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How much critical health insurance cover do you need?

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With the rising number of cases of cancer, heart ailments, kidney ailments and other life-threatening diseases, today having critical health insurance is essential as a regular health insurance cover. But, often we make two mistakes regarding critical health insurance.

First is, since critical health insurance comes as a rider with term insurance we feel buying critical health insurance separately is not essential. And the second mistake is we do not buy adequate cover.

Now, coming back to the first part – why should we buy critical health insurance separately. The critical health insurance rider that comes with term insurance will only cover specific diseases mentioned in the policy papers and that number is usually not very large. Also, the cover amount is 5 to 10 lakh for a 1 crore term cover which is far too low if there is a need.

Now, treatment for any critical illnesses is high (think cancer) and the cost can go up to 25 – 30 lakh. And there might be also loss of income and other additional expenses. So in comparison to the need, a 5 – 10 lakh cover isn’t sufficient enough.

So, how much critical insurance cover do you need and how do you calculate that?

Like calculating term life cover, the most effective way to calculate critical health insurance is through expense estimator measure, i.e. considering all expenses that might incur to calculate the amount needed.

Now, let’s calculate the amount one would need in few steps considering a timeline of five years.

  1. Let’s assume that your monthly expenses and liabilities (like home loan, car loan etc) that are completely unavoidable is 80,000. So in the next five years, the future household expenses would be around 48 lakh to 50 lakh.
  2. Treatment cost for critical illnesses can go up to 30 lakh
  3. Let’s consider there is a second earning member in the family who can contribute up to 50,000 per month, i.e. 30 lakh in five years.
  4. Also there is a readily available emergency corpus of 10 lakh which can be used under such circumstance

So that way, you add the expenses together and then deduct the income and the emergency corpus from the total amount to calculate the amount that you would need as critical health cover.

Expenses and liabilities (+) 50 lakh
Treatment cost (+) 30 lakh
Income (-) 30 lakh
Emergency Corpus (-) 10 lakh
Critical illness cover 40 lakh

As per the assumptions above, one would need 40 lakh critical health insurance. In the same manner, you can easily calculate the amount you would require considering three important factors – your income, expenses and liabilities.

It should be remembered, expense estimator measure is not an exact science since we make many assumptions into the future. However, it is one of the best methods to calculate insurance requirements. But keep a check every five years whether there is a need to change or upgrade the amount needed.

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