Is Your Critical Illness Insurance Enough? Here's 4 Steps to Find Out.
Critical Illness (CI) insurance - most of us have it. And many think that they have sufficient coverage. Besides, who in the right mind would want to sit down with a financial planner and talk about diseases such as cancer, heart attack, stroke, or kidney failure befalling upon us and our family?
When I meet clients in their twenties, a common response is that they are fit and healthy and nothing will happen to them.
When it comes to clients in their thirties, they would justify that they have housing and family commitments and they would prefer to focus on those at the moment. And since they are still relatively young, CI insurance is not an important priority yet.
When clients in their forties come and see me, they come with sincerity and recognise that illness is fast becoming more of a possibility — they see their friends getting this-and-that. That worries them. However their age is higher now, and so are their insurance premiums. But their kids are going to university soon and they’re worried about job security, so they dare not commit to the high premiums required for them to get the coverage they need.
Clients in their fifties and sixties - they are getting very concerned about their insurance coverage now. Unfortunately they have been attending far too many funerals of their friends. However their health is not as good as compared to the past — blood pressure has gone up and so has their cholesterol levels — and this leads to exclusions of pre-existing illnesses. On top of that, premiums have become prohibitively expensive. Many gave up the thought of buying insurance at all. Those who still proceed to buy, only managed to buy a fraction of the coverage that a twenty- something can get for the same price.
So many people actually trudge through life with insufficient coverage, living on pure faith and optimism bias that no serious illness will happen to them, and that they would die a peaceful death. So what are the chances a person will contract a critical illness before he/she passes away?
Statistical chance of Critical Illnesses
According to Ministry of Health (Singapore) statistics, 29.1% of deaths in Singapore are caused by cancer. Ischaemic heart diseases (including heart attack) killed 18.5% of people. And cerebrovascular diseases (including stroke) contributed to 6.3% of deaths.
These 3 critical illnesses already made up 53.9%, that is more than half of all deaths registered in 2017. And we have not even included other critical illnesses such as kidney failure, liver failure, coma, brain tumours and so on.
So suddenly it looks like the prospect of having a peaceful death is pretty dim, at a chance of lower than 50%, isn’t it?
To ensure that we are financially prepared to face this eventuality, I cannot emphasise enough on the importance of having your critical illness needs properly analysed and appraised. It is no longer wise to think that $50,000 or $100,000 sounds like a sizeable amount of money, and that amount of coverage should be enough for critical illness. That cannot be further away from the truth!
How to work out your Critical Illness needs
As a rule of thumb, ensure that you have at least 5 years of replacement income at your disposal in the event of a critical illness taking you out of work. The amount of replacement income can be determined by you using one of the following methods:
STEP 1: DETERMINED DESIRED INCOME TO BE REPLACED
Method A - Income Method: Replace your full annual income
Method B - Expense Method: Provide enough income to meet your financial obligations, personal expenses, and family expenses
Method C - Hybrid Method: Provide enough income to meet your expenses as shown in Method 2, plus a buffer to provide for retirement savings and emergency fund.
STEP 2: MULTIPLY REPLACEMENT INCOME BY 60
Once you decided how much replacement income you need, all you have to do is to multiply the monthly income by 60 months, which is 5 years.
STEP 3: ADD IN MEDICAL BUFFER
On top of the above replacement income, add in a buffer for medical expenses, say $50,000 or $100,000, to pay for any miscellaneous expenses not covered by your Shield plan.
STEP 4: DEDUCT EXISTING INSURANCE AND/OR ASSETS
Take the answer from Step 3, and deduct your total CI insurance cover from it. The resultant figure would be your CI shortfall.
If there are any liquid assets that can be sold off in the event of a critical illness, these can help to bring down the shortfall. Though in most cases we do not recommend doing so as these assets could be meant for retirement or children’s education.
For example, John earns $6,000 a month. His total expenses (including mortgage payments) add up to $4,000 a month. He wish to set aside a buffer of $50,000 for medical expense.
Using Method A (Income), John should target to have $360,000 ($6,000 x 60) of CI insurance cover to replace his full income. Adding a buffer of $50,000, his CI insurance needs become $410,000 ($360,000 + $50,000).
Using Method B (Expense), John should target to have $240,000 ($4,000 x 60) of CI insurance cover to provide for his obligations and expenses. Adding the same $50,000 buffer, his CI insurance needs become $290,000 ($240,000 + $50,000).
Using Method C (Hybrid), John may wish to provide for a $5,000 monthly income, enough to cover his $4,000 expenses plus $1,000 of savings. He should target to have $300,000 ($5,000 x 60) of CI insurance cover to provide for his obligations and expenses. Adding the same $50,000 buffer, his CI insurance needs become $350,000 ($300,000 + $50,000).
If John has other CI insurance or other assets that can be sold off to fund for his critical illness needs, he may deduct the amount off from the target shown above. This will help to reduce his shortfall, which will subsequently affect his action plan.
So do yourself a favour and calculate your own critical illness shortfall using the 4 simple steps above. If the resultant number is anything more than $50,000, I would recommend you picking up your phone and calling me for a consultation without further delay.
After all, prevention is better (and cheaper) than cure!