Thursday, March 27, 2008

How much Critical Illnesses Cover???

I asked this question to many financial practitioners since I joined the industry 5 years ago. Most of them gave me different figures, like 10 times your annual income, as much as you can afford, or even a fixed amount like $200k, $300k seemingly plucked from the sky. I also couldn't find the answer in any Financial textbooks.

I'm not surprised that most people out there do not know their Insurance numbers because the practitioners themselves seems confused and passed down all sort of numbers to their clients.


I have my way to calculation, not adopted by any financial books but generally very well accepted by my clients. They felt that the approach is simple and make a lot of sense. Let me show you below:

1) The Permanent Needs (Approximately $50k to $100k)
* The Permanent needs for critical illnesses are the needs of the insured regardless of age when they are down with Critical Illnesses. They include:

a) Alternative Medicine
A person down with Critical Illness may not just seek treatment from hospital. They may want to seek extra treatment like Chinese Medicine, Detoxification programs, Extra Tonic, etc
b) Rising Medical Expenses
A Medical Insurance may have their leakages. Eg, Consultation fees, Ambulance Fees, Drugs on trial not covered, etc
c) Misc Expenses
There could be other extra expenses incurred during the process of treatment. Eg, The need to engage a domestic worker, frequent transporation to/fro hospital over a period of 3 to 5 years.

2) Temporary Needs (Approximately 3 to 5 times annual Income)
* This expense will come in need when this person is
a) working,
b) independent or
c) someone is dependent on his/her income.
* This Temporary needs will last till the person retire because the person is no longer working and logically, he need not replace his loss of income. This person is also presumed to have saved adequately for retirement.
* Some high income earners may prefer to apply a percentage of their income to better illustrate needs because they know that they will forgo part of their luxuries in event of contracting the Critical Illnesses.

Term or Life policy?
A lot of people can argue with me for this recommedation. Term or Life Policy?

a) For the Permament Insurance Needs, I'll recommend Life Insurance or Term with pure Critical Illness Whole Life cover.
* Nothing wrong using Term insurance if the person is ready to set aside a sinking provision to self-insure the permanent needs into old age. But make sure the person really do it and not just get term insurance and not doing anything about setting aside the permanent insurance coverage.
b) For the Temporary Needs, I'll recommend Term Insurance
* The reason is simple. The needs is temporary, don't need to use Life Insurance. The extra cash you have is better invested for other purposes such as retirement or Children Education fundings, etc

The above figures are approximated and needs of each individual is unique.
The true numbers can only be derived after a proper fact finding analysis.

9 comments:

val: i believe in me => said...

Hi Adrian, just wanted to say that i chanced upon your blog n i really appreciate the informative n honest analysis of insurance n wealth planning products in ur blog entries. Cheers!

Khiat Han Hwee Adrian said...

Thanks for your encouragement. I'll continue to impart my knowledge in laymen language to my readers.

Do drop into my blog when you are free. Cheers.

Anonymous said...

Hmmm, lucky guy ,having attractive and sexy girl visiting you.Wish, she visits my blog... Oh!!! i forgot I don't have one.... must set up one quickly ....Right, Val? Will you visit me? First blog, then the real blog.
Remember, my name is Jay.
Bye

Anonymous said...

I agree with the permanent need of approximately $50k to 100k.

The term approach with a sinking fund is still more superior as the life insured may not be struck with either of the 30 dread diseases, but instead with another illness/disease that requires him to cough out some money that is due to the gap of his Shield plan. This is the approach I have taken.

However, I also agree that not many people will have the discipline to execute this strategy.

blackbox

Khiat Han Hwee Adrian said...

Hey Jay, don't scare away my reader hor. haha.

The sinking fund provision is actually a simple approach. Get a Level Term for CI till retirement age. Accumulate via an investment fund at X%p.a till the level term insurance runs out on retirement. Inflation has to be factored into the sinking fund target.

When term matures, re-allocate assets into a Conversative portfolio which generally able to gives 3-4%p.a

Strong discipline is required to ensure the fund is separate from other investments or objective.

It is difficult to see through this discipline. I had adopted the Life Insurance approach myself.

wilfredling said...

The right way to address "Temporary Needs" is to use Disability Income insurance which replaces most of a person's salary until his retirement. This assumes that the person is working at the point of illness.

Wilfred Lig

Khiat Han Hwee Adrian said...

I agree with Wilfred that disability Income is better in covering the temporary needs in event the person is not able to work due to illnesses.

This is because that particular illness could be the 31st illnesses which is not part of the 30 and yet the person still can't work.

Unfortunately, the premium for such Insurance is relatively higher compared to a Critical Illnesses cover.

Anonymous said...

You ask the wrong practitioner you get the wrong answer. The practyitioner who gives a big figure becuase he wants to sell a big amount. And the one who gives a small one is one who is not sure. Sowaht is thr right amount? 3-5 yeras of family expenses or salary? Just like the one who thinks a whole life works better. he belongs to the kiasu? or husltler? or a malpractitioner?
Therefore it depends on whose side you are on, the client's or yourself. If you are on the client's you use your heart and if you use your head it is yours.
This is always the issue , isn't it?

blackbox said...

Adrian,

You wrote "Unfortunately, the premium for such Insurance is relatively higher compared to a Critical Illnesses cover."

This is not unfortunate. The disability insurance has been priced to reflect the risk that the insurer has to take. Since the definition is broader, it is expected that the risks are higher for the insurer as well.