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How Much Critical Illness Insurance to Buy?

How-Much-Insurance
If you’re considering purchasing critical illness insurance, in addition to all of the contractual and coverage decisions, there’s two basic product questions you need to answer.

  1. How much critical illness insurance to buy and
  2. What type of critical illness insurance to buy (i.e. the premium structure).

The answer to both of those questions are fairly mechanical in nature.

How much to buy?

For the total amount, it’s a matter of totaling up the expected costs you may have should you develop a covered condition. Examine each reason and estimate the amount that you’ll need for each of those items.  Total these amounts and you have a solid estimate as to the amount of coverage.  When in doubt, round higher.

Here’s an example:

  1. Time off work, estimated 6 months: (1/2 of your annual salary)
  2. Drug costs, 1 year: $50,000 (Forbes magazine quotes “Newfangled cancer drugs can cost $50,000 a year”)
  3. Travel/food/hotel costs to be near treatment center:  $2000 (or your best reasonable estimate)
  4. Time off work for partner, estimated 3 months:  (1/4 of partner’s annual salary)
  5. Additional costs i.e. childcare, house cleaning:  $5000 (or your best reasonable estimate)

Additionally if you’re considering payment for out of country treatment you may consider an additional $75,000 to $150,000. A quote from this article (discussing prostate cancer treatment at the Mayo clinic) says:

A 2007 study from the Journal of Clinical Oncology compared proton-beam therapy to a more common form of radiation therapy on prostate-cancer patients. For a 70-year-old man, the proton-therapy treatment cost $63,511.

For a total estimate of $100,000-$250,000 (as the Mayo clinic number is merely an estimate for one type of cancer).

In the end, these numbers are estimates and will vary wildly with your predictions, assumptions, and desired coverage level. However amounts of $25,000 to $250,000 would be common for critical illness coverage. For young families who are properly covered with life insurance and disability insurance, you may consider amounts in the range of $25,000 to $50,000 as a rough estimate for an emergency fund.

What type of critical illness insurance to buy?

Critical illness insurance premiums are structured similiar to life insurance premiums. The different types of premiums structures are very similiar to term life insurance and term to 100 life insurance. Critical illness 10 year term has premiums that are level for 10 years. After 10 years the premiums increase and are level for another 10 year period. Eventually the policy will expire, typically at age 75. Most policies however have an option up to age 65 to exchange or convert your term policy to a permanent policy without taking a new medical exam. The common types of critical illness term policies are 10 year term, 20 year term, term to age 65 (premiums level to age 65) and term to age 75 (premiums level to age 75).

The second premiums structure is term to 100. This type of critical illness policy is level for life. Premiums for this type of policy are initially higher than a comparable term policy, however the premiums are level for life. There’s no expiry age (the policy continues as long as you pay the premiums, no matter your age) and no conversion option (as the policy is already a lifetime policy).

Which one should you choose? Term or Term to 100? The answer lies in how long you expect to need the policy. If you’re intending to keep the policy only for 10 or 20 years, a term policy will be much less expensive. If your intention is to keep the policy forever, than while a Term to 100 policy is initially more expensive, it should still be your choice. The Term to 100 product ensures that your premiums remain affordable later in life.

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