Critical illness insurance is coverage for critical illnesses such as cancer, heart attack, liver failure, kidney failure, renal failure etc. Your insurance company will pay the sum assured if you are detected with any of the critical diseases (mentioned in the policy documents) during the tenure. Nevertheless, you do not have to give hospital bills, treatment expenses, etc., in case of health insurance plans, to claim the sum assured.
In most scenarios, there is a survival period of 30 days. Simply put, if the policyholder outlives 30 days after being diagnosed with the disease, the sum assured is paid to the policyholder.
Now that you understand what critical illness insurance is, it is necessary to know how much coverage you require.
The expense estimator proccess is a very scientific way of computing the coverage amount for term life insurance and critical illness insurance.
And to make the calculations easier, we take the example of 40-year-old professional Abhas.
Abhas lives with his spouse, parents and two small children. Their monthly household costs are Rs 50,000, which are inevitable. Also, he is currently spending on an EMI of Rs 40,000 per month for their new house.
Now, let’s compute how much critical illness insurance Abhas needs. Here are the 6 steps.
(The five-year rule: A person might take some years to fully recover from a critical illness and start a healthy life. Therefore, we are mainly using a period of five years for the entire evaluation to make the computation easier.)
Step 1: Consider the monthly expenses:
Abhas and his family’s monthly expenses are Rs 50,000. Therefore, for the next 5 years, it will be Rs 30 lakh.
Step 2: Evaluate the obligations:
He is paying an EMI of Rs 40,000 per month for their new house, which would be the same for the next 5 years. Therefore, in the next 5 years, he will have to spend Rs 24 lakh.
Step 3: Cost of treatment and unplanned expenses:
Being detected with some critical illness means the treatment will proceed for some time. And treatment for any critical disease usually is expensive. The treatment and other related expenses, like buying medical supplies and fitting it in your home, would be around Rs 25 lakh, which you would need in the next 5 years.
Treatment-related expenses: Rs 25 lakh
On the one hand, we have considered monthly expenses, obligations, treatment expenses etc. that need to be added while computing critical insurance coverage. On the other hand, are the income (from different origins) and investments that you have done over the years and that also has to be analysed.
Step 4: Consider the income of all other family members
Abhas’ wife is working and can provide Rs 40,000 every month, i.e. Rs 24 lakh in the next 5 years.
Step 5: Factor in easily available money:
Abhas has Rs 5 lakh in savings as an emergency corpus as savings account balance and Liquid Funds. This money is immediately accessible.
Emergency funds: Rs 5 lakh.
Considering all these circumstances, let’s calculate how much money Abhas and his family would require in the next 5 years if he is detected with any critical illnesses.
Step 6: Now to determine the coverage you would need, multiply the amount required with 1. 5. In this case, the total coverage Abhas would need is Rs 75 lakh.
The reason for using the 1.5x multiple is to consider for inflation and any unexpected events such as complexity in treatment or incapacity to the spouse to work etc.
The method isn’t a full-proof method but gives you an idea of how to manage your expenses and savings.
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