder. The idea is that you must have adequate health cover. Adequate is a subjective term. If you some have idea about health care expenses in your city, cost of surgical procedures etc, you can arrive at a number. On a lighter note, if God goes after you, nothing is ever going to be adequate.
If you ask me, I will go with either (3) or (5). Which option would you go with?
Please understand a Critical Illness insurance plan is not a substitute for a regular health insurance plan. It can only supplement a regular health plan. Hence, Irrespective of whether you opt for a critical illness plan, you must have adequate health insurance.
Image Credit: Darko Stojanovic, 2015. The original image and information about usage rights can be downloaded from Pixabay.
Deepesh is a SEBI registered Investment Adviser and Founder, PersonalFinancePlan.