Explain what critical illness cover pays for and how it differs from hospital cover.
Ryan asked Jun Hao a pointed question about his cover: if you were diagnosed with cancer tomorrow, your shield plan would pay the hospital, but who pays your share of the mortgage while you are having chemo? The question stopped Jun Hao, because he had assumed his hospital cover dealt with illness when it deals only with hospital bills, and hospital bills are only one part of what a serious illness costs a household.
Hospital cover, explained in Module 4, pays the hospital and doctors when you are admitted or have certain treatments. Its payouts are subject to its deductible, co-insurance and limits, so it pays part of the bill, and how much depends on the bill. Faced with a S$40,000 hospital bill (an example figure), it would pay part of that amount, and if you are never admitted, it pays nothing at all.
Critical illness cover pays a fixed lump sum when you are diagnosed with a condition listed in the policy, provided the diagnosis meets the policy's definition. The payout equals the sum assured you chose. It does not depend on what treatment costs, on whether you were admitted, or on whether you stop working. The lump sum is paid to you, the insured, to spend as you like. Lesson 4.3 of the course "The Singapore personal finance system, end to end", titled "Critical illness and disability income cover", introduced the idea, and this module goes deeper into definitions and how policies are structured.
The two kinds of cover overlap only slightly. Hospital cover deals with the bill, and critical illness cover deals with the costs around the bill.
Suppose Jun Hao is diagnosed with a cancer that needs a year of treatment. His shield plan and rider pay most of the hospital and treatment bills, which still leaves these costs:
his income, if he can't work or can only work part-time for a year or more Mei's lost earnings, if she takes unpaid leave to care for him or Elise a helper or extra childcare transport, special food, home changes and equipment treatment his plan doesn't cover, or a second opinion abroad the mortgage, which keeps falling due
In Module 2, Jun Hao's household relies on S$42,000 a year from his pay. A year without his pay would mean losing that S$42,000, and his hospital cover would pay none of it. For this reason critical illness cover is sized from your living costs and how long recovery takes, rather than from the cost of treatment.
A diagnosis on its own does not guarantee a payout. Three conditions decide whether the policy pays and when it pays.
The first is that the condition must be on the policy's list and meet the policy's definition. Most policies define a heart attack specifically, and a mild event may not meet that definition. Lesson 5.2, "Severe, early and multi-stage: what the definitions decide", covers definitions in detail.
The second is the survival period, which many policies have: a set number of days the insured must live after diagnosis before the benefit is paid. If the insured dies within the survival period, the critical illness benefit is not paid, though a death benefit may be paid if the policy includes one. The length of the survival period is set in the policy contract and varies between policies.
The third is the waiting period, which many policies have at the start. Certain conditions diagnosed during it are not covered, often including major cancers and heart conditions. It is there to stop people buying cover after they notice symptoms, so check the waiting period for each condition in your own policy.
The usual exclusions also apply, such as pre-existing conditions, meaning ones you disclosed or ones the policy excludes in general, as explained in lesson 1.3.
When you check whether a claim would pay, go through it in order. Confirm the condition is on the policy's list and the diagnosis meets the policy's definition for it. Confirm the insured survives the survival period, if the policy has one. Confirm the diagnosis did not fall within the waiting period for that condition, and that no exclusion, such as a pre-existing condition, applies.
A common misconception is that critical illness cover protects your income in general. It protects you only against a listed set of diagnoses. A back injury that stops you working for two years, a long depression or a bad car accident may never appear on a critical illness list, and the policy would not pay for any of them. Cover that pays when you can't work for any covered reason is disability or income cover, which Module 6 deals with.
The question critical illness cover answers is this: if you were diagnosed with one of the listed serious conditions, would your household have enough money to get through treatment and recovery, beyond what hospital cover pays?
Write down the costs you would face in the year after a serious diagnosis that hospital cover would not pay. Be concrete. Write the monthly amount your household relies on from your pay, who would care for you and your children, and the costs that would rise. That list becomes the first line of your sizing sheet in lesson 5.4, "Size your critical illness cover in years of expenses".
List the costs you would face in the year after a serious diagnosis that hospital cover would not pay.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).