critical illness insurance cover

How Much Critical Illness Insurance Do I Need?

There is no denying the fact that critical illnesses are on the rise today. The reasons are many such as pollution, stress, sedentary lifestyles etc. As much as it is necessary to take measures to prevent such diseases, it is equally important to be financially prepared to fight it in case you fall into the prey. 

If you single out the expenses for medical treatments, it can go up to the tune of Rs 20 to Rs 30 lakh. Then since you might have to stop working or at least cut down on the working hours due to the illness, there might be loss (or far less) of regular income. Such things might put your family under tremendous financial stress. 

Owing to these facts, critical illness insurance cover has become an absolute essential for everyone. It acts as a financial safety net if you are diagnosed with any critical illness. But the question is how do one determine how much critical illness insurance cover he/she should take? 

In this blog we will help you calculate the correct critical illness insurance coverage and what factors you need to consider while doing that. 

But, before that let’s understand what critical illness insurance cover is. 

Critical illness insurance is a coverage for specific critical illnesses like cancer, heart attack, kidney failure, liver failure, renal failure etc. The insurance company will pay you the sum assured if you are diagnosed with any of the critical illnesses (mentioned in the plan) during the policy tenure. However, you do not have to provide hospital bills, treatment expenses etc., like in case of health insurance policies, to claim the sum assured.

In most cases there is a survival period of 30 days, i.e. if the policyholder survives 30 days after being diagnosed with the illness, the sum assured is paid to him/her. 

Read: What is critical illness insurance policy? Should I buy it?

Now that you know what a critical illness insurance is, it is important to understand how much coverage you need. 

The expense estimator method is a very scientific way of calculating the coverage amount for term life insurance and critical illness insurance. We will use the same method here.

And to make the calculations simpler, we take the example of 40-year-old professional Samar. 

Samar lives with his wife, parents and two young children. Their monthly household expenses are Rs 50,000 which are completely unavoidable. Plus, he is currently paying an EMI of Rs 40,000 per month for their house. 

Now let’s calculate how much critical illness insurance coverage Samar needs. Here are the 6 steps.

(The five year rule: A person might take a few years to fully recover from a critical illness and start a normal life. Hence, we are particularly using a time span of five year for the entire estimation to make the calculation easier.)

Step 1: Factor in the monthly expenses: 

Samar and his family’s monthly expenses are Rs 50,000 which are completely unavoidable. Hence, for the next five years it would be Rs 30 lakh. 

  • Future household expenses: Rs 30 lakh. 

Step 2: Evaluate the liabilities: 

He is currently paying an EMI of Rs 40,000 per month for their house, which will continue for the next five years. Hence, in the next five years, he will have to pay Rs 24 lakh. 

  • Home Loan EMI: Rs 24 lakh

Step 3: Cost of treatment and incidental expenses: 

Being diagnosed with some critical ailment means the treatment will continue for sometime. And treatment for any critical ailment is usually expensive. The treatment and other incidental expenses, like buying medical equipment and fitting it in your home, would be to the tune of Rs 25 lakh, which you would need in the next five years.

  • Treatment an incidental expenses: Rs 25 lakh

On one side, we have mentioned monthly expenses, liabilities, treatment expenses etc that need to be included while calculating critical insurance coverage. On the other side of your personal balance sheet, are the income (from other sources) and investments that you have made over the years and that also need to be considered.

Step 4: Consider income of any other family members

Samar’s wife is working and can contribute Rs 40,000 every month, i.e. Rs 30 lakh in the next five years. 

  • Income of any other family members: Rs 24 lakh

Step 5: Factor in readily accessible money: 

Samar has Rs 5 lakh savings as an emergency corpus as savings account balance and Liquid Funds. This money is readily accessible.

  • Emergency funds: Rs 5 lakh. 

Considering all these factors let’s calculate how much money Samar and his family would need in the next five years if he is diagnosed with any critical illnesses.

Amount Of Money Samar Would Need In Case Of Critical Illness
Expenses/InvestmentsExamplesAmount
Future household expenses (+)Utility bills, food, school etc₹30 lakh
Liability (+)Housing loan₹24 lakh
Treatment and incidental expenses (+)Medicine, nursing charges, home treatment₹25 lakh
Income from other sources (-)Wife’s contribution₹24 lakh
Readily accessible money (-)Savings account balance, Liquid Funds₹5 lakh
Total sum Samar would need₹50 lakh

Step 6: Now to calculate the coverage you would need, multiply the amount needed with 1. 5. In this case the total coverage Samar would need is Rs 75 lakh.

The reason for applying the 1.5x multiple is to account for inflation and for any unforeseen circumstances such as complication in treatment or inability to spouse/partner to work etc. 

Pro-tip:  It is always a good practice to review your insurance requirements once every 5 years because by then a lot might have changed e.g. better plans might have come up, your financial situation might have changed etc.

Bottomline: 

The method that we used to calculate the critical illness  insurance cover is not completely foolproof, that is simply because there are several future assumptions that have been taken into consideration. But, it gives you a rough idea about how you should approach it. 

However, no matter whatever the number is (as per your assumption) critical insurance cover is as important as having a health and a term insurance plan.

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