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Why is a Critical Illness policy so 'Critical' and where can you buy it?

A mediclaim policy is not a substitute to a critical illness policy. And, it is comparatively more expensive.

Harsh Roongta

24 Jun 2009

A friend recently told me he had taken my advise and had bought a term insurance policy for Rs. 50 lacs for a premium of only Rs. 800 p.m. even though he was only 30 years old and in good health. He felt very satisfied that he had made adequate provision for his family in case of his untimely death. When I enquired if he had also taken the critical illness policy as we had discussed last time he replied in the negative. When I asked him for the reason he said it was a very expensive policy (costing around Rs. 1500 per month for a cover of Rs. 50 lacs) and since he already had a mediclaim policy he had decided against buying the critical illness policy.

I had to spend more time with my friend to explain to him why a mediclaim policy is not a substitute to a critical illness policy and also why the critical illness policy is relatively more expensive.

I informed my friend that he had done a great job in buying peace of mind by taking an adequate (for him) value life insurance policy. I reminded him about the fate of a common friend of ours who had suffered from paralytic stroke. He had survived due to some excellent treatment by the doctors and was now expected to lead a semi-normal life though his speech and the functioning of the left side of the body was still affected. While he was being treated, however he had lost his job and was finding it very difficult to get another job given his circumstances. He and his family were now financially dependent on his brother. I explained to him that whilst our common friends' mediclaim policy had paid for the hospital expenditure, he had nothing to fall back on now for his day to day living requirements. Although he was saved from actual death, the paralytic stroke had bought "financial death" to our common friend. Since a life insurance policy only pays on actual death it is the critical illness policy that pays on such occasions (organ failure, cancer, paralytic stroke, etc.) that bring "financial death" to a person. Ideally the critical illness cover should at least be the same as your life insurance cover.

My friend then asked me the reason why the critical illness policy was so expensive. I had to explain to him that insurance works on probabilities. The probability of him dying before the tenure of the policy was much less as compared to the probability of his contracting one of the critical illness policies during the tenure of the critical illness policy.

I think all this convinced my friend about the "critical" need for a critical illness policy. His next question was "where do I buy it from". Now critical illness policy is either available as a rider on top of a Life Insurance policy or as a separate stand alone policy from the non life (general) insurance companies. The issue with buying it as a rider from life insurance companies is that you need to buy it only it at the time of buying your life cover. Also adequate Critical illness cover is not available through this route as the premium on all riders put together cannot exceed 30% of the premium for the base policy. Since the critical illness rider is more expensive than even the basic life cover you cannot really get adequate critical illness cover through this route. Which means you will need to turn to the non-life companies to get adequate critical illness cover. IRDAs recent circulars have also taken care of the earlier problem with this route as renewal of the policy now cannot be denied except on grounds of fraud, moral hazard or misrepresentation and the non life company also has to indicate in advance about the maximum age up to which the policy is renewable and the premiums chargeable at different age levels at today's rates. This making it almost like a long term life insurance policy except that the premiums can be increased with the prior approval of IRDA in later years if it has been indicated that such future premiums are not guaranteed.

I also asked him to check out the critical illness policy comparator on www.apnapaisa.com before deciding whom to buy the policy from. My friend was happy for all the unpaid free advise given by me and resolved to buy the critical illness policy within the next week itself.

My friend has made the right decision. What about you?