Do you need a critical illness plan?

A basic health insurance policy that pays hospitalization bills is a must-have, and by now, most of us realize this. But will a health insurance policy be enough if you are diagnosed of a critical illness or you meet with a serious accident? Assuming you have sufficient health insurance cover (at least 3-5 lakh individually and at least 7-10 lakh as family floater), your hospitalization will be taken care of. But what about incidental expenses? Or worse, what if the event impairs your ability to earn? You will be forced to dip into your investments or slip into debt.

To help you tide over such medical exigencies, there is another category of insurance plans that you should consider. Known as defined benefit plans, these pay you a lump sum so that you can pay for the incidentals. In that sense, these work as income supplements. There are broadly three kinds of defined benefit plans that you can buy: critical illness plans, personal accident cover and hospital cash.

Understand the merits and caveats in each and insure yourself well.

Critical illness plan

This will pay a lump sum if you contract any of the specified illness. Earlier, these plans primarily covered six critical ailments—coronary artery bypass graft surgery, cancer, kidney failure, heart attack, major organ transplant and stroke. But now insurers have begun launching plans that cover many more critical illnesses; even 20 including loss of speech, deafness, serious burns and end-stage liver and lung diseases. (See table for an indicative list of how many critical ailments get covered.)

A critical illness policy can be bought as a stand-alone policy or as an add-on, popularly known as rider, on a life insurance policy. In fact, some of the health insurance plans come bundled with critical illness, but experts recommend buying a stand-alone policy. “A stand-alone policy is most comprehensive both in terms of the ailments covered and the amount of cover it offers,” said Sanjay Datta, chief, underwriting and claims, ICICI Lombard General Insurance Co. Ltd. “It’s also important to note that while as a rider a critical illness plan may be a tad cheaper because the insurer saves on administrative costs, you can’t continue the plan beyond the tenor of the base plan,” he added.

If you don’t have sufficient savings to see you through an expensive medical emergency, critical illness policies work well. But there are some important caveats to know. The biggest is the survival period.

Usually, a critical illness policy comes with a survival clause of 30 days; some policies, depending upon the ailment, may also extend it to more than 30 days—that means the policyholder needs to survive for 30 days after diagnosis to make a claim. This is different from the initial waiting period of 60-90 days that most health insurance policies have at the time of buying a policy.

The insurer will pay the money after the survival period. According to new rules, a critical illness plan is renewable for life, but once a claim is made and the sum assured paid in full, the policy stands terminated.

Also, keep in mind that critical illness plans don’t cover pre-existing ailments. “Insurers, depending upon their underwriting guidelines, may offer health policy to individuals with pre-existing diseases, provided the disease is not related to any of the insured critical illnesses,” said Rakesh Jain, chief executive officer and executive director, Reliance General Insurance Co. Ltd.

While these are the broad norms, there are a few exceptions. For instance, the critical illness plan from ICICI Lombard does not have a survival period clause. This means that as soon as one gets diagnosed with a critical illness, a claim can be made. The one from Max Bupa Health Insurance Co. Ltd covers pre-existing ailments after a waiting period of 48 months. “The 48 months waiting period will be applicable if the pre-existing ailment is related to the 20 critical illnesses covered under the policy. If the ailment is not related, the policyholder will be covered after the 90 days initial waiting period,” explained a written response from the company.

So how should one choose? “Critical illness plans are cost-effective and work well to provide income during a serious illness. Look for the number of critical illnesses covered and survival period in a plan. Even as the definition of critical illness is now standardized, insurers may add extra caveats; one needs to be mindful of these,” said Kapil Mehta, managing director, SecureNow Insurance Broking Pvt. Ltd.

Personal accident plan

While a critical illness plan would give you lump sum payment, a personal accident policy would give you a lump sum payment if you meet with an accident that leaves you permanently or temporarily disabled. A personal accident plan has four covers: death, permanent disability, permanent partial disability and temporary total disability. For death or permanent disability, the policy would typically pay 100% of the sum assured. For permanent partial disability, it would pay a portion of the sum assured and for temporary disability, it pays a weekly compensation, usually up to 104 weeks.

“We pay 1% of the sum assured per day subject to a maximum of 10,000 per day for up to 102 weeks. There are caps on the amount of daily compensation because the cover was designed keeping in mind that the nature of disability is temporary and, therefore, it would impair the ability to earn for some time and not permanently. The daily compensation would help take care of the incidental expenditure,” says M. Ravichandran, president-insurance, Tata AIG General Insurance Co. Ltd.

Typically, the maximum insurance cover you can get under personal accident policy is 10 times your annual income. The premiums you pay depend upon your profession: a pilot, for instance, will pay a higher premium than a corporate employee because her profession is considered riskier.

Despite the gradation, a personal accident is an affordable policy. “The premium in a personal accident policy ranges from 100 to 120 per lakh of sum assured,” said Ravichandran.

Personal accident policies often come bundled with credit cards or as riders with life insurance policies. You can also get personal accident covers with auto insurance and home loan covers. But remember to understand what covers are available to you in the name of personal accident policies. Often, these bundled policies cover only accidental death. Choose a policy that covers all four casualties.

Hospital cash policy

This policy offers daily cash so that you can pay for other medical and non-medical expenditure during your stay in the hospital. But in their current form, these are not very effective. At the time of buying, the policy features would communicate three things: daily cash limit, number of days covered and eligibility. Most hospital cash policies need you to be hospitalized for at least 24 hours to be eligible for the cash payout. Some may insist on 48 hours.

Typically, a hospital cash policy will pay daily cash of 500-3,000. For hospitalization in an intensive care unit (ICU), the limit increases but the number of days eligible for cash in the ICU reduces.

Typically, a hospital cash policy comes bundled with health insurance policies or as a rider. With a health insurance policy, these, too, come with initial waiting periods on pre-existing ailments, but that is not what makes these plans less effective.

The claim process in these plans is a dampener. You don’t actually get a daily allowance while you are hospitalized, but post-hospitalization, when you produce medical records to prove it. So, this policy does not help you with daily expenses during your stay in the hospital; it only reimburses a fixed sum post-hospitalization. “The daily cash limit in these plans is small and then these are reimbursement policies. Given these constraints, I don’t find these plans to have good value,” said Mehta.

The strategy to follow is to first have a health insurance plan with adequate cover. Once you have that, you can add on lump sum benefit policies such as critical illness plan and personal accident cover.