The Straits Times published an article “AIA survey uncovers 3 gaps in CI coverage here” on 22 August 2016.
I am not surprised at all by the survey findings. In my decade long financial planning practice, I have not met any client who has secured adequate critical illness coverage.
Why? I call it the ‘insurance agent phobia’ – the fear of being asked to buy another insurance policy without fully comprehending the purpose and reason behind the action. People find it awkward to say ‘no’ and hence, avoid a meetup altogether. It is also not uncommon to hear comments like “I don’t know what I’m paying for” or “I’m not sure what plans I have”. Therefore, they prefer to stay status quo. Then there are others who think they have enough protection and hence, do not do regular reviews with their agent.
Some of the insurance portfolios I’ve examined are skewed towards endowment (savings) plans and Investment-Linked Policies (ILPs). Different types of insurance have different purposes. And it must be reiterated that saving plans do not equal protection. This is because such plans usually provide coverage for death but not total and permanent disability (TPD) or critical illness (CI).
As for ILPs, the truth about escalating mortality charges (i.e. cost of insurance) is never explained to customers at point of sale. The ILP can lapse around one’s retirement years and one can lose insurance coverage when one needs it the most! To understand more about ILPs, read my article on ILPs.
Gap #1: The average coverage amount is insufficient to cover loss of income and other relevant costs.
First thing first – Critical illness coverage is CORE in insurance planning. When I look at an insurance portfolio, the area that I zoom in on first is the critical illness coverage amount. Whether the individual is a swinging single or a breadwinner or a double income couple with no kids, there must be adequate critical illness coverage. And before I commence on any planning work, I will share with my client the insurance planning framework that I use and the various essential components that will form a robust and fool-proof protection program.
How do you know what is ADEQUATE should you suffer from a major illness? My opinion is 3 to 5 times of one’s gross annual income.
Why? If you benchmark it against annual gross income, that will mean that your mortgage loan, children education funding, your household expense and other financial commitments are all taken into consideration.
Why 3 times?
This is because if one is diagnosed with a critical illness like cancer, heart attack, stroke, it would take an average of 3 to 3.5 years of treatment before the condition stabilises. In optimistic situations, recovery may be quicker. But full time work is definitely out of the question during this period. The survey revealed a fairly huge shortfall in critical illness coverage i.e. majority of people are covered for only 1.5 years equivalent of lost income. It is no surprise then that 95% of participants are worried about the financial impact on their family members if they were to be diagnosed with a critical illness.
Why 5 times?
Cancer is one of the top 3 killers in Singapore. To give you an idea about chemotherapy, it is typically given in cycles which is a treatment followed by a period of rest. A cycle can last one or more days, but is usually one, two, three, or four weeks long. A course of chemotherapy is comprised of multiple cycles. Each course is different, but generally consists of four to six cycles. There’s no way for doctors to know that all of the cancer cells in your body are gone, which is why many doctors don’t use the word “cured.” If cancer cells do come back, it usually happens within the 5 years following the first diagnosis and treatment.
If you do not wish to use annual gross income as the benchmark, then you would want to consider the following when calculating critical illness coverage:
- Post hospitalisation expenses – Recuperation needs money. Do not underestimate the expenses for alternative treatments, special dietary requirements, supplements, medical costs not covered beyond the post-hospitalisation coverage in your integrated shield plan (Medishield Life does not have pre and post hospitalisation medical expenses coverage.)
- Liabilities – Outstanding mortgage loan, car loan, personal loan, credit card debt, income tax, guarantor’s liability
- Children’s education funding
- Ongoing household and personal expenses
- Existing critical illness coverage – If in doubt, please get a review done with your planner.
GAP #2: Singaporeans are concerned about not having protection should another critical illness strike
The statistics are pretty shocking – almost one in three (33%) of the surveyed are already diagnosed with more than one critical illness!
Question I get asked many times: Can I claim from all my policies that cover critical illness when I am diagnosed with one? The answer is yes, as long as the critical illness fulfils the claim definition (this is spelt out in the policy contract).
What do you do with this lump sum payout? Use it wisely! It would seem like a windfall so the challenge lies in sensible money management. If you do not trust yourself, get a trustworthy party to act as a trustee for this money.
Many a times, because there is already a shortfall in the CI coverage, most people would claim on all their existing policies. A bird in hand is worth two in the bush! There’s no reason not to unless you are hoping you can claim on another critical illness. God forbid!
As survival rates are high in cases of early detection, it is essential to still stay insured after the diagnosis of a critical illness. Why? Because the risk of being diagnosed with another critical illness like stroke or heart attack can result in another ‘financial tsunami’.
How does one then get insured for a second critical illness?
If you have a clean bill of health now, what are you waiting for? Get your financial health check up done immediately and close the gap in your insurance shortfall.
To ensure coverage beyond the first critical illness diagnosis, you need an insurance plan that covers all stages of critical illness – early, intermediate and advanced – and allowing you to make more than one claim.
But do note that not all plans are are created equal. Only a competent, objective financial planner (who does a good job at comparing such plans) will be able to identify and explain the differences in the claim definitions to you.
For those who have been diagnosed with a critical illness, unfortunately, they are uninsurable even if they are willing to pay higher premiums.
GAP #3: Singaporeans seeking protection for more critical illness conditions across different stages
Critical illness coverage has, for the longest time, been synonymous with covering only advanced or late stage conditions. It is good news that more and more Singaporeans are aware of early and intermediate stage CI coverage. Being informed means that proactive action can be taken to close the gap.
Limited pay whole life plans and term plans these days are getting more sophisticated in their scope of coverage. A comprehensive whole life or term (by attaching appropriate riders) plan covers early, intermediate and advanced stage illnesses, accidental death, disability income and special conditions like osteoporosis, osteoarthritis, diabetic complications and even juvenile related ones.
More and more people want to be covered for early and intermediate stage illnesses. For those who are diligent with their annual health screening, they would stand to benefit more from such protection plans.
Food for thought:
- Do a financial planning review! If you prefer to get a second (objective) opinion from an independent financial planner, feel free to contact me.
- Get insured while you are still healthy! It is good to have some coverage than nothing at all.
- It is better to have more (if you can afford it) than less. Because no one will complain of having too much insurance payout when you need it the most!
- Look after your health because no one has more vested interest in it than yourself.