Insuring for critical illness
Critical illness insurance was introduced 25 years ago. Before that, most people were quite happy to insure against death (by accident or illness, but not critical illness) under a life insurance policy. With the introduction of the expanded cover, many consumers (with a nudge from the insurance agents) think that it is essential to cover against critical illness.
Critical illness
The key difference is that the critical illness policy pays out the sum insured in the event of the diagnosis of a critical illness. If the illness reaches a critical stage, the insured person will die within a few years of receiving the payout, but it was argued that the payout could be used for treating the critical illness. In some cases, the insured person may survive and lead a normal life after receiving the payout.
What many people may not know is that the illness must have reached a critical stage before a claim can be approved. For example, cancer has to reach stage 3 or 4 (under the late stage critical illness covers) before a payout can be approved.
Some insured people are quite upset to learn that if the cancer is discovered at stage 1, there is no payout. They are under a dilemma. Most people consider that life is too precious and would opt to be treated immediately, even though they are not eligible to make a claim. They felt that the conditions are too stiff.
Early payout
To overcome this difficulty, some insurance companies have introduced an early payout critical illness policy, but the premium would be several times higher than the typical critical illness policy.
Choice of cover
Many consumers need guidance. Should they buy the typical critical illness policy or the early payout policy? Is it worth paying a higher premium for the cover? Should they buy a critical illness policy that pays out beyond age 60 or one that pays out only on occurrence at an earlier age?
Managing personal risk
The consumer should be aware of the following:
* At a young age, the biggest risk is death or serious injury caused by accidents
* A person is likely to suffer a critical illness at an advanced age, say beyond age 70, but the cost of insurance may be too high.
* The consumer has to read the fine prints on what is covered or excluded and the stage of the illness in which a claim can be approved.
The consumer should be careful not to pay too much premium for an insurance that has a low chance of occurrence. The consumer should be careful about relying on the advice of the person selling the insurance, as there is a conflict of interest.
Tips for consumers
My tips are:
* Invest your savings in a low cost investment fund to earn an attractive yield. For example, if
you invest $500 a month over 20 or 30 years and earn a yield of 4% per annum, the
accumulated savings will be $179,000 and $336,000 respectively. This is likely to be much
more than the amount that can be covered under an expensive critical illness policy.
* Buy term insurance, accident insurance or critical illness insurance for 20 years only. If you insure for a short period, the premium rate is quite low. If you were to suffer a critical illness after 20 years, you would have more than sufficient savings to meet your needs.
* The cost of term insurance of $100,000 for 20 years is about $150 a year. This will cover
death by accident or illness.
You can insure for critical illness insurance before age 45 by paying an annual premium of about $120. The cost of insurance will increase by 13 times when you reach age 60. By that time, you have to pay $1,560 a year. There is really no need to pay such a large premium for the insurance, as you would have more than sufficient savings to pay for the treatment if it happens after age 45.
Be your own insurer
I advise consumers to invest their savings on their own to earn an attractive yield rather than to put the savings into a whole life insurance policy that provide critical illness cover but provide a low yield on the premiums. Invested in a low cost fund, the savings can accumulate to a large
sum after 20 or 30 years. At that time, the consumer can use the savings to pay for critical illness and other financial needs.
They should avoid paying too much premium for critical illness insurance, as they may find that the policy does not cover some special conditions or the claim may be rejected if they did not declare a pre-existing illness, even though you might not be aware about it.
If the consumer has his own savings, he can be his own insurer to pay out the claim from his savings. He does not have to rely on the approval of a third party, i.e. the insurance claim manager.
Tan Kin Lian
Note: the cost of term and critical illness insurance indicated above are taken from the
insurance policy offered by SAF to soldiers and their dependents. These rates are benchmarks
to compare against the rates charged by the market.
Tan Kin Lian & Associates - Onyx
#ci
Now, the only CI will buy is a rider attached to term policy, and will buy only a small amount like $50k to help with cash flow. (eg: even with a dividend warrior portfolio, the dividends may occur quarterly, so for 1-2 months, you may not get much dividends and you may need the cashflow)
