Critical Illness Insurance Policies: Do You Really Need One?

Last Updated on December 18, 2021 at 10:50 pm

Radhey Sharma* who blogs at The Wealth Wisher recently compared critical illness insurance policies in India. The following is an expansion of my comment to his post.

* He used to. It is now run by Madhupan Krishna.

What is CI insurance? It offers a lump sum if the insurer is convinced that an individual has any one of critical illness listed in the policy document. The payment is made when the individual survives a certain period (typically a month) after confirmation of the diagnosis.

What you should know before you consider buying a CI policy: Yes the idea of a CI cover does sound good. However on closer inspection things are not so rosy.

Term insurance policies pay on the death of the insured. One year after policy inception it pays for death irrespective of the nature of death. If one doctor proclaims a man dead, what are the chances that another doctor is going to disagree?!

Health insurance policies pay on hospitalization, except for a small subset of treatments listed in the policy document. If the hospital says the insured person is/was a patient, what are the chances that the insurer is going to dispute it?!

Critical illness policies pay when a critical illness is diagnosed established. Once your doctor confirms an illness ‘listed’ in the policy document, the doctors who work for the insurer have to concur that the nature of the illness falls in line with the policies definition of ‘critical’. If they don’t concur (I would expect them to try hard not to!), no payment will be made.

According to Ramesh Mangal (a doctor and personal finance enthusiast), insurers have a narrow definition of many critical illnesses.  So there is absolutely no guarantee that even if a person is diagnosed with an illness listed in the policy document, he will receive the sum insured.

Financial planner Manikaran  Singhal made the following comment in another CI cover related article in The Wealth Wisher blog:

“I was a big fan of Critical illness policy and used to advise all my clients until I understood the Criticality aspect through the policy wordings. Some are as below

Kidney Failure requiring Regular Dialysis: End stage renal disease presented 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 transplantation is carried out.

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.

All the conditions are related to some specific severity. I discussed this with one of my doctor friend to which he replied that in these health conditions there are very few chances that they discharge the patients and also there is very rare chance of the patient to survive.

Now this means that as long as he’s in a hospital, he has to bear hospitalisation cost. Thus for him hospitalisation cover is more important then Critical Illness. and moreover as CI policy is a fixed benefit plan, so I generally feel that one should continue with the cover only till he doesn’t accumulate the same amount in “Health benefit fund”. So now I am not in favour of critical illness plan.

Bottomline:  Critical Illness insurance is not an umbrella cover like term insurance, health insurance or even accident insurance. CI policies come with two kinds of fine print. One that is visible but hard to understand (like all policies) and one that is visible only to the team that evaluates claims!

Do you need one? Are you better off using the premium and other resources to build yourself a good medical corpus? Are you better off regularly contributing to your emergency fund? Answers will depend on your personal situation.

Before even thinking about buying a CI cover:

•  Check your family history for critical illness. If you can find any, then determine the age at which the illness surfaced. If there is a history of illness at a young age,then you will need to take a CI cover right away. The cover should include the illnesses present in your family history.

• If the age of CI onset in your family is pretty late then you could consider building a medical corpus instead of a CI policy (of there is a risk involved in this as no one can predict the onset of CI and not all CIs have a genetic predisposition).
• Such a risk can be mitigated to an extent if
  • there is enough emergency fund – preferably at least a years worth of expenses to start with.
  • you take stock of your financial situation and check if you can allocate some funds to a medical corpus immediately.
  • you plan to contribute to  both funds regularly

DNA Testing: Whether there is a history of illness or not, you could consider a DNA test to determine the (approximate) probability of contracting certain diseases. This will help us mentally and fiscally prepare for the future.

• Google’s co-founder, Sergey Brin, has a 50% chance of getting Parkinson’s disease.
• Angelina Jolie decided to get a preventive double mastectomy based on such DNA testing. Here is a good read about this
• In India, Bioaxis DNA Research Centre offers this service
• Any such test will have its own limitations.
• One requires tremendous courage to get the test done and face results. Typically family members would be against such testing.
• Cost: Ballpark, Rs. 15K -25K.
• There is no need to mention results to any insurer.

Personally, I find the CI policy a little too complicated. I am focussed on increasing my families health cover as much as possible each year and establishing a medical corpus.

If you think a CI cover is important for you, then you could read this article for help in choosing a policy.What do you think?