What is critical illness insurance? Do you need it?

While life insurance & health insurance are topics covered extensively by media, one rarely reads or hears about critical illness insurance. Every time I have tried telling people about the need for this product, I get a strange look followed by “didn’t we just discuss my health cover”, as not many can distinguish between the two.

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Critical illness insurance pays you the sum insured on being diagnosed with a critical illness which is covered under the policy, provided you survive for the minimum survival period as per the terms of the policy.

Health insurance policy will reimburse the cost incurred by you including hospitalization, diagnostic tests and medicine for a specified number of days pre and post the illness.The critical illness policy will pay you the sum insured on being diagnosed with an illness covered under the policy “no questions asked”. Critical illness is not a reimbursement plan.

Most of us underestimate the chances of being diagnosed with a critical illness. As per a newspaper article published a couple of years back “It is estimated that by 2020 cardiovascular disease will be the cause of over 40 per cent deaths in India. India is set to be the 'heart disease capital of the world' in few years” The treatment for the same can set you back by 3 to 7 lakhs.

As per another article in Business Today a couple of years back “millions are grappling with the prohibitive cost of cancer treatment in India, where the disease has wiped out entire life savings and even forced some people to sell their homes” It further gives indicative cost of treatment. I have reproduced that paragraph in italics below.

"Breast cancer patients, need targeted treatment drugs, such as Herceptin or Herclon, made by global major Roche, which cost around Rs 75,000 for a course; a patient could need up to 17 courses. Similarly, a drug called Avastin – used to treat colon, kidney, lung and gall bladder cancer – can add around Rs 8 lakh to a patient's bill at around Rs 1 lakh a cycle".

It is worth noting that the above estimates take only treatment costs and do not factor in other costs related to inability to work and lifestyle changes associated with the illness.

So how is a critical illness different from a health insurance?

A health insurance reimburses expenses incurred due to hospitalization and medical expenses related to the hospitalization. Critical illness insurance pays the entire sum insured on being diagnosed with a critical illness covered under the policy. It is not a reimbursement and hence has nothing to do with hospitalization.

What should you look for in a critical illness policy apart from the premium?

One should primarily look at illness covered & survival period apart from the premium while deciding on the policy. It may be worthwhile to note, that your application for a policy may be rejected by the insurance company and hence it may make sense to apply to a company who is likely to accept your application. This information can be obtained from somebody who deals with these companies regularly.

What are Illnesses covered under a critical illness policy?

The number of critical illness covered differs from company to company. You also get policies which cover one single illness example Cancer Care. Some of the more common critical illnesses include

  • Heart attack
  • Cancer
  • Paralysis
  • Coronary artery bypass surgery
  • Major organ transplant (e.g. heart, lung, liver, pancreas)
  • Stroke
  • Kidney Failure

What is Survival period?

Most critical illness policies come with a survival period which could range from a few days to a few months. This essentially means you need to survive the pre-specified period after being diagnosed with the illness to be eligible for a claim.

Who should opt for this policy?

This policy ensures that the financial burden of illness is circumvented and hence everybody should opt for it. People with family history and primary bread winners should definitely ensure that they are adequately insured.

What does it cost?

The premium is based on age, the premium for a healthy 30 year old for 20 lakhs policy should be approximately INR 7,500. Like in the case of health insurance the premium will increase with increase in age and is not fixed.

Are there any tax benefits?

Premium paid towards critical illness insurance can be claimed as deduction under section 80 D, the limit of this section have been increased in the recent budget. Under Section 80D, the premiums paid towards health insurance/critical illness policies for self, spouse, children & parents are allowed as a deduction. For this FY the limit has been raised to INR 25000,for senior citizens the limit is INR 30,000. I have written on this subject earlier and am giving you a link to the article. http://finwise.in/blog/?ph=412 

Should we take a stand alone policy or opt for a rider with an existing life insurance policy?

When you opt for a critical illness rider with your life insurance policy the premium remains constant throughout your tenure. Whereas with a stand-alone policy it increases every time you cross the age slab. The issues with opting for a rider are two. Firstly these riders are taken when you buy the policy and you may not be able to opt for it at a later stage. So if you already have a life insurance policy you may not be able to add-on a rider now. Secondly the sum insured in a critical illness rider may be limited and may not suffice. My Suggestion would be to go in for a combination of both with the purpose of having adequate insurance.

While it is good to hope for the best, it is equally important to plan for the worst. Let us endeavor to keep illness at bay and double our time invested in fitness. At the same time take adequate measures to mitigate the financial risk arising out of the illness. God forbid if you were to be diagnosed with a critical illness, there should be nothing which stands between you and the best healthcare possible.