Critical Illness (CI) definitions are changing on 26 August and I feel this is a timely article to provoke thinking points again. The short answer to the question stated in the title, it's a yes. Hospitalization insurance and critical illness insurance serves different purposes. In this article, I also hope to provide a few consideration factors you need to evaluate when trying to decide if you want to forgo getting critical illness coverage.
Difference Between Hospitalization Insurance and Critical Illness Insurance
Hospitalization insurance basically reimburses you for hospitalization and medical bills as incurred assuming you got the main plan and rider. It does not give you a payout. On the other hand, a critical illness insurance gives the insured a lump sum pay out upon the diagnosis of critical illness.
For example, if you get hospitalized for dengue, you cannot claim your critical illness insurance to cover the bills but you can claim from your hospitalization coverage.
Likewise, if you have a stroke and half your body is temporarily paralysed, you may be forced to stop working. Your hospitalization insurance won't be giving you any money while you recuperate at home. However, your critical illness insurance can give you a pay out that can potentially cover your living expenses.
If I have my own savings, do I need critical illness insurance?
The question is, do you want to use your own savings?
A lot of people assume they can avoid taking up critical illness coverage because they are prudent savers. The question is, how huge is your reserve? Let's assume that you have $200,000 set aside in savings. Your income might be $6000/month. $200,000 can cover your income for only 2 years 9 months. In other words, you need to recover by then if not you will run out of money and empty your savings in the process.
Of course, it might be argued that you will not be spending 100% of your income monthly. Let's further assume that you spend $3000 every month inclusive of medicine and supplements. Now your money can last you for 5 years and 2 months. Good news, you recover! Now you have no money in your bank account, and you need to start from scratch to save up the $200,000 you originally had. Also, depending on your age at the onset of critical illness, you might encounter challenges looking for work while also commanding the same income.
Watch from 1:30 onwards if you don't want to watch the full video
In this video, you will see that Chew Chor Meng, a Mediacorp actor, is suffering from a condition known as Muscular Dystrophy. He also shared that he had to give up acting roles due to his condition. Giving up roles potentially means giving up on income. This is on top of all the stress and discomfort that the illness must be giving him at that time. Are you sure you are mentally prepared to go through the financial stress that comes with critical illness if you decide to rely solely on your savings?
What if there is a relapse? Can you save up a second reserve for that in time?
A relapse is a highly realistic risk consideration that many people overlook. Assuming you decide to self insure and rely on your own savings, then your savings must be robust enough to sustain not one but multiple critical illness risk. Given that critical illnesses are usually not 'cured', the potential possibility of a recurrence is high.
Should one wish to self-insure, the savings must be sufficiently huge because the time frame for a relapse is unpredictable. Very often, people assume that they can go back to the workforce with the same wage and have enough time to accumulate savings. This is very optimistic. Depending on the type of occupation and illness, there's a possibility that working at the same stress level may not be recommended. Also, if your savings can only sustain you for a few years, it's highly unlikely your lifestyle can be maintained should a relapse occur.
If you use up your funds for survival, do you still have enough saved up for retirement?
Another consideration a lot of people tend to overlook is their retirement. Very often, because we only evaluate our situation in the short term, we see the sizable savings we have accumulated as a huge safety net. However, we do not consider what happens after this money is spent. It's highly possible that as financially prudent people, your assumption is that you will not voluntarily overspend your retirement nest egg. The consideration here is, what happens when this expenses is involuntary? Will you have the time to save up another nest egg for retirement?
How modern critical illness plans continue to stay relevant to medical advancement
Skepticism in the need for insurance is especially high for the older generation partly because default critical illness insurance only covers critical illnesses listed by the Life Insurance Association of Singapore. Such coverage always refers to advanced stages of critical illness only. Hence, it's quite common for consumers to be denied claims because they got diagnosed with early or intermediate stage CI which won't be eligible for claims. Often, consumers up till today assume that as long as they have bought a CI plan, they would be eligible to claim the moment CI occurs.
Early Stage Critical Illness (ECI) Coverage
Insurance plans are constantly evolving with times and ECI coverage was subsequently introduced to ensure that consumers can get covered for early and intermediate stage as well. This takes away the confusion of whether a critical illness is claimable upon diagnosis. Most of the time though, if your coverage is below $300K, you are likely to be able to claim only once. This is important to know because upon diagnosis of a critical illness, a person would be deemed to have a pre-existing condition and more often than not, would no longer be eligible to buy new protection plans on standard terms. Also, it's noteworthy to know that all ECI coverage has the word 'early stage' in it. If these 2 words are missing, it's better to double check with your advisor what stages does your critical illness coverage entail.
Multi-Pay Critical Illness Coverage
Even more recently, insurance plans now offer multiple pay critical illness coverage. Such coverage allows for multiple claims. This is especially important given that people are more well-informed today and also place a greater emphasis on regular health check ups. This means that detection might happen earlier and recovery chances would increase. Hence, it is possible that a person might discover their illness at a younger age and still have a long way ahead of them. Naturally, as a CI survivor, you have a higher risk of getting new illnesses due to lower immunity. Once a person has gone through the experience of CI, they will know the costs involve and would likely want to get more coverage in case of recurrence. In the past though, they would be unlikely to successfully get a new plan without exclusions.
With a multi-pay critical illness plan, a consumer need not go through the difficulties of getting a new plan after recovery because they would still retain their coverage after a claim is made. Most of the plans in the market today offers relapse benefits, allow multiple CI claims and some may even offer pre-early benefits that cover for benign tumours, among other conditions. The number of conditions covered has also been increasing. Such plans ensures that modern day coverage continues to stay relevant in view of better healthcare advancement and longevity concerns.
Is it worth the money spent?
A lot of times people are not willing to pay for coverage because of this lingering belief - if nothing happens to me, it's money down the drain. Technically, I'd say the same for 4D and TOTO as well. So why do people still buy lottery and yet have a big problem with insurance? People think that 4D & Toto cost very little and have the potential to make a lot of money. If you think about it, I'd say the mechanics is similar for critical illness plans. Of course, the rationale differs as lottery is buying hope while insurance is buying security.
A typical multi-pay critical illness plan can cover for 3 to 9 times of the basic sum assured. Assuming a 30 year old male, non smoker, buying a basic coverage of $100K till he turns 65, he would be paying about $75/month for this coverage which can be claimed up to 600% of the basic sum assured. That is approximately $600K in this example. So, if nothing happens to him, he pays a total of about $31,500 for 35 years of coverage. However, if something happens to him between age 30 - 65, he can potentially claim $100K up to $600K depending on the severity and frequency of his illnesses. If he makes a claim for example at age 40, he only paid $9000 to get a $100,000 payout or more. If he claims at age 50, he would have paid $18,000 for a payout of $100,000 or more. In this example, a peace of mind is worth $31,500. How much are you willing to pay for a peace of mind?
Critical Illness Definition Changing
These are some of the key changes in the CI definitions that will be implemented on Aug 26 this year. The existing definitions are broader and still available in all existing critical illness plans purchased before 26 Aug 2020. To read the full details of the changes, you can refer here.
If you would like to get your critical illness coverage sorted, please speak with a trusted advisor. Alternatively, you can drop me a message if you want me to help you with it.
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Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.
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