How critical is a critical illness cover?

“An open-heart surgery is required for Bhushan as there are multiple blocks,” the doctor told Seema, his wife. Tears welled up in her eyes. “Don’t worry,” the doctor comforted her. “Medical science has advanced so much that the risks in such a surgery are not that high any longer. Bhushan will be fine,” he said.

Seema asked, “Doctor, how much will it cost?”

The doctor replied that it may cost about Rs 3 lakh. Tears welled up again in Seema’s eyes. She knew they had a medical insurance that covered them for Rs 2 lakh each.
Now, the surgery alone will cost Rs 3 lakh, and then there are hospital charges, medicines… What she did not know was that Bhushan had taken a critical illness cover and most of the expenses would be covered by this policy. Good news, then! Seema, however, wanted to know what this plan was all about and how it worked.

Critical illness cover
This is an insurance cover available against specified diseases/conditions. Here, the insurer pays a lumpsum amount on diagnosis of the condition, irrespective of the amount spent on the illness. Such policies are available from both life and general insurance companies and premium varies depending upon the desired sum assured.

Features and benefits
Benefit amount paid over and above other medical policy claims, as this is a defined benefit policy

This is available as a separate product or as a rider in a life insurance policy. Depending on that, it may be a yearly renewable or a tenured contract

Will cover a specified number of illnesses — may be just 10 in some cases, especially riders, and is over 30 in case of most standalone policies

No maturity benefit is payable in these policies

There is a premium guarantee for a certain number of years in most policies. Premiums can change post that, subject to the approval of the Insurance Regulatory Development

Authority
Premium varies widely. Indicative premium for a 40-year-old can be between Rs 3,000 and Rs 8,500, depending on the term, coverage and other benefits

Age at entry varies widely from product to product — six years or more, depending on the product chosen

Coverage term and age up to which covered (75 is the best I’ve seen in these policies) also varies widely from policy to policy

Claim payment made as per pre-decided payouts (as a percentage of sum assured): Many policies have a pre-defined list of illnesses for which they pay a certain percentage of sum assured — typically 50% to 100%. Some policies limit the claim in case of a particular disease. After a payout is made for a disease, balance sum assured can be carried forward for other diseases — the premium is set accordingly lower in consonance with the balance sum assured. Claim can be done more than once, up to the sum assured. After that, the policy terminates

Some policies impose a survival condition of a certain number of days (example 30 days) for claim admittance. Waiting period for claims under this policy would be there in almost all cases — typically 3-6 months

Tax benefits available under Sec 80D or Sec 80C, according to the plan structure

Analysis & deliberation
This policy is not a replacement for medical insurance. This cover needs to be taken to protect oneself from the jolt such as Bhushan’s family received.

However, bear in mind that this policy terminates once the sum assured is paid, unlike in a medical insurance policy.

Some policies allow you to carry the policy forward after settlement of a portion of the sum assured for the other covered diseases, for the balance sum assured. This is a very useful option as at least a portion of the cover is available for other illnesses.

The other limitation is that the policy is only for a limited number of diseases/conditions. In life, one may incur huge expenses in hospital bills for diseases other than those covered in the policy. Also, the number of diseases/conditions covered by different policies is different. Also, this policy does not come very cheap, especially considering it has limited applicability and can at best be an add-on policy.

Do you need one?
Insurance companies have come out with this product as there is a clear need for it. However, it is best taken in conjunction with a proper medical insurance plan — not in isolation as this a very focused, but limited plan. One should look at the family history, nature of work, station in life, ability/disability to absorb a jolt etc, before deciding on whether a critical illness cover is required.

In the final analysis, one needs to take a view on the age up to which the cover is sought, diseases covered, special benefits in the policy, waiting period, survival condition imposed, etc apart from the premium before arriving on the final choice of the policy. If you can afford to put aside money for this, it is a good safety net to have.

A check on the claim history would be a good idea. You would not want to run around with IV needles still stuck to your arms, would you?

Seema hopes that the critical illness policy of Bhushan pays. She is, however, wondering if a surgical assistance policy would have been a better idea. That, I will cover in my next column.

The writer is a certified financial planner who runs Ladder 7 Financial Advisories and can be reached at ladder7@gmail.com