Early critical illness insurance preys on people’s fear of an increasing likely scenario. Will a more prudent savings and contingency plan may make more sense?
Note: Author is not a certified financial advisor. These are personal opinions. Please consult your insurance advisor.
One area of insurance advice that is getting very popular is early dreaded disease or early critical illness cover.
I kind of have an idea that this is the sort of insurance that insurance companies like to sell. They seem expensive yet prey on people’s fear from hearsay or acquaintances experiences.
This article provide you guys with 10 points to think about.
Protection against Early Stage Cancer
The crux of these type of policy is to bridge the gap that, your normal critical illness policy are most likely claimable in advanced stage cancer or illness that are in advance stage.
Due to that, it becomes the case that when you get the payout, it is likely that you have a low chance of surviving.
As such, it will be akin to buying a death, TPD cover.
Policies under the umbrella of early critical cover bridges this gap by
- Paying out for early developed illness (not all, so please read what is covered carefully).
- From what I see most of the cover is $75,000 (AXA, NTUC, Tokio Marine)
- Allows further claim should there be a relapse or further dreaded disease in the future. This is usually what is left after the first claim.
- Pays out annually possibly a fixed sum yearly health check up reimbursement
- A small death benefit
- Some small money allowance
So how much do you need?
The pertinent question becomes how much do you need and what do you need it for.
I suppose here are the following considerations
- Alternative treatments
- Income replacement for expenses
- Out of pocket expenses for numerous checkups
- Coverage of loss income till 65 years old
Early dreaded disease does present a difficult problem. Compare to normal critical illness.
In normal critical illness, you are probably at a stage where the chances of surviving are pretty slim.
There is a likely hood that you need the above 1-3 and perhaps not 4.
It is said that what you should work towards 5 years of your annual expenses + cost of alternative treatment.
Else a rough amount could be 5 years of your annual income.
If you earn 60k that will be 300k of critical illness coverage. If its 5 years of expenses + 100k that will be perhaps 250k.
That will be rather difficult if its early dreaded disease, perhaps they work out that you need $75,000 because of this.
Medical cost are getting more expensive (including alternative treatment) so even with $75000 it may not be enough for it.
Premiums are more expensive than normal critical illness
The premiums for early critical illness is more expensive than normal critical illness in a term plan.
Tokio Marine’s brochure quotes a male 30 year old annual premium for a planned 100k coverage to be annually $1412, which works out to be $117 monthly.
AXA’s brochure quotes a male 30 year old annual premium for a planned 100k coverage to be annually $1197, which works out to be $99.75 monthly.
In contrast, a 100k Tokio Marine Level Term Insurance cover Death ,TPD and normal Critical Illness cost $588 annually, which works out to be $49 monthly.
If you take out the critical illness (which is the most costly part of the level term), a death and TPD only term policy for 100k works out to be $216 annually or $18 monthly.
Note that all policies above do not have cash values (aka savings component)
Is it worth it?
You can deconstruct these policies to a rough 75k critical illness, death, tpd level term and a 25k death tpd term.
This is not a like for like, as the main purpose of early critical illness is to be able to claim early. So we are essentially calculating the cost here.
The monthly premiums work out to be 49 x 0.75 + 18 x 0.25 = $41 monthly or $495 yearly
Usually, these policy will just throw in some more $25k “special benefit”. So lets add that in as well, which will be an additional $4.50 monthly or $54 yearly.
If you look at this example you can see that for Tokio Marine, you are paying 1412 – 549 = 863 more or 157% more than this DIY late stage critical illness.
For AXA its nearly 118% more.
Saving instead of paying premiums
The opportunity cost of paying the premium is saving this amount that you pay so that in the event when you need, you will be able to use this savings to pay yourself for your needs.
So remember, you have to save to make this work!
If we use the case of AXA as an illustration, you can probably save $1197 – $549 = $648 in annual premium yourself.
If you don’t buy this policy at all, you can probably save more in case of this contingency happening.
This table shows the cumulative savings that you can reach if you save the difference or all the insurance premium. Correspondingly, I also put an estimate of the likely hood that you can claim.
From the table you can see that you can never reach that amount of $75k just by savings. It is a large amount.
If you choose not to buy, you have to ensure that you have save adequately on top of this amount.
Premium waiver advantages and future insurance premium liabilities
The benefits of such a policy is that usually when detected at the early stage, future premiums are waived.
This will cut down on your expenses. But that is usually because your premiums are expensive in the first place.
However, in contrast, should you not be able to claim in early stage, a similar DIY policy you will have to continue to pay the annual premium of $549 else your policy will lapse.
Here is where it gets complicated. If you manage to survive a dreaded disease you may not be able to work in the job that maximize your potential, or you may not be able to work at all.
In that case, having to pay this $549 premium becomes a drag.
How can you offset this? One way that I can think of is to purchase a disability income insurance policy, which you are able to claim a monthly income replacement up to a specified age of 55, 60 or 65 should you not be able to work in your insured profession.
You playing the game of probability
Part of the selling point of these policies is that you are likely to encounter this policy so that you are able to claim.
The insurance agent will likely scare you by throwing the worst case scenario at your face.
While on my end, I am hearing more and more stories that cancer and stroke are hitting folks around my age (33) more and more often.
You cannot discount such event happening.
The probability increases should your family have a history of suffering from cancer, you do not have a good lifestyle or that you are generally susceptible to this.
Hell, if you go to a feng shui master or a fortune teller, they may tell you your chances of suffering from this is high!
Insurance is a game of betting on the odds of unexpected events happening. If you have an edge, you “win” (though I don’t think you want to win) and if the insurance company have an edge, you lose these premiums)
For myself, I would say that I am rather weak, since taking steroids for my psoriasis may result in further complications that affects the colon, liver and kidney.
So I would rate my chances higher than others.
Insurance companies earn more than they pay out
It is said that you need a demand in order for you to supply. The trend of the need for early reimbursement is there, but insurance companies are armed with actuaries that have evaluated the expected returns of these policies.
Disability Income is one, Early Critical Illness is another.
I asked David Merkel, a fund manager who is a train actuary on whether there are benefits of these early critical illness policies:
For a manager who mainly invests in insurance companies and reinsurers and looking for margin of safety, it is quite a statement when he steers clear of companies that sells more universal life insurance or whole life insurance and focus more on those that sells disability income and such low incidence policies.
This tells you how much of a vegetable head they are expecting you to make this out to be.
Duplicated coverage over more important plans
Depending on how the insurance agent sells you, they may fail to inform you that majority of your insurance plans cover a lot of the costs
- A comprehensive hospital and surgical plan with a deductible and co-insurance is important to insure against large hospital bills and surgeries
- You may want to supplement (1) with a addition that takes care of the co-insurance (which is the higher cost compare to deductibles)
- A disability income will offset and pay for expenses, should you not be able to work in your trained profession
- Your existing death and TPD terms at a lower cost will take care of your dependents should you not be able to make it.
With this in mind you may not need a $75,000 payout.
Make a decision to improve your lifestyle
If you decide that the cost is too much for your budget or that you decide to take your chances, you might want to re-evaluate your lifestyle to reduce your chances or probability
Your checklist for evaluation
- What are my existing coverage area and how much am I covered?
- Am I more susceptible compare to the average to suffer from this?
- How much do I need in the event?
- Have I save enough?
- Do I have the budget for it?
I hope I given you enough to think about. These are decision points that you can build a check list like above to come to a decision whether you need early critical illness cover.
While your savings may not cover the unexpected scenario should it happen in your 30-40, there are duplicates in your insurance portfolio that may be able to lessen the impact.
A combination of savings + insurance portfolio may be more cost effective versus insuring against something that insurance companies have calculate we won’t claim too much.
Would like to hear from you guys take on this. If you have cases of early critical illness and the expenses and risks that is tied to it, we will love to hear from you.
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