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Mediclaim and critical illness policies: What you must know

Amar Pandit in Mumbai | January 27, 2009 11:30 IST

Most people are quite confused between mediclaim and critical illness policies. Unlike mediclaim policies that have been around for a long time, very few people have a critical illness policy. However, mediclaim and critical illness insurance serve two different purposes and are, in fact, two completely different products.

Mediclaim, a health insurance brand offered by general insurance companies, is a reimbursement plan whereas critical illness insurance is a benefit plan that both life and non-life insurance companies offer. For instance, both Bajaj Allianz General Insurance and ICICI [Get Quote] Lombard offer critical illness policies.

In a traditional mediclaim policy, a person needs to spend the money on hospitalisation or incur other expenses that are reimbursed at a later date. The other option is to go for a cashless mode, where the insurance company directly settles bills with the hospital.

In the second case, there is no need to spend money first. In a critical illness policy, once you are diagnosed with a certain illness, you are paid the entire insured amount. This amount is paid, irrespective of whether you decide to spend on it or not.

Suppose you have a mediclaim of Rs 500,000 and a critical illness policy of another Rs 300,000. If you were to contract an illness that is covered by the latter policy, then there will be two payments made. One, you will be reimbursed the amount that you spend on hospitalisation. And the entire Rs 300,000 will be paid to you that can be used while the person is recovering or for any other purpose. In other words, the sum assured of critical illness policies provide an additional benefit to the holder.

That's the reason they are referred to as benefit plans and different from a mediclaim.

Most insurance companies cover anywhere between 12-16 critical illnesses under a single policy. Some of the common illnesses covered are cancer, heart attack, major organ transplants like kidney, lung, pancreas or bone marrow, heart surgery, renal failure (failure of both kidneys), multiple sclerosis and primary pulmonary arterial hypertension.

 The maximum cover that can be availed is Rs 1 million. However, there is a strong condition: If you die within 30 days of the illness being diagnosed, you will not get the cover. Also, there is no cover if the illness is diagnosed within 90 days of taking the policy.

Critical illness cover can be taken in two ways:

  • Standalone policy from any general insurance company
  • Rider on your life insurance policy.

When taken as a rider on your life insurance policy, your premium remains constant throughout the entire term of the policy. As a result, the overall cost over a period of 10-20 years is much lower than a standalone policy.

In a standalone policy, the premiums will change every five years and will significantly go up as you age.

When taken as a rider to your life insurance policy, the approximate premium Rs 10 lakh cover for a 35-year old male will be Rs 6,000 per annum. The premium will remain constant for the entire duration of the policy. Even in this case, as one grows older, the premiums also shoot up substantially.

At the same time, if you discontinue your life insurance policy, then the critical illness cover is no longer there. This is one disadvantage in opting for critical illness through a rider on a life insurance policy.

One of the key things to remember, when you opt for a critical illness rider, is the sum assured of the base policy that must be taken for this advantage. For a critical illness cover of Rs 1 million, you must at least have a life cover of Rs 2.5 million. So, the overall cost could be slightly higher to get a life cover, along with a critical illness cover.

Critical illness policies might not make sense early on in your career, but you should look at it as once you cross a certain age. Here are a few situations where it can be purchased. For instance, if you are over 35 years or there is a history of critical illnesses in your family buy a policy with critical illness riders.

Below that age, that is, between 21 and 35 years, opt for a standalone cover. Most times, there is no need for a life insurance policy. That is why a standalone cover is recommended.

However, if in certain circumstances where there are dependents and there's a genuine need for life cover, there's a need to evaluate the cost of taking a critical illness rider and the age till which you can get this cover. This should be the first line of defence.

If you are above 50 years, most life insurance companies will not give you a pure risk cover and, even if they do, the medical underwriting will be stringent. In this age group, you have no choice but to opt for a standalone cover. Costs, however, will be exorbitant once you cross 55.

Before you sign on the dotted line, make sure you have read the exclusions carefully, something that is ignored by most people. Additionally, it is important to take the opinion of your family doctor on the policy language to see if the wording and conditions on the policy are fair.

The writer is director, My Financial Advisor.

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