Critical Illness Insurance Policy

Why should any individual buy a particular insurance policy?

Insurance is a Risk Management tool. If an incident in the life of the individual can financially ruin the standard of living of that individual and his family, (S)he needs to invariably buy insurance. The key word is a financial loss beyond the balance sheet capacity of the individual. Each of us knows of people who have spent a few Crores of Rupees for treatment of life-threatening diseases like Cancer, Renal failure, heart diseases, etc. Such expenditure can financially ruin the family. We know of some well-to-do middle-class families having to resort to crowdfunding after exhausting all their savings.

The most important of such insurances are “Critical Illness Insurance”.  One question arises – will not a Health Insurance policy take care of such expenses for Critical Illness? The Health Insurance policy Sum Insured is limited. Taking a very high sum insured under a health insurance policy makes it unaffordable, especially for a person after retirement. Health insurance policies are usually “Indemnity based” which means that the policy only reimburses medical expenses related to hospitalization. Critical Illness policies are Benefit policies. The lump sum amount is paid on the diagnosis of a critical illness covered in the policy. No need to prove that the expenses are incurred. Compared to health insurance, these policies are much cheaper.

Some of the aspects that Insurance companies need to take care of to make Critical Illness policies more customer-friendly are:

a)      The coverage wording should be simplified. For example, insurance companies coverage for heart attack is mentioned as “Myocardial infraction with various conditions to be fulfilled. However, NSTEMI not covered. Any type of Angina Pectoris not covered”. This is supposed to be heart attack coverage. A medical degree is a must to understand these terms.

b)      Guarantee on premium is only for 3 years. The insurance company reserves the right to increase premiums or even withdraw the product. In most developed countries, such health-related products cannot be easily withdrawn, or pricing changed. However, it seems very easy to do in India. Insurers have Actuaries whose responsibility is to price for the long term. IRDAI should look at any health product withdrawal or increase in filed prices very strictly and not allow it except in exceptional circumstances.

c)      Policies with lumpsum single premium payment with lifelong coverage should be introduced.

In conclusion, Critical Illness policies are the most important policy to be bought by any middle-class individual. If I have to rank the products in terms of risks that need to be compulsorily transferred to an insurance company, the Critical Illness policy will rank on top with Life (term insurance) ranking second and Health Insurance ranking third. Motor Insurance, Home Insurance, Travel Insurance, etc will fall much below the ranking order.

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