Calculate how much critical illness cover you need from your expenses and recovery time.
Jun Hao has two critical illness quotes from his adviser Ryan, both for S$150,000 (this figure and every other amount below are made up for the exercise). When Jun Hao asked where the amount came from, Ryan said it was "what most clients your age take", so Jun Hao treated it as a guess, which is what any sum assured nobody can explain amounts to.
You can replace a guessed figure with the method from module 2 that you used to size life cover. Critical illness cover is worked out the same way, from the money your household would need. The difference is the question you ask: how long would you need that money while you are treated and recover? Set aside about 30 minutes. Before you start, have your list from the lesson 5.1 activity, your premium breakdown from lesson 1.4 and your critical illness benefit types from lesson 5.3 beside you.
Start with your essential yearly expenses, meaning the spending that would carry on if you were seriously ill. This includes housing, food, utilities, insurance premiums, children's costs, transport and support for parents. Holidays and discretionary spending stay off the list. If your partner earns, count only the share of the household's essentials that your income pays for, the same approach you used in lesson 2.1.
Next, choose how many recovery years to cover. There is no correct number. Some people pick the time a typical treatment and recovery might take, while others pick a longer period in case they can't return to the same job or the same hours. Whichever you choose, write your reason beside it. Your essential yearly expenses multiplied by your recovery years go on the first line of the sheet.
On the second line, add the extra costs that hospital cover won't pay, using your lesson 5.1 list. These can include a helper or extra childcare, transport, changes to your home, treatments your plan wouldn't cover, a second opinion abroad, and a partner's unpaid leave. Rough estimates are fine as long as you label them as your own. Where you have no figure at all, put in a round allowance so the cost is still counted.
Jun Hao's household relies on S$42,000 a year from his pay. He chose 3 years: 1 year of treatment followed by 2 years of reduced hours. 42,000 x 3 = S$126,000. He added an allowance of S$24,000 for a helper for a year, transport, and treatment his plan doesn't cover, which brought his total need to S$126,000 + S$24,000 = S$150,000.
List every critical illness benefit you hold, with its amount and type, and subtract the total from your need. Mark any accelerated benefit, which is a critical illness benefit that reduces your life cover when you claim it, and note beside it how much life cover you would lose. You can also subtract savings you have put aside specifically for a critical illness. Leave your emergency fund out, because a serious illness would use it up in the first few months. What remains is your critical illness cover gap.
Jun Hao holds a S$50,000 accelerated critical illness rider on his whole life policy, so his gap is 150,000 - 50,000 = S$100,000. A claim on the rider would cut his whole life death benefit from S$100,000 to S$50,000. Lesson 5.3 suggested topping up term life cover to make up for that kind of loss, so he plans to add S$50,000 to the term life cover he buys.
Ryan's S$150,000 turned out to be close to Jun Hao's total need. Because Jun Hao already had S$50,000 of cover, he only needs to buy S$100,000, and he can explain every line on his sheet that produced that number.
Lesson 5.2, "Severe, early and multi-stage: what the definitions decide", showed what early-stage and multi-pay structures do. With your gap worked out, you can decide whether either is worth the extra premium. Ask two questions: would an early payout change what you could do, and would a second illness ruin the plan?
Early-stage cover adds little if your buffer could handle an early illness, for example an early cancer needing a short operation and a few weeks off work. It is worth more if your job means even an early illness would keep you from working for months, or if a particular condition runs in your family.
Multi-pay cover adds little if one payout would see you through recovery and you have other savings to fall back on. It helps most in a household that has already spent its first payout when a second illness arrives years later.
For each structure, get a price at your sum assured and write the yearly price difference beside your answer.
Jun Hao chose early-stage cover. His father had a cancer caught early at screening, and an early payout would let Jun Hao take time off without drawing on the family's savings. He turned down multi-pay. With term life cover in place and his savings growing, a second payout would be useful but not essential, and the price difference was more than he wanted to pay.
Fill in the sheet in this order: your essential yearly expenses and the recovery years you chose, with your reason; your extra costs, each estimated and labelled; your existing critical illness cover, showing each benefit's type and the life cover it would cost you; and your gap. Below that, write your decisions on early-stage and multi-pay cover, with the yearly price difference you weighed for each. You will carry the gap into your household plan in lesson 7.5.
Make a short sizing sheet with your expenses, years covered, extra costs and existing cover. Then write down your critical illness cover gap.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).