What to look for in a critical illness health plan

This article was originally published in 2021. We are now republishing it for the benefit of our newer subscribers.

In our coverage of health insurance so far, we’ve highlighted the many shortcomings of conventional hospitalisation policies and argued why there’s no point in investing too much in them. 

But what do you do if life hands you a really raw deal and you are diagnosed with a life-threatening illness that threatens to dent your career or finances?

You do need insurance to cover this risk. We think that critical illness policies would be a good choice here. The advantage of buying a critical illness insurance plan is that on diagnosis of a specified serious illness, the insurer pays you a promised lumpsum amount with no questions asked on how you’re planning to spend the money.

Critical illness covers are usually offered from a very young age with the age of entry capped at 60 or 65. These policies, however, offer life-long renewability. While many insurers waive medical tests for younger folk, taking such a test can ensure a better claims experience at a later date.

Pros and cons

A critical illness plan offers five distinct benefits over a cashless hospitalisation cover. 

• It is a benefit plan that promises to pay you the entire sum assured. It is NOT an indemnity plan that requires proof of actual spending to file a claim. Predictability of payout is its biggest plus.  
• It covers all expenses that you may incur if diagnosed with a serious illness, irrespective of whether you are hospitalized or not. With the payout, you can fund consultations, tests, medications, home care or any other costs incurred on treatment without worrying if they are admissible or not.   
• A large enough critical illness cover can compensate you for the loss of income you are likely to face while you battle the illness and offer a financial lifeline to your dependents while you are out of action. Most critical illness plans are available at lower premiums than hospitalisation plans for the same sum assured.  
• Insurers’ claim settlement records on critical illness plans are better than for hospitalisation plans, given their very defined policy terms and fine print. 
• To file and receive a claim under a critical illness policy, you need not rely on a hospital or any other intermediary. As the insurer pays out the entire sum assured as soon as you are diagnosed, you will not be sandwiched between a hospital that is eager to inflate its bill and an insurer who is keen to reduce it. 

On the flip side though, payouts in critical illness plans are restricted to the very specific illnesses mentioned in the policy. While the premium may be low at the time of signing up, insurers can increase premiums on every renewal, so your premiums could rise steeply with age. The payouts are made only if you survive a minimum period after diagnosis. They allow you to make only one claim in a lifetime and are subject to several exclusions, which require you to pore over the policy wordings.

How much cover

A critical illness cover should complement your Mediclaim plan in covering your treatment costs, compensate you for loss of income and take care of your family’s living expenses, should you be out of commission. This makes it difficult for us to recommend an ‘ideal’ size for your critical insurance cover. However, you can use these guidelines to decide on the size of cover you buy: 

• The cost of treatment of key critical illnesses and what your family history says about your susceptibility to them. The data we carried in our previous article tells us that the total cost of treatment for serious conditions such as cancer, major heart surgery, stroke, organ replacement surgeries, etc. can range between Rs 10 lakh to Rs 50 lakh in corporate hospitals. Your critical illness cover should complement your hospitalisation cover to fully cover the cost of treating such conditions. 
• Factor in the cost of engaging home care services, a nurse, hiring equipment (such as oxygen concentrators or a BiPAP machine) and the cost of day-care procedures (such as dialysis, chemotherapy) when buying such a plan. 
• The cover is also intended to compensate you for loss of income if you fall ill, so apply some principles of buying a term insurance policy to estimate the cover you need. The higher your income, lifestyle needs, number of dependents and loans outstanding, the higher should be your critical illness cover. 
• As the cost of treating critical illnesses and your own living expenses will vary with location, folks living in the metros require a higher critical illness cover than those in smaller cities.

Where to buy

Critical illness covers in India can be bought from three sources. Life insurers offer a critical illness benefit as a rider tagged on to their term insurance plan. The rider pays you a lumpsum benefit if diagnosed. You get to lock into a fixed premium for this rider until the policy runs out. But the flip side is that such riders offer cover against just a few illnesses and the sum assured is at a fraction of your life cover. 

Many health insurers bundle critical illness covers with their hospitalisation plans. In such cases, you get a lumpsum payout that can help you take care of expenses not covered by the basic hospitalisation plan. But the critical illness benefit in such cases is smaller than the sum assured on the basic hospitalisation plan. Further, it is not guaranteed that you will get the full sum – if you make a claim on the hospitalisation policy, it can eat into your future claims for critical illness too. 

Finally, a few general insurers offer standalone critical illness policies that simply pay a lumpsum to you on diagnosis of specified critical illnesses. We think that this category of critical illness plans are the best bet to really guard your finances against critical illness. Standalone plans cover you against a wide array of serious conditions and allow you to buy a sum assured that is much larger than your hospitalisation cover.

What they exclude

Most critical illness plans in the market have a long list of exclusions. Some exclusions are based on the policyholder’s health history or condition, some are based on the therapies used and some pertain to generic clauses. Here are the common conditions NOT covered. 

Based on your history:  

• Pre-existing disease prior to the policy inception, except where it is disclosed in the proposal form and accepted by the insurer. 
• Illness contracted during the initial waiting period
• Illnesses arising out of birth control, fertility treatments, hormone replacement therapy  
• Abuse of drugs, alcohol or intoxicants 
• Sexually transmitted diseases, AIDS, nervous or mental disorders 
• Death within the survival period after diagnosis 
• Congenital conditions or illnesses caused by them

Based on treatments taken:  

• Covered critical illness arising from self-medication or therapies not scientifically recognised
• Covered critical illness arising from alternative therapies such as Ayurveda, Homeopathy, Unani etc 
• Failure to seek medical treatment after diagnosis or injury 

Generic exclusions – conditions from: 

Choosing a plan

In the insurance industry, the most useful products are often the least marketed ones! Only a few health and general insurers offer standalone critical illness covers and you may need some extensive googling to locate the good ones. Below, we tell you what to consider while selecting one.

Conditions covered 

Critical illness plans only promise payouts for the specific illnesses mentioned in their policy terms. The coverage of diseases in the standalone critical illness plans available in the market ranges from 10 illnesses to well over 60. You can run three checks on coverage. 

One, review your own medical and family history to assess the critical illnesses you are likely to be susceptible to, and ensure that they are covered. Folks having a family history of cancer or heart conditions should obviously cover these. But it may also pay to check with your doctor for conditions you are at risk for from your lifestyle. If you have diabetes, that may make you susceptible to heart conditions or renal issues later in life. 

Two, as there’s no hard and fast rule that you will only contract lifestyle diseases or those in your family, it is best to go for plans with wide coverage. Three, while seeking coverage, do look for plans that offer coverage against debilitating mental or neurological conditions such as Parkinson’s and Alzheimer’s which can result in a sharp spike in your healthcare expenses later in life. 

We found that while most critical illness plans in the market to cover cancer, organ transplant, multiple sclerosis, open heart surgery, full body paralysis and the like, mental or neurological conditions weren’t commonly covered. Aditya Birla Activ Secure and HDFC Ergo’s Critical Illness were among the few to cover conditions like muscular dystrophy, Alzheimer’s and Parkinson’s, if they result in a permanent loss of ability to do essential daily activities.    

Even within the conditions covered, it may pay to deep dive into the detailed description contained in the policy wordings. HDFC Ergo’s critical illness policy covers bypass surgery but excludes angioplasty. Many critical illness policies covering cancer only make payouts for specific types of cancer (skin and prostate cancers are a common exclusion). They only make payouts for cancers of specific severity. In such cases, you may not receive your payout on the first diagnosis. 

Sum assured

While it may be in your best interests to take a generous critical illness cover that is larger than your hospital cover, some insurers set caps on the amount of cover they’re willing to offer. Aditya Birla’s Activ Secure, a policy with very wide coverage of 64 illnesses, caps the sum assured at 12 times your gross income if you are the earning member of the family and at 50% or Rs 30 lakh, whichever is lower, for a non-earning spouse.  

Reliance General Insurance offers critical illness plans only with Rs 5 lakh, Rs 7 lakh and Rs 10 lakh sum assured. Care Health, while it offers critical illness cover upto Rs 2 crore, has structured this policy as an indemnity plan, endowing it with all the disadvantages of a mediclaim plan. Ideally, look for critical illness plans that offer sufficient sum assured to compensate both for treatment costs and loss of income. 

Coverage of pre-existing diseases 

Most critical illness plans do not cover illnesses arising out of pre-existing diseases. Some do not cover critical illnesses contracted in the 4 years (48 months) immediately preceding the policy date.  At times, while the insurer may accept the risk, your premium may be significantly increased to compensate for it. All this argues for buying your critical illness plan at a young age, rather than waiting for middle age. This would preclude your having pre-existing conditions that are excluded.  

Waiting period 

Most critical illness plans specify a minimum waiting period after buying the policy, when you can’t make claims. The waiting period is 90 days in most cases. The shorter it is, the better. If you let your critical illness policy lapse due to not paying the premium on time and the policy gets revived later, the waiting period of 90 days will apply afresh.  

Survival period  

Critical illness plans are designed to help you meet treatment and living expenses if you have to live with the illness. So most critical illness policies specify a minimum number of days for which you must survive after being diagnosed with a critical condition, to get the payout. Most insurers set this survival period at 30 days after the first diagnosis. But a few make exceptions.

Multiple claims 

Most critical illness policies allow you to make only a single claim during your policy term (though a few newer policies offer the ability to make multiple claims). The policy lapses after you make this claim. If you contract multiple critical illnesses during your lifetime, you need to be aware that you will only receive a lumpsum payout for the first one. This again argues for taking a generous cover so that you get a significant payout at the first instance of a critical illness. 

Overall, therefore, to protect your finances against critical illness, buy a standalone cover much larger than your hospitalisation plan, from a general insurer when you are in your 20s or early 30s.