wealthfactsheet-life_insurance-critical

6. Critical Illness Insurance
Critical Illness Insurance is not a medical insurance policy. That is because the structure of the two different policies are paid-out differently.

The difference:
Medical Insurance is primarily compensated on an indemnity basis. You cannot profit or buy more of medical insurance.

Critical Illness is like a life insurance policy. You can accumulate and purchase as much as possible, subject to individual company's limits. Upon a claim, a policyholder will expect to claim whatever he or she have bought.

The other difference between a medical insurance and Critical Illness policy is that medical insurance are only claimable upon a hospital claim. While a critical Illness claim is claim upon a diagnosis of a critical illness named in the policy conditions.

Usually a Critical Illness policy will have a list a major diseases (usually 30 major illness) listed in the contract conditions. And upon a certified doctor's diagnosis which must resemble the diagnosis of the contract then the claims will proceed and the policyholder will claim the full amount or upon the conditions as stated in the policy.

Therefore upon claim, you do not have to die or become totally or permanently disabled in order to claim. Upon any diagnosis of the mentioned illness, a policyholder would be able to claim the benefits of the policy. When that happens, the insurance company is said to have fulfilled its obligations.

Since Critical Illness policies are paid in one lump sum, what is the right amount to buy. Here are two ways to decide:

1. Economic value of an individual (income replacement)
For example if you are earning $50,000 a year, it would be a good indication to multiple by a factor of 4. That means you would need to insure upto approximately $200,000. Why? The reason is because studies have concluded that whenever a person suffers from a critical illness, the time that was diagnosed till the time of full recovery is 4 years give or take.

Remember it is not the medical bill that you would be concerned of. That is one area of concern, but rather the time needed to recuperate and rehabilitate that is costly. You are insuring that portion when you buy Critical Illness insurance.

2. Cost of Major Illness (expense method)
This is usually done by taking in statistics of medical costs that a person would incur when he or she is suffering such illness. Usually it is a smaller amount. For example, one may get information that a person suffering from Cancer spents about $100,000 so to use that figure would be realistic.

Just remember, that this is a realistic method and can be quite effective. But the cost may at times vary, so to be sure, always insure a little more.

Critical Illness policies are very popular these days but it seems the cost of these type of insurances are too costly for the insurance companies.

In the past, the younger you are and when you buy a Critical Illness policy, you can continue to maintain paying that low premium. Now insurance companies have change some of the terms. Now premiums will increase with age. This is because of high claims experience and at the same time policyholders are generally taking less care of their health right now.