Critical Illness Insurance Plan: Should you buy?

A Critical Illness Insurance Plan pays you a fixed amount (lumpsum) if you are diagnosed with a specified critical illness.

You have already bought a family floater health plan for Rs 20 lacs. That looks ok, right?

Well, your neighbour underwent cancer treatment last year. The treatment cost approximately Rs 30 lacs. You worry, if you were to contract a critical illness, your regular health plan won’t suffice. You will have to dip into your savings to fund the treatment. Therefore, you see a need to augment your health cover.

And a Critical Illness Insurance plan is one of the ways to augment your health cover.

Let’s find out more.

What is a Critical Illness plan?

A simple product.

1. You buy a critical illness plan.
2. If diagnosed with a specified critical illness, the insurer pays you a fixed amount (Sum Assured) and the policy terminates.
3. You can use the amount for treatment or for any other purpose. No restriction on end-use of money.

With no restriction on end use, a critical illness plans can cover both hospitalization and non-hospitalization expenses and can also provide much needed cash flow during the recovery period. 

You have a lot of flexibility with the insurance money. For instance, you can go abroad for treatment. On the other hand, most health insurance plans would cover treatment in India only.

Besides, treatment of critical illnesses may require medication/therapies long after the hospitalization ends. A regular health insurance plan won’t be much use for such expenses. A critical illness plan will come in handy.

One way to think about this could be:

For hospitalization pertaining to non-critical ailments, your regular health cover will suffice.

For treatment of a complicated/critical illness, your critical illness plan would kick in.

Critical Illness Insurance Plan Vs. Health Insurance Plan

I list out the important differences in the table below. Will elaborate on these aspects later in the post.

Let’s find out more about Critical Illness plan, its benefits/limitations, and whether you should purchase such a plan. Before we go there, let’s look at the concept of Sum Insured and Sum Assured.

Sum Assured and Sum Insured

Notice the usage of terms. Sum Assured and Sum Insured. For defined benefit insurance products such as term plans, personal accident plans, and critical illness plans, Sum Assured is used. On the occurrence of insured event e.g., death in case of life insurance, the insurer pays a fixed amount (Sum Assured) to the policy holder or her nominee, as applicable. There is no link to expenses incurred or anything else.

Under indemnity plans, Sum Insured is used. You are compensated for loss or damage on occurrence of insured event. Non-life insurance products such as motor, health and home insurance are mostly indemnity products. The compensation from the insurance company is subject to the ceiling of Sum Insured. For instance, in health insurance plans, the insurer indemnifies (pays) the hospitalization costs.

At the end, it is just nomenclature. A few critical illness plans may use Sum Insured or Sum Assured. However, that does not change the nature of a critical illness plan. It remains a defined benefit product. Hence, Sum Assured is a more apt usage. In this post, I will use “Sum Assured” when I refer to Critical Illness plans.

Read: Which is the Best Life Insurance Company (2022)?

Important Things to know about a Critical Illness Plan

#1  A Defined benefit product (and not an indemnity product)

A critical illness insurance plan is a defined benefit policy. On diagnosis of a specified critical illness, the insurance company pays the fixed amount (Sum Assured) to the policy holder. And the policy terminates.

The payout has no linkage to the treatment cost. In fact, the amount is paid irrespective of whether she chooses to undergo the treatment or not. The policyholder can choose to use the amount as she wishes.

For instance, if the Sum Assured under the plan is Rs 10 lacs, on diagnosis of the critical illness, the insurance pays Rs 10 lacs to the policy holder and the policy terminates. Completely up to you how you want to use this insurance payout.

Contrast this with regular health insurance plans, which are indemnity products. The health insurance plan covers your hospitalization expenses, pre and post hospitalization expenses and certain specified day care procedures.

Under indemnity products, the insurance only compensates you for the actual expenses incurred subject to the ceiling of Sum Insured. For instance, if the Sum Insured is Rs 10 lacs and your hospitalization bill is Rs 4 lacs,the insurance company will pay only Rs 4 lacs and the policy continues. For the remainder of the policy year, you can make a further claim of Rs 6 lacs. At the start of the next policy year, the coverage limit will reset to Rs 10 lacs.

No concept of coverage reset in Critical Illness plans.

#2 Lifelong Renewability and Termination on payment of Sum Assured

As per IRDA regulations, all critical illness plans provide lifelong renewability. However, “lifelong renewability” has slightly different connotation in critical illness plans.

Lifelong renewal unless you are diagnosed with an insured critical illness.

Since the critical illness plan is a defined benefit plan (just like a term insurance plan), the insurance company pays the Sum Assured on diagnosis of a critical illness (insured event) and the plan terminates. Makes sense too. Under defined benefit plans, the insurance companies won’t pay more than the Sum Assured. And once the Sum Assured has been paid, there is no point of insurance.

If you want to continue Critical Illness cover, you must buy a new plan. A new plan (from same or different insurer) means fresh underwriting. Since you have been diagnosed with a critical illness, your chances of getting are bleak. Even if you can get one, you will have to cough up a very high premium.

Regular health insurance plans do not terminate after a claim. And the coverage limit (Sum Insured) resets at the start of each policy year. You can keep making claims for the same illness/disease year after year. Besides, since claims-based loading is not permitted,  the insurer can’t increase your annual premium just because you made a claim under the plan.

#3 Survival Period Clause

A policy holder needs to survive for a period of at least 15/30 days after diagnosis of critical illness before she can make the claim. So, if the policy holder dies 10 days after the diagnosis of a critical illness, insurance company will not pay anything. This is beyond me. I couldn’t really understand the rationale behind such a clause. If you have an answer, please leave a comment.

In fact, the same critical illness plan may have different survival period for different illnesses. IRDA regulations don’t prevent this.

Regular health insurance plans have no concept of Survival period.

Regular health insurance plans have waiting periods (2-4 years) for pre-existing illnesses and certain specified treatments. Critical illness plans have waiting periods too (much shorter though. Only a few months).

#4 Which Critical Illnesses are covered?

The number of critical illnesses covered will vary across plans.

A good part is that IRDA has standardized the definitions of 22 critical illnesses through its circular dated July 29, 2016. Therefore, you will find the definitions of the following critical illnesses exactly the same across insurers.

1. Cancer of specified severity
2. Myocardial Infarction
3. Open Chest CABG
4. Open Heart Replacement or repair of heart valves
5. Coma of specified severity
6. Kidney failure requiring regular dialysis
7. Stroke resulting in permanent symptoms
8. Major organ/bone marrow transplant
9. Permanent Paralysis of Limbs
10. Motor Neuron disease with Permanent Symptoms
11. Multiple Sclerosis with persisting symptoms
12. Angioplasty
13. Benign Brain Tumor
14. Blindness
15. Deafness
16. End stage lung failure
17. End stage liver failure
18. Loss of speech
19. Loss of limbs
20. Major head Trauma
21. Primary (Idiopathic) Pulmonary Hypertension
22. Third degree burns

A Critical Illness insurance plan can choose how many critical illnesses it covers. For instance, a CI plan can cover 10 out of the above critical illnesses. It can cover additional illnesses (not in the list) too. However, if it covers any of the above critical illnesses, the definition/severity of the critical illness must be copied verbatim from IRDA regulations.

I copy definition of 2 critical illnesses below.

Kidney Failure Requiring Regular Dialysis

End Stage Renal Failure presenting as chronic irreversible failure of both kidneys to function, as a result of which either regular renal dialysis (haemodialysis or peritoneal dialysis) is instituted or renal transplant is carried out. Diagnosis has to be confirmed by a specialist Medical Practitioner

MYOCARDIAL INFARCTION (First Heart Attack of specific severity)

The first occurrence of heart attack or myocardial infarction, which means the death of a portion of the heart muscle as a result of inadequate blood supply to the relevant area. The diagnosis for Myocardial Infarction should be evidenced by all of the following criteria:

1. A history of typical clinical symptoms consistent with the diagnosis of acute myocardial infarction (For e.g., typical chest pain)
2. New characteristic electrocardiogram changes
3. Elevation of infarction specific enzymes, Troponins or other specific biochemical markers.

The following are excluded:

1. Other acute Coronary Syndromes
2. Any type of angina pectoris
3. A rise in cardiac biomarkers or Troponin T or I in absence of overt ischemic heart disease OR following an intra-arterial cardiac procedure

Please note this is the standard definition (no matter how confusing) of kidney failure or heart attack as per IRDA guidelines. You will find the same definition of kidney failure in all the critical illness policies.

Now, I don’t know what these wordings mean. Only a doctor can explain. These narrow definitions (or so I believe) can be a source of dispute at the time of claim. What you (or your doctor ) feels is a kidney failure or a heart attack may not be kidney failure (or a heart attack) as per the insurance company.  There is severity attached to every condition. And this can cause a lot of confusion and makes critical illness plans less reliable.

To be fair to insurance companies, they must define the insured events objectively to underwrite the risk properly. Ambiguous definitions will also lead to unnecessary claim disputes. However, if you plan to purchase a critical illness cover, this is something you should be aware of.

A point to note: If these conditions are so severe that you require hospitalization, your regular health cover will anyways cover the expenses.

#5 Sub-Limits

A few critical Illness policies may have sub-limits for each critical illness. They pay only such amount (sub-limit) on diagnosis of the illness and the company’s liability in the future goes down by such amount. The policy ceases if the entire base Sum Assured has been paid. For instance, total cover is Rs 20 lacs and there is sub-limit of Rs 5 lacs for kidney failure. On diagnosis of kidney failure, the insurer will pay Rs 5 lacs and the company’s liability towards all the future claims will reduce to Rs 15 lacs.

How much does a Critical Illness Plan cost?

The premium will depend on your age and the number of critical illnesses covered under the plan.

Given the narrow scope of coverage and the defined benefit nature, do not expect premium to be very high.

I list the premium for Rs 10 lacs cover for a 35-year-old male.

Have picked the plans randomly (I could find the premiums about these plans easily). Please note that the premium can change each year or after a fixed number of years.

Cancer and Cardiac Care Plans

Now, the insurers have launched disease specific products too, primarily to cover cancer and cardiac issues.

For instance, you can have a plan that covers only 1 critical illness, say cancer. Or cardiac conditions. Therefore, if you foresee the risk of a particular illness to be high (and such a plan exists), you can buy that plan.

Plus, the insurer could structure the product that has both defined benefit and indemnity benefits. Say, pays a lumpsum on diagnosis and reimburses/pays hospitalization bills too.

Enhanced health cover vs. Critical Illness Insurance plan

You considered buying a critical illness health insurance plan because you were worried that your regular health plan won’t be able to meet the treatment expenses of a critical illness.

What about enhancing your health cover?

After all, a regular health insurance plan offers a much wider coverage than a Critical Illness plan. I have picked up plans from two insurance companies. You can see there is not much difference in terms of premium for

1. Separate health cover (10 lacs) and Critical Illness Plan (Rs 10 lacs)
2. Health cover of Rs 20 lacs

Easy to note that marginal cost of health is not very high. For insurance, to double the cover from 10 lacs to 20 lacs, you just must pay only 25-30% more.

Premium-wise, there is not much difference (Higher health cover Vs. Lower Health cover + Critical illness plan).

Therefore, the decision must be based around preferred way of coverage.

Should you buy a Critical Illness Insurance plan?

I have a strong opinion on many insurance matters. For example, don’t buy traditional life insurance plans. Purchase a pure term cover to meet your life insurance needs.

However, in this case, I do not have a black and white answer.

A critical illness plan has many merits. Given the defined benefit nature of product, you can use the money whichever way you want. You can even go abroad for treatment that most regular health plans won’t cover. You can use it for non-hospitalization expenses too (that regular health plans won’t cover).

If you have a family history of any critical illness (there is a genetic disposition to the illness), it makes sense to spend some money to guard against that illness.  And yes, do make full disclosures while purchasing the policy.

At the same time, there are several limitations too due to restrictive nature of definition of various illnesses and the survival period clause. However, the biggest drawback is that a critical illness policy ceases once the company pays Sum Assured on diagnosis of a critical illness. Regular health plans continue as long as you keep paying the premium (irrespective of whether you make a claim or not). Hospitalization for all the critical illness will likely be covered under your regular health plan.

Consider these aspects.

1. A Critical Illness Insurance plan will pay just once. What will you do after that? A Health insurance plan can pay multiple times. The coverage under health insurance plans also reset every year.
2. You need critical illness insurance plan to fund the expenses for treatment of a major illness. A health insurance plan will cover most of those expenses too.
3. If you are worried about the treatment cost of major illnesses, you can consider a bigger health insurance cover. Instead of Rs 10 lacs health cover + 20 lacs Critical illness plan, you can simply buy a health cover of Rs 30 lacs. The marginal cost of health insurance is low. Hence, a Rs 30 lacs cover won’t be thrice as expensive as a Rs 10 lacs cover.  Alternatively, you can consider a super top-up plan.
4. A CI plans covers you for only specified ailments. Associated severity can make things quite complicated. A regular health insurance plans provides a much more exhaustive coverage and has much simpler criteria.

What should you do?

You have a many options:

1. Continue with the existing health cover. Do not purchase a fresh critical illness plan.
2. Continue with the existing health insurance plan and purchase a fresh critical Illness Plan.
3. Do not purchase a Critical Illness plan. Go for an even higher health cover; say Sum Insured of Rs 20 lacs in place of Rs 10 lacs. You will have to shell out additional premium. We have already seen there is not much difference between enhancing your Sum Assured. Ensures much wider coverage. This option is essentially an extension of option (1).
4. Go for a super top up health cover over your existing health cover.
5. Purchase adequate health cover. Instead of buying a critical illness plan, keep adding to a medical emergency fund. Do not touch the corpus except in the event of a medical emergency.

No wrong answer here. The idea is that you must have adequate health cover. Adequate is a subjective term. If you some have idea about health care expenses in your city, cost of surgical procedures etc, you can arrive at a number. On a lighter note, if God goes after you, nothing is ever going to be adequate.

If you ask me, I will go with (3), (4) or (5). Which option would you go with?

A Critical Illness plan is not a substitute for health insurance plan. You can use it only to augment your health insurance cover. Therefore, irrespective of whether you opt for a critical illness plan, you must have adequate health insurance.

Critical Illness Insurance Rider or a Standalone Insurance Plan?

You can also buy critical illness rider with the regular life/health insurance plans for extra premium. A rider can be cheaper than a standalone plan since there are lesser administration costs. Both approaches work in a similar way. There are a few minor differences.

Under a rider, the cover may be linked to the Sum Assured/Sum Insured under the base plan. Under a separate plan, you will have flexibility to choose cover.

Under a rider, your rider will automatically get renewed when you renew the base plan. In case of a standalone plan, you will have to renew the base plan every year.

As far as premium is concerned, premium for the separate plan can change every year. This can also happen if you buy a rider with your health insurance plan.

A point to note if you are buying critical illness rider with your term insurance plan. Do check if the rider offers accelerated benefit or additional benefit. Let’s say you have a term cover of 1 crore and a critical illness rider is Rs 20 lacs.

If the critical illness rider has accelerated benefit, the life insurance cover will go down to Rs 80 lacs once the CI benefit is paid.

If the CI rider offers additional benefit, the life cover stays at Rs 1 crore even after payment of Rs 20 lacs under CI rider.

Between rider and a separate plan, a separate critical illness insurance plan gives greater flexibility.

Additional Links

HDFC Ergo Critical Illness Plans

Niva Bupa Critical Illness Insurance Plans