Critical Illness Insurance – Which Type Should I Get (Assuming I Need Some)?
Client: Hey Choe, is this critical illness insurance worth it? It’s almost 50% more expensive than death cover.
Me: The answer is that it costs just as much if you measure by “risk”.
Client: What do you mean by “risk”?
Me: Do you know the average age of claim for death benefit?
Client: Well, I guess it’s about age 80 since that’s about how long we’ll live.
Me: Sure, let’s use age 80 as the average age of claim for death benefit. Do you know what is the average age of claim for critical illness benefit?
Client: Hmm…I have no idea.
Me: Well, by some estimates, it’s about 40 to 50 years old.
Client: Are you sure?
Me: If I’m sure, then the premiums for critical illness insurance are not really that expensive, isn’t it?
Critical illness insurance is a type of insurance that provides a lump sum pay out when the life insured is diagnosed with one of the conditions covered in the policy. According to actual claim statistics provided by an insurer, these are the average age of claim for various critical illnesses in the first half of 2021:
Heart Related Claims:
Open Heart Surgery – 35 years old
Heart Valve Replacement – 50 years old
Heart Attack – 52 years old
Motor Neurone Disease – 45 years old
Neuro-Muscular Related Claims:
Stroke – 50 years old
Multiple Sclerosis – 44 years old
Parkinson’s Disease – 56 years old
Alzheimer’s Disease – 61 years old
Cancer Related Claims:
Testicular Cancer – 38 years old
Leukaemia – 39 years old
Ovarian and Cervical Cancer – 44 years old
Lymphoma – 45 years old
Breast Cancer and melanoma – 47 years old
Renal Cancer – 50 years old
Bowel Cancer – 52 years old
Lung Cancer – 57 years old
Prostate Cancer – 58 years old
As I was typing out these statistics, my heart skipped a beat, or a few beats, and this probably gave you a clue as to how old I am. Well, these claims statistics are provided by an UK insurer, and they were for 2021. Perhaps our local context will be very different.
Using Income Insurance’s claim statistics in June 2023, there were a total of 38 critical illness insurance claims paid out that was above $100,000, with the highest amount being $474,550. The youngest claim age was a cancer claim for a 31 year old while the oldest claim was also a cancer claim for a 76 year old.
And, the statistic we are most interested in – 56 years old. The average age of claim for critical illness insurance in a recent and local context is about the time people generally start to think seriously about retirement.
Of course, not everyone will suffer from a critical illness and there is a theory that since we are already insured with hospitalisation insurance such as MediShield Life and Integrated Shield Plans, there is really no need to buy critical illness insurance and instead, use our savings for other financial needs such as investment or retirement planning.
Critical Illness Insurance vs and Hospitalisation Insurance
Critical Illness insurance is often confused with hospitalisation insurance as both types of coverage responds when there is a “loss of health” event.
The major difference is that one pays out a sum of money (i.e. critical illness insurance) while the other reimburses you (i.e. hospitalisation insurance) for what you have paid out. One way to understand this is that hospitalisation insurance is like carbohydrates, we need them to replenish the energy we’ve used (i.e. cover what was lost) while critical illness insurance is like proteins, they help us to build and repair our bodies so that we have better health and an even better quality of life.
Of course, proteins typically cost more than carbohydrates (think of the difference in price between salmon and rice) so it’s natural to question the need for critical illness insurance when you are already well covered for hospitalisation insurance.
The answer is that it is not about how much it costs, but what your financial body needs to keep you well-functioning to the extent that life is enjoyable and not miserable. While we may all differ in our needs, it is rare for a doctor to recommend a “no protein” diet even if you are currently in the pink of health. You might need less, but you will probably need some.
So, if critical illness insurance plays such an important role in your financial risk management and there are so many types and packaging in the market, which type should you get?
Basics of Risk Management (Skip the next three paragraphs if you think you already know this)
Critical illness insurance is part of an individual’s overall financial risk management program and it’s important to have a good background of what is risk management, what are the strategies to managing risks and where does critical illness insurance fit in.
What is Risk Management in personal financial planning?
The risk in financial planning is financial loss and risk management is to prevent or mitigate any financial loss. There are 2 main types of assets we have. The first are our financial assets or what we currently own and the second is our human life value or what we are going to earn in the future. Risk management should take into consideration both of these assets. For example, there are insurance to cover our bank deposits should the bank fail and critical illness insurance is to cover our loss of future income should our health fails.
What are the strategies to managing risks?
There are four things you can do to manage risk and an example of being hurt in a motor bike accident as the risk:
- Avoid – Choose to have completely no exposure to the risk if possible. For example, never ride on a motor bike.
- Prevent – Do what you can to reduce the probability of injury. For example, following traffic rules and wearing appropriate protective equipment.
- Retain – Prepare to write off any loss should anything happen. For example, being prepared mentally for any bad outcome that may occur.
- Transfer – Arrange for another party to replace or cover any loss that you incur. For example, having an insurance program that will pay for the costs of hospitalisation and loss of income during the treatment and recovery phase after an accident.
Which strategy you use depends on the frequency and severity of the risk.
Where do critical illness insurance fit in?
Critical illness is a low frequency + high severity event so to properly manage this risk, a combination of strategies is required ideally. This includes “prevent and reduce” by lifestyle choices including exercise, diet and wellness. However, the probability of a critical illness cannot be avoided completely no matter what we do and because the severity is high (i.e. financial loss can run into hundred of thousands and even millions if you include medical, loss of income, supplemental services for quality of life), the need to have a plan to transfer any financial loss is essential.
This is where critical illness insurance fits in.
Types Of Critical Illness Insurance Coverage
There are many critical illness products in the market (every insurer has at least a few options) and they come in different packages and features. This may make it difficult for you to understand which is the right coverage.
Do You Know?
Critical illness insurance is known by different names including crisis cover, critical care…etc. The easiest way to see if your insurance policy provides critical illness insurance cover is to check your policy contract and see if there are definitions for critical illnesses such as cancer, stroke or heart attack.
In GEN, we group all the different types of critical illness coverage in the market into 3 types and here is a summary of each type:
Type 1: Severe Stage with Standard Definitions
All insurers that offer critical illness insurance coverage start with this type of basic critical illness insurance coverage. The number of illnesses covered is 37 and the definitions are standardised using Life Insurance Association’s (LIA) guidelines.
Type 2: All Stages Cover with Additional Conditions (i.e. Early, Intermediate and Severe + Additional Conditions)
Type 2 is where insurers differ. There are Type 2 critical illness plans that cover only one type of critical illness (e.g. cancer only), a small group of illnesses (e.g. the 3 illnesses that resulted in most claims such as cancer, stroke and heart attack) or even more than a 100 illnesses covered. The key difference as compared to Type 1 is that Type 2 coverage extends beyond the severe or critical stages of an illness as it includes coverage the early or intermediate stages.
Using the example of Major Cancer, the standard definition provided by LIA is:
“A malignant tumour positively diagnosed with histological confirmation and characterised by the uncontrolled growth of malignant cells with invasion and destruction of normal tissue.” In addition, Cancer which is “carcinoma-in-situ” is specifically excluded.
This can result in someone being diagnosed with cancer yet being unable to claim is the cancer is at the “carcinoma-in-situ” stage or when the cancer hasn’t spread.
The coverage for Type 2 is more comprehensive and there are also options for “multiple claims” such as being able to claim more than once for the same illness or different illnesses depending on the plan features and this provides the peace of mind that there is still insurance protection even after making the first claim.
Type 3: Impairment-Based Definitions
This is currently not offered by all insurers and it’s a different approach towards providing coverage for “loss of health”. For Type 1 and Type 2 coverage, the illnesses are defined clearly and the insurance plan can only pay out when one of the illnesses covered is diagnosed. This means that the greater the number of illnesses or conditions covered, the more comprehensive the coverage is. For example, a plan that covers 100 conditions is better than another that covers 80 conditions.
However, if an illness is not defined and by extension not covered, the plan will not pay out even if the illnesses resulted in a significant health impact. An example will be Covid which is not defined in critical illness insurance definitions because it’s a new disease yet for some, it can result in damage to the lungs resulting in permanent impairment. Type 3 critical illness coverage may be able to pay-out if the impairment to lungs meets the definitions.
Some examples of areas where impairment-based definitions can cover includes:
- Cardiovascular System
- Neurological System
- Hepatic System and Liver Function
- Renal System and Kidney Function
- Digestive System
- Respiratory System
- Sensory System
Choosing The Right Type of Critical Illness Insurance
Choosing the right type of critical illness insurance coverage depends on many factors including your actual financial needs, your budget, your current insurance coverage and your personal preference on how big of a role you want insurance and critical illnesses insurance to play in your financial plan.
Nonetheless, you can use the characteristics of the 3 Types of critical illness insurance as a reference to what will fit your own unique financial circumstances.
Here is a comparison summary using a simple Low-Medium-High rating:
Focus On What You Can Control
When it comes to loss of health planning, it is always a difficult planning to get right because there are so much that is not within your control. Critical illness may never happen to begin with and if it did happen, there are so many illnesses and different illness brings with it different challenges and financial considerations.
And, it is not a pleasant topic to keep worrying about.
Thus, my advice is to put in the effort to think about this topic seriously at least once, put together a good risk management plan customised to your unique personal financial circumstances and don’t worry about it again knowing that you have the “drawer plan” in place.
Of the many things that you have no control over, there are two that not only can you have complete control over but they make a material difference to your planning. They are “When do you start?” and “How do you plan?”.
Start early, plan prudently and above all, focus on what you can control!
Article by Lee Meng Choe
Email: mengchoe.lee@gen.com.sg
The writer is the Executive Director (Advisory) of GEN Financial Advisory
