STI: Getting to the heart of critical illness plans

April 12, 2009

Getting to the heart of critical illness plans

A look at how the new insurance plans of Great Eastern Life and Prudential measure up

By Lorna Tan 

 

Nearly everyone is cutting back on his spending.

 

Luxury items are out for many people, but others are also holding off on the purchase of insurance products such as investment-linked insurance plans (ILPs).

 

But no matter how grim the economy, experts warn that it is most unwise to defer basic protection needs against death and illness.

 

As an added incentive to buy such policies, insurers recently launched innovative critical illness products which attempt to offer enhanced coverage.

 

Marketing hype aside, what do the new critical illness insurance plans in the market really offer? The Sunday Times checks out policies from local insurer Great Eastern Life (GE) and British Prudential Assurance.

 

Critical illness plans

 

In a nutshell, a critical illness policy pays out the sum that is insured upon the diagnosis of any of 30 specified critical illnesses such as cancer and heart attack.

 

This cover benefit is typically bundled as an optional rider with a basic whole life, term or an ILP. Some insurers, such as French insurer Axa Life and British insurer HSBC Insurance, offer standalone critical illness plans.

 

For the bundled plans, an 'accelerated' critical illness rider with a life policy will pay out the insured sum upon diagnosis of any of the 30 critical illnesses and the policy terminates with no death benefit remaining.

 

Plans with an 'unaccelerated' rider will pay out a critical illness claim upon diagnosis but the death benefit remains and is payable upon the insured's death. That is, as long as premiums continue to be paid.

 

Some consumers feel that one downside of a critical illness benefit is that it usually allows claims only when the insured person is in the more advanced stages of a critical illness. It is no wonder that a common complaint is that it pays the claims only 'when the person is about to die'.

 

For instance, the definition for cancer is 'a malignant tumour characterised by the uncontrolled growth and spread of malignant cells and the invasion of tissue'.

 

This excludes non-invasive 'cancer in-situ', which refers to cancerous cells that have not yet invaded the surrounding or underlying tissue.

 

GE's Early-Payout CriticalCare

 

Rather than paying claims only when the critical illness reaches an advanced stage, GE's new critical illness plan pays at earlier or less severe stages of the illness for some of the 30 stated illnesses.

 

The total claim payouts are capped at the sum assured. The plan also comes with a death benefit of $10,000.

 

With medical advances and the growing emphasis on early illness screenings, you are likely to detect critical illnesses earlier than before. Financial support from an early critical illness claim payout will help patients seek treatment early.

 

'An earlier benefit payout based on less stringent criteria gives better peace of mind,' said Mr Tan Siak Lim, Alpha Financial Advisers' business unit director.

 

But this peace of mind does not come cheap. The GE product is 60 per cent more expensive than a traditional critical illness plan, he added.

 

Pros

 

Payout at earlier stages of critical illnesses such as, in the case of cancer, upon diagnosis of 'cancer in-situ' across 15 body sites. These include breast, uterus, ovary, colon, rectum and liver cancer.

 

Multiple lump sum payouts at different stages of the same critical illness or across different critical illnesses.

 

Depending on the severity, the policy will pay out either 25 per cent, 50 per cent or 100 per cent of the sum assured.

 

There is no minimum waiting period between claims.

 

Cons

 

The premiums for GE's new product are a 'huge jump' over the traditional critical illness benefit, said Mr Patrick Lim, associate director of financial advisory firm PromiseLand. For example, the annual premium of a GE plan for a male aged 41 with a sum assured of $200,000 and a term of 20 years is $2,570. It costs just $1,616 for a traditional Aviva term plan with a critical illness rider and additional terminal illness coverage, he added.

 

There is a limit of a one-time claim entitlement for each severity level of the same critical illness. Once a claim is admitted, no future claims can be made under the same or lower severity level of the same illness, noted Mr Lim. For example, if a claim for 'major cancers' at severity 50 is admitted, no future claims can be made under 'major cancers' at severity 25 and severity 50. These severity levels are used as a measure of the severity of an illness.

 

The insured has to survive beyond 30 days from the day on which he is diagnosed as suffering from a critical illness. If he dies within 30 days, he will receive only the death benefit.

 

The maximum term of coverage is until the insured person is aged 75 years. This poses an increasing risk as life expectancy levels rise.

 

Prudential's PRUmultiple Crisis Cover

 

Traditional critical illness cover terminates after one claim, leaving policyholders without protection for the future.

 

Prudential's new plan allows policyholders to claim three times and up to three times the sum assured. This is subject to certain conditions like waiting periods between claims and a maximum of two cancer claims. For this product, the 30 illnesses are divided into seven groups. It comes with a death benefit of $3,000.

 

Pros

 

The policyholder can claim up to three times for different critical illnesses diagnosed at different times during the term of the policy.

 

There is a waiver of all future premiums once the first claim has been paid.

 

It addresses longevity risks because it covers the insured till he turns 99.

 

Cons

 

It is about 50 per cent more expensive than conventional critical illness plans, said Mr Tan.

 

There are specified waiting periods between claims. Multiple claims must arise from different groups. There is a waiting period of one year between claims.

 

However, in the event of a major cancer, the policyholder may claim for another cancer attack or a major organ failure, provided he has fully recovered from the previous cancer and is certified by a doctor to be cancer-free for at least five years, noted Mr Tan.

 

The insured must survive for 30 days from the diagnosis of any of the 30 illnesses for a claim to be paid. If the insured dies during this period, no critical illness benefit will be paid but the death benefit is payable.

 

Frequently asked questions

Some commonly asked questions about the critical illness cover:

 

Q How different is a critical illness plan from a hospitalisation & surgical (H&S) plan?

 

The critical illness cover is often mistaken as a policy to cover hospital bills. Such bills would be better covered by an H&S policy such as MediShield, or a private Shield 'as charged' plan which typically covers the entire hospitalisation bill except for specified amounts known as a deductible and/or co-insurance.

 

That means that if you have a critical illness cover with a sum assured of $200,000, that is the sum you will get upon diagnosis, even if your H&S fees for the illness total only $50,000.

 

A critical illness payout is useful for subsequent outpatient follow-ups, medication, therapy and alternative treatment like traditional Chinese medicine, said Mr Tan Siak Lim, Alpha Financial Advisers' business unit director. It also takes care of the potential loss of income from taking time off work for recuperation and recovery.

 

Most experts would advise consumers to have a basic H&S policy first before buying a critical illness cover. Another medical plan to consider is a disability income plan which pays a fixed regular replacement income if you are unable to work due to an illness or accident.

 

Q How much should an individual be insured for to cover critical illness?

 

As a guide, consider about two to five times the individual's annual salary, said Mr Eddy Cheong, head of risk management & special projects at wealth management firm Providend.

 

Mr Patrick Lim, associate director of financial advisory firm PromiseLand, suggested that family history may be a significant factor when deciding on the sum assured because some studies have shown that cancers are associated with genes. Another tip is to compute the actual health-care cost today with an assumed rate of inflation.

 

Q Which is better? A standalone critical illness policy or a cover that rides on a basic plan?

 

Mr Lim dislikes standalone plans as they typically require the insured to survive beyond 30 days from the day on which he is diagnosed with a critical illness. If he dies within 30 days, he will receive only the death benefit, which is usually a small sum of $10,000 or less.

 

With many illnesses such as a severe heart attack, severe stroke, massive brain haemorrhage and sudden death syndrome which result in a quick death, what good is a standalone critical illness plan, he asked.

 

Exceptions are Axa Life's Living Enhancer and HSBC Insurance's Vitalcare, which require a survival period of seven and 15 days, respectively, after diagnosis of a critical illness.

 

On the other hand, an 'accelerated' critical illness rider does not impose a survival requirement. Riders also cost less than standalone plans.

 

However, Mr Willy Lim, head of risk and an adviser with ipac financial planning Singapore, said that for bundled plans, the death benefits are usually needed till retirement, but critical illness needs to stretch beyond retirement. So it would not be feasible to keep a plan beyond the term that you need it, just because of the attached critical illness benefit.

 

Still, there are some people who need critical illness without death benefits, for example, singles with no dependants.

 

'This is where a standalone policy is most appropriate. However, if the term for the critical illness needs and other benefits coincide, then a rider makes sense as it is more affordable compared to standalone policies,' he added.

 

Q Should consumers go for the new critical illness plans?

 

Experts say consumers should weigh the benefits and costs of these plans.

 

While multiple claims or early payouts are a good feature to have, such plans come with a huge premium, said Mr Cheong.

 

'From a cost standpoint, I would think that the traditional critical illness cover should still form the significant portion of one's critical illness needs, and if budget allows, to supplement some portion with the newer critical illness plans,' he said.

 

Mr Tan suggested that consumers consider the probability of suffering from two or three critical illnesses and the ability to claim under the rules imposed by the policies.

 

In fact, PromiseLand's Mr Lim's first death and critical illness claim came from his brother Paul, who was also his client. The latter had died from kidney cancer in April 2007. Mr Lim said his brother's kidney cancer resurfaced less than five years after it went into remission.

 

As a result, both Mr Lim and Mr Tan believe that consumers are better off using the cost savings to buy a bigger traditional plan which is much cheaper.