Determining the Amount of Critical Illness Coverage Required
In today's world, the need for critical illness insurance has become more important than ever. With critical illnesses on the rise due to factors such as pollution, stress, and sedentary lifestyles, it is essential to be prepared financially.
A 40-year-old professional named Samar, for instance, requires a critical illness insurance coverage of Rs 54 lakh for the next five years. This covers future household expenses of Rs 30 lakh and home loan EMI of Rs 24 lakh.
The expense estimator method is a scientific way of calculating the coverage amount for term life insurance and critical illness insurance. To determine the appropriate amount of critical illness insurance coverage, start by calculating all your current monthly personal expenses that would need to be covered if you were critically ill. This includes mortgage/rent, utilities, groceries, loan payments, and other liabilities.
Next, add a buffer for additional costs such as travel to treatment centers, medication, increased utilities, or special equipment during your illness. Medical treatments for critical illnesses can cost between Rs 20 to Rs 30 lakh. Multiply this total monthly amount by the number of months you expect to need support during and after treatment (a common estimate is around 5 to 10 years or longer for recovery) to get the lump sum coverage amount you require.
For example, if your monthly expenses to maintain your lifestyle and obligations are £2,000, with a buffer of £500, your total monthly needed would be £2,500. If you expect to need coverage for 120 months (10 years), your required lump sum would be £2,500 × 120 = £300,000.
It is also crucial to consider your outstanding debts and liabilities that must be paid during illness. Additionally, you might want to consider coverage for premium waiver or additional riders that may accommodate inflation or extend coverage duration.
Your income, age, savings, and overall financial situation also influence coverage needs. Approaches used in life insurance needs analysis such as income replacement and needs analysis methods should be adjusted to the critical illness context.
In summary, calculating critical illness coverage is a personalized process based on adding up personal monthly expenses and liabilities, adding anticipated extra costs related to illness, multiplying by the expected duration to cover income and recovery, and adjusting for savings and other financial resources to avoid under- or over-insurance. This approach ensures you have sufficient coverage to manage both your financial obligations and treatment-related costs during a critical illness.
- During a critical illness, liquid funds are crucial for managing unexpected expenses, such as medical treatments, which can range from Rs 20 to Rs 30 lakh.
- To create an emergency fund for critical illness, one should calculate their monthly expenses (including mortgage/rent, utilities, groceries, loan payments, and other liabilities) and multiply by the expected duration of support during and after treatment.
- In addition to the lump sum coverage, it's advisable to consider outstanding debts and liabilities that need to be paid during illness, along with a premium waiver or additional riders that may accommodate inflation or extend coverage duration.
- Maintaining health and wellness, through fitness and exercise, mental health support, and balanced nutrition, can help reduce the risk of chronic diseases and associated medical-conditions, ultimately lowering the potential need for critical illness coverage.
- It's essential to remember that critical illness insurance coverage and the required amount are unique to each individual; the expense estimator method is a scientific way to calculate an appropriate coverage amount, but should be adjusted to consider one's income, age, savings, and overall financial situation.
