How Much Insurance Is Required? (Part 3)

You can read part 1 of this article here.

Critical Illness 

The benefits of critical illness (CI), commonly referred to as dread disease, have evolved over the last three decades. In the 1990s, CI coverage encompassed only four severe critical illnesses. Over the years, the Life Insurance Association (LIA) has standardised coverage for 37 severe conditions. In recent years, early critical illness has been introduced to provide wider coverage; and multi-pay critical illness, which provides continuous critical illness coverage, even in relapse situations.  

While severe-stage critical illness was once associated with a kind of death sentence, medical advancements have made it more treatable. Thus, early critical illness policies have gained popularity due to early detection and receipt of payout. The primary distinction between severe and early critical illness lies in the definition required to file a claim. At the time of writing this eBook, most insurers have their own set of definitions for early critical illness. As most people are not medically trained, understanding the definition and its workings may only become apparent when a claim is made. Here are the three main definitions: 

  1. Severe-stage critical illness (standardising 37 CI as per LIA guideline) 
  2. Early critical illness (more than 150 critical illnesses, including severe critical illness) 
  3. Multi-pay critical illness (enabling multiple critical illness claims, including early to severe and relapse of critical illness) 


Evolution of Critical Illness Coverage 

A significant development in critical illness policies is the inclusion of multiple claims features within the policy term, encompassing recurring or relapse benefits. Through Havend’s study and research, we have identified the importance of covering for a relapse of critical illness. This aspect addresses the potential income loss gap in the insured’s financial plan if they are re-diagnosed with the same condition. Another important development is the multi-claim feature, ensuring continued coverage even after the first claim. This offers additional assurance in the unfortunate event of another occurrence of critical illness.   


Diagram of Typical CI Policy (Example)  

Figure 21: The Flow of a Typical CI Policy

Diagram of Multi-Pay CI Policy (MPCI) (Example)

Figure 22: The Flow of a Multi-Pay CI Policy

While the concept of extensive coverage in a critical illness policy may be appealing, our findings indicate that having early critical illness may not necessarily result in a significant financial impact. This is due to the swift recovery timeframes for certain illnesses (e.g., *not all early-stage cancers require chemotherapy; some only require surgical removal of the tumour). Therefore, in our framework, we prioritise severe critical illness coverage, considering that the recovery rate for such conditions could take a longer period.

*Source: National Breast Cancer Foundation

According to the LIA guidelines, the average recovery rate for a severe critical illness could take about five years. However, the recovery rate varies among different types of critical illness. Some could take longer than five years for recovery, and some shorter. Therefore, the framework to calculate the income replacement needed would be:

Figure 23: Framework for Calculating CI Income Replacement

If you had to stop working when suffering from a critical illness, you would have to take note not only of your household expenses, daily expenses, bills, hobbies, or miscellaneous expenses. You would also have to consider your children’s education savings and saving or investing for your retirement. This is so that when you recover and return to work later, you will remain on track to fulfill your life goals.

This approach of having at least two to five times annual income coverage is relative and would be based on your personal financial situation. For affluent and higher-net-worth individuals, a coverage of five times annual income may not be necessary, as you have more financial assets to tide you through, hence requiring lesser coverage.

In a situation where your condition worsens, certain disabilities may afflict the insured who is then unable to perform any work. This is when occupational disability insurance would be activated to lessen the financial impact if the critical illness payout is not enough to continuously fund the daily expenses.

Multi-Pay Critical Illness

Multi-pay critical illness (MPCI) is an interesting type of policy that differs from the typical critical illness policy. Generally, a critical illness policy will terminate once it pays out a lump sum. However, multi-pay critical illness provides several times of payout in event of suffering multiple types of critical illness over the years. This is one of the key advantages of such a policy because if you have suffered from critical illness before, you would most likely not be able to be insured for critical illness again by the insurer. Hence, being insured by multi-pay critical illness provides continuous coverage even after the initial claim payout.

Another key advantage of multi-pay critical illness is that it provides relapse benefits that pay out an additional lump sum upon suffering the same critical illness again. However, this relapse benefit may differ across different insurance companies. You must be aware if such a policy benefit is what you are looking for. Due to the unique feature of a multi-pay critical illness policy that allows multiple claims and relapse benefits, it is therefore advisable to cover the insured for a lifetime, to complement the medical insurance, to cover any medical expenses leakages, or even alternative treatment costs.

Pricing Comparison

Next, let us compare the annual premium between severe-stage critical illness and multi-pay critical illness (MPCI). For simplicity, we will compare using a term policy with a severe-stage critical illness rider (the current market does not have the usual standalone severe-stage CI policy), coverage of $300,000, and coverage term till age 65 for the protection of income loss. We will also be using MPCI, which covers $300,000 in severe-stage critical illness.

Figure 24: A Pricing Comparison (Quoted as of 3 Jan 2024)

From the pricing comparison in Figure 24, the cost of MPCI ranges between 35% to 100% higher than the severe-stage critical illness policy. Although MPCI provides an additional $600,000 sum assured after the first claim (multi-claim and relapsed benefit), with the huge premium difference over the working period, MPCI seems to be less attractive. On the other hand, the severe-stage critical illness policy provides additional coverage such as death and total and permanent disability.

If you have concerns over the potential loss of income during your working years, it makes more sense to cover severe-stage critical illness and supplement it with a disability income policy. The main purpose of having critical illness coverage is to cover about two to five years of annual income for the potential loss of income. If your condition persists or worsens after several years and you are unable to work or unable to fulfill some daily activities of living – washing, feeding, transferring, toileting, mobility, and dressing, then the disability income policy should be activated to cover your income until retirement age.

Alternative Treatment

Alternative Treatment is another area that we had mentioned in an earlier chapter. There are many types of treatment (overseas medical treatment) or medication (off-label cancer drugs) and supplements (vitamins, minerals, botanicals, or herbs) that are not claimable through the insurance policy. It will have a financial impact on your life should you have to fund this out of your own pocket. In this area of need, to be prudent, the coverage will be a lifetime, as critical illness can happen anytime in a person’s lifetime. To mitigate this area of risk, you would need to set aside around $200,000 or higher depending on your medical expectations.

Lifetime coverage for critical illness can be a good tool to leverage to get that amount of coverage needed. Let us compare the premium between severe-stage critical illness and multi-pay critical illness (MPCI). For simplicity, we will compare using a term policy with a severe-stage critical illness rider (the current market does not have the usual standalone severe-stage CI policy), coverage of $200,000, and coverage term till 99. We will also be using MPCI, which covers $200,000 in severe-stage critical illness.

Figure 25: A Pricing Comparison (Quoted as of 3 Jan 2024)

In Figure 25, the annual premium difference between both types of policies is not remarkably huge. If we compare against price, value, and benefit, MPCI seems to be a better proposition in this case. As we know, once critical illness is diagnosed, and a claim has been made, it is extremely difficult to be insured again. Therefore, MPCI provides better value and keeps you covered by providing additional CI claim and relapse benefits (resulting in as much as three times more benefits), while the term policy with severe-stage CI only provides a one-time coverage.

In the current market, there are different MPCI policies with features and benefits created differently, with some insurers offering between two times to nine times the coverage. It is important to have a deeper understanding of the features and benefits of MPCI to evaluate if it is suitable for you or not.

Critical Illness (CI) Summary

To mitigate additional medical cost from critical illness, we recommend another layered approach that covers for a lifetime and offers comprehensive CI protection. In general, if your budget allows, you should consider an MPCI policy instead of the usual CI policy because of the multi-claim feature and relapse benefits. However, it is important to maintain a balance between your needs and affordability.

Read on to chapter 5, where we talk about the key diffierences between term and whole life insurance.


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