After spending a large chunk of time thinking about life insurance – when I wrote my post about my decision to discontinue my Whole Life insurance in favour of getting a Term Life insurance and investing the rest – I started thinking about the other types of insurance.
I wanted to see whether there are other areas in which I’m either overpaying or lacking in coverage.
As this is a pretty complex and touchy topic, before I get into the post, a little disclaimer:
Disclaimer: I am not a certified financial planner nor an expert within the insurance industry (I make nothing from this post). I’m just a normal guy finding my way towards financial independence. I’m documenting my thought process around insurance in the hopes that you can learn from my experience. Before making any major changes or decisions regarding your personal insurance plans, please consult a qualified professional. I am also assessing this from the perspective of a person looking to retire early, so it may not make sense for those who are not following the same retirement horizon.
Now then, since insurance is a product that is meant to protect me from risk, I want to make sure that I’m adequately covered.
Overpaying for insurance is certainly annoying and slows down my early retirement plans but isn’t as bad as not having adequate coverage – which could be disastrous for my loved ones and myself.
How I assessed my coverage
So in order to assess the risks, I broke down my insurance coverage into a 2 by 2 grid based on (1) whether the current coverage is adequate and (2) whether I am paying too much for the coverage I have.
Pretty self-explanatory. The factor that contributes to the priority the most is whether the coverage is adequate, then once the coverage is good, only then we start looking at the price.
In the case of my whole life insurance and term life insurance, this is what that decision looks like on the grid:
I was essentially not getting enough coverage and also overpaying at the same time (according to my needs.) It was really the worst of both worlds, so I took action on that first.
What are the remaining insurance to be considered?
So with Life Insurance taken cared of, what was left? Looking at just the personal health-related insurance, here are the remaining core types:
- Personal Accident*
- Income Protection*
- Early Critical Illness (ECI)
The asterisks beside the insurance type indicates that I already have an insurance to cover that type – but I have yet to look at their adequacy. Here’s what that looks like on the grid:
Let’s break it down:
- I have a pretty good hospitalisation plan that covers me up to S$1,000,000 per hospitalisation up to A Ward stay at a private hospital. I don’t know if I’m overpaying for this though. So that’s why it’s on the left side, but could be on either the top or bottom box.
- I have both income and personal accident protection already, but without assessing them in detail, I’m not sure yet where they land. At least I know that I have “some” coverage here and won’t be completely hung out to dry if something happens.
- As for early critical illness, I know for a fact that I do not have any coverage here at all at the moment. Since I’m not paying anything for any coverage here, I guess I’m paying “just right” for this (haha.)
Given the chart, ECI stood out as the next best place for serious assessment.
Ideally, as a part of this assessment, I will be able to buy the right coverage to bring the ECI over to the left side.
Great, now I know to focus on ECI as a priority… but what is it? Why is it important to have?
Before I can make any value judgement, I needed to find out more about this type of insurance and understand it – so let’s take a look shall we?
Breaking it down
Here’s how I’ll be structuring the rest of the post. Depending on your personal understanding of the subject, you might want to skip around to the sections that you are most interested in:
- What’s the purpose of the ECI Insurance and why is it important?
- How my ECI insurance works
- Breaking down the cost-benefits of my ECI insurance
- How I decided to purchase my ECI
So with all that laid out, let’s get right into our very first section.
The purpose of ECI Insurance
If you’re like me, when you first heard of Early Critical Illness insurance, you might be wondering what it is and how it is different from the normal Critical Illness insurance that is already bundled in with your Life Insurance.
Well there’s quite a bit of difference. The first and most important difference is this, it provides coverage even when you detect critical illness early unlike normal critical illness cover in life insurance.
ECI Insurance provides coverage for much earlier stages of critical illnesses
You may be surprised to hear this. At first I thought that the normal Critical Illness insurance that comes bundled with my Life Insurance plans will pay out when a covered critical illness is detected at any time. This is, unfortunately, not true.
Normal CI insurance bundled with Life Insurance plans usually only pays out when your critical illness is already so advanced that you’re very likely going to die or become permanently disabled from the disease.
Your own Life Insurance may have slightly different way to determine what qualifies for the critical illness payout, but here are the ones that’s defined in my Life Insurance plan:
For the detailed definition of what constitutes severe critical illness, we are asked to refer to Life Insurance Association (LIA) of Singapore’s “LIA CRITICAL ILLNESS (CI) FRAMEWORK 2014.”
Here’s an excerpt for “Major Cancers”:
(Source: LIA CRITICAL ILLNESS (CI) FRAMEWORK 2014)
Based on the above, so many things are excluded that, basically, it only covers things that is in a stage that is severe enough to likely kill you soon. Anything else – if you discover cancer too early or when it’s “pre-malignant” or “having borderline malignancy” – are not covered. You gotta wait until it becomes clearly “malignant.”
That’s wonderful, thanks. I’ll wait for this thing to make me more dead first before coming back for our next appointment.
Why is this important?
As critical illnesses are extremely bad news, we want to be detecting them earlier so we have a better chance at dealing with it and recover from it before it kills us.
Therefore after we get to a certain age, we should be doing regular health checkups to – hopefully – catch these illnesses before they become serious and treat it early.
With advancement in healthcare and technology, we will continue to be able to detect these critical illnesses earlier and earlier and deal with them better.
Then when they are discovered, we’d like to be able to:
- Afford to take time off to go for treatments.
- Afford the cost of the treatments.
- Afford to go in for constant checkups and monitoring.
These costs may not be fully covered by the hospitalisation insurance, and neither will it be covered by the normal Critical Illness insurance since the illness is not yet advanced enough to be classified as “severe stage.”
Enter the ECI to fill the gap
This is the space that ECI insurance is meant to fill. If we are able to find and diagnose critical illnesses early, the ECI insurance will pay out to help us cover the costs necessary to deal with the treatment and the aftermath.
This allows us to focus on getting treatment and the recovery without having to also worry about whether we can afford the treatment and recovery or not.
We should never be in a situation where we think “damn, I caught this too early and my life insurance doesn’t cover it… should I wait until it becomes more serious so that I can qualify?”
That would be pretty messed up. The ECI insurance that we buy should protect us from having that type of dilemma.
Now that we understand where ECI insurance fits, let’s take a detailed look at how it works and what it covers.
How my ECI insurance works
When I spoke to my financial advisor about getting an Early Critical Illness plan, started walking me through the features of the types of coverage that I should be getting in my ECI insurance.
ECI insurance – unlike life insurance which just pays out when you die, are permanently disabled, or have late stage critical illness – functions differently in order to provide better coverage for people with early to intermediate stage critical illness.
So afterter looking through the insurance agreement, I’ll attempt to explain how it works and why its structure fits better with the entire life-cycle of early, intermediate and late stage critical illness.
Overview of my ECI insurance
|Premium||S$1,288 per year (fixed)|
|Payment & Protection Term||36 years (till 70 years old)|
|Payout||Multiple payouts based on conditions|
One important feature that I want to highlight right out of the bat is that the ECI insurance allows multiple claims and will payout multiple times if the need arises. This is meant to cater to the likelihood of recurrence of critical illness once you have one.
Note: I will be breaking down how my ECI insurance works and it may not be true for you depending on your insurance provider so make sure you do your own research into your own insurance package to fully understand the coverage structure of your insurance.
Let’s get right into it.
Protection Layer 1: Early & Intermediate Stage Critical Illness Protection
The first protective layer is the “Early or Intermediate Stage” critical illness protection.
The purpose of this layer is to provide you a payout when you detect critical illnesses in its early stages before it becomes more serious.
Note: For details on which exact diagnosis falls into each of the categories, you will have to refer to the insurance policy agreement. The policy will also provide the exact terminology that your doctor should be aware of to put into your diagnosis to make sure you can make a proper claim. That will be important when you attempt to claim.
Limited to 2 claims, 100% of sum assured each, and only once from each type of illness – it will pay out even if I am diagnosed with more than one critical illness. This is great given that in many cases, if you have a critical illness, you may be at risk of developing others as a result.
With my sum assured at S$100,000, the total payout from this layer is S$200,000.
In addition to providing a payout for early and intermediate critical illness, this ECI plan also provides late stage critical illness protection as part of its next protective layer.
Protection Layer 2: Severe Stage Critical Illness Protection
This layer is meant to handle critical illness when it has become more severe or if I was not able to catch the illness early enough.
The payout is limited to 300% of the sum assured less any claims already paid out from layer 1. Therefore the total payout from layers one and two is S$300,000.
After a claim is approved from Layer 2, subsequent premiums for this insurance policy is waived. The likelihood of survival long after a severe stage critical illness is low so it makes sense that they stop charging me for my premium after this point.
At this point, even if I make a partial or full recovery, there is a high likelihood of relapse, recurrence of old diseases (like cancer and heart attack) or a development of new ones as my body would be quite weak from the previous onslaught of a dreaded disease.
The good news is that the policy does not expire or end when a layer 2 claim is paid out as it still provides Layer 3 and Layer 4 protection for recurring illness.
Protection Layers 3 & 4: Sustained Protection for First Time & Recurrent Critical Illness
Once I have some form of critical illness, like a heart attack and stroke, even if I seek treatment and recover, there’s a higher chance that the illness will be recurrent and happen again. It is also more likely for me to get other forms of critical illness once I have had another illness.
The job of layer 3 and 4 are to keep protecting me once I have already been diagnosed with the illnesses that triggered layers 1 and 2.
I am able to make a claim for both first-time illness and recurrent ones, so it doesn’t matter if I’ve already claimed for the illness before in other layers or I’ve just been hit by a new critical illness.
However, in order to receive a payout under this layer, I must wait at least 2 years from the claim on the previous layer. Although I am allowed to make 2 claims (1 for layer 3 and 1 for layer 4) I must wait at least 2 years between each claim.
i.e. If I have a heart attack in 2017 and a stroke in 2018 where I already have claimed for the heart attack, I will not be able to claim for the stroke.
Do note that because of the 2 year waiting period, this layer has a lower chance of being paid out (and I’m sure the insurance company knows this) as if layer 2 has already triggered – with a severe critical illness – it’s likely that I won’t live long after that. It will be very rare that I will trigger layer 3, let alone layer 4.
These 2 layers pays out a 150% of sum assured per claim each, therefore the maximum payout for this layer is an additional S$300,000.
Once the layer 4 claim has been paid out, the policy terminates.
Special Benefits: Protection from Some Other Diseases
This benefit is akin to having some magical accessories that specifically protect against certain ailments.
I can claim 20% of the sum assured if I am diagnosed with one of the qualified diseases, but I am only allowed to claim once per disease. Claims from this special benefit does not reduce sum assured nor the death benefit.
Although not the main point of this policy, the small payout in case of any of these other conditions is a welcomed bonus.
The maximum payout per claim under the special benefits is S$25,000.
Lastly, this policy also pays out upon death, but not much.
Since I’m not buying this insurance policy for the death benefit, I don’t really care too much about whether it has a death benefit or not.
Although it’s not much, S$5,000 is still money, so I’ll take it.
Now all the above protection for critical illness sounds pretty good, but how should I make a decision on whether it’s all worth the money or not?
How I down the financial cost-benefits of my ECI insurance
Directly comparing the payouts with the cost of the premiums
So first things first on analysing the cost-benefits. Let’s take a look at how much the premiums would have grown into if I had invested them instead of paying for this insurance.
Here are the numbers we will use for comparison:
- Investing S$1,288 per year over 36 years at 7% p.a. and 8% p.a. to compare 2 different rate of returns.
- Layer 1 Claim #1: S$100,000
- Layer 1 Claim #2: S$100,000 (cumulatively S$200,000)
- Layer 2: S$300,000 (includes any Layer 1 payouts)
- Layer 3: S$150,000 (cumulatively S$450,000)
- Layer 4: S$150,000 (cumulatively S$600,000)
Graphed out, here’s what this looks like over the 36 years of the term of the insurance:
Alright, so what does this mean? Let’s break the chart down:
- Throughout the term of the insurance coverage, investing the premiums instead will never be able to provide the same level of financial support as the ECI insurance, if all the layers are accounted for.
- If I am diagnosed with a severe state critical illness at any time during the insurance term, the payout will provide more financial support than investing the premium.
- It would take 26 years at 7% p.a. (when I’m 60 years old) or 24 years at 8% p.a. (when I’m 58 years old) for investing to provide the same financial support as the first payout from layer 1. Thus if I have my first diagnosis before I turn 58 or 60, I would be better off with the insurance policy rather than investing the money.
- It would take the 7% p.a. investment 35 years (69 years old) and 8% p.a. Investment 32 years (66 years old) to be able to cover as much as the second payout of layer 1.
To really visualise this, if we highlight the area on top of the chart that is above the investment lines and the areas that is below the investment line:
The green areas are when the ECI plan provides a better financial support than investment. The red areas are the times when investing the money instead would make sense.
Important: I will note that since there’s low likelihood of surviving to claim layer 3 and layer 4 payout, I won’t weigh the value of those 2 layers as heavily as the first 2 layers.
Like every insurance, I hope I never have to make a claim, but when I do, it’s always more financially beneficial to do so earlier rather than later.
So before I can make a call whether the above trade-off makes sense or not, I have to also see how likely I will have to make a claim and how old will I likely need to make claims against this policy.
What’s the likelihood of being diagnosed with a critical illness?
This is going to be very hard to figure out, but let’s give it a shot.
The incidence rate of illness really depends upon the type of illness we are talking about. Let’s take a look at the most common critical illness in Singapore and see which ones are the most likely:
(Source: Ministry of Health)
Based on the above, the top 3 groups of causes that fall under critical illness are:
- Heart Disease
Let’s take a look at the statistics for each in turn.
According to the Singapore Cancer Registry Annual Registry Report 2015 from the National Registry of Disease Office (NRDO), cancer is a leading cause of death in Singapore and “the lifetime risk for developing cancer in the Singapore population is approximately 1 for every 4-5 people.”
As I also have a family history of cancer, this risk is also likely to be slightly higher for me.
I believe because of this, the cancer protection alone is probably worth the entire plan for me.
However, let’s also take a look at the other 2 groups of illnesses.
According to the Singapore Myocardial Infarction Registry Annual Report 2016 from the NRDO, “Ischaemic heart disease was the third most common cause of hospitalization in 2015.” The incidence rate of acute myocardial infarction is also increasing, even when accounting for age.
Also that “the average age at onset ranged from 67 to 70 years and it increased gradually over
the years. About 7 in 10 of the patients were aged 60 years or above.”
If you believe that you may have a higher risk of getting heart disease, you may want to make sure you are protected here.
In the case of stroke, the NRDO has this to say in the Singapore Stroke Registry Annual Report 2016 : “Cerebrovascular diseases including stroke, were the 9th most common condition of hospitalisation, the 4th most common principal cause of death, and the leading contributor to the burden of disease in Singapore.”
With regards to the age of incidence of stroke: “The average age at stroke admission was 68.2 years old in 2016. Before 2012, the highest proportion of stroke patients were aged 70-79 years. Since 2012, the highest proportion of stroke patients was amongst those aged 60-69 years.”
As we age, the more likely we are to be susceptible to stroke. If we have heart disease or high blood pressure, the likelihood increases even more.
Making the decision to get the ECI based on the above information
Given the financial analysis and based on reading up on the above and other critical illnesses, my belief is that the likelihood is pretty high for me personally to be hit with at least one of these throughout my lifetime.
My main fear is cancer which can strike at any time, plus a family history of early onset of the disease, it makes me much more cautious.
In my case, I believe it’s more of a matter of when, not if so an ECI insurance makes perfect sense for me up until age 70.
Normally coverage goes to age 60, why did I choose to increase it to age 70?
Good question. Since the risks increase as I age, the insurance premium also increases to adjust for the risk. So why did I decided that the increase was worth the increase in premium?
Well because if you look above, the average age at onset of heart disease and stroke are nearer to 70 years old rather than 60. If I want to make sure that this insurance will cover me in the times in which it’s going to be most likely, it won’t make sense to stop the coverage at 60.
I feel that the premium increase for going from age 60 to 70 is still reasonable. I believe stopping at 60 will mean I will be paying around S$1,000 per year for coverage compared to the current S$1,288 per year. Still not too bad.
However, it’s another story all together if I want to push the coverage age up to 75 or 80 years old.
Why stop at 70? Why not get ECI protection until 80 or even 100 since the risk increases as you age?
In order to increase the coverage age from 70 to 80, the premium per year will increase to closer to S$2,000 per year, which is very steep, with no corresponding increase in sum assured. This changes the financial formula significantly.
Here’s the same chart above with the S$2,000 premium line added in:
As you can see, the invested premium starts penetrating the layer 2 payout level near the end of the term. If we extend this out until I am 80 years old, the invested premium will outperform even the S$600,000 total payout until layer 4.
At that point, it might just be better to invest the funds myself instead. Especially since layer 3 and layer 4 will likely never get paid out if I die from what allows me to claim from layer 2 in the first place.
Aside from the huge increase in annual premium, here are other reasons why increasing to 80 may not be needed:
- Similar to my previous analysis of life insurance, as we age past 70, our need to support dependents may be much lower, we are no longer earning income, and thus the need for getting a lump sum insurance payout is much reduced at that point.
- At that age, we would also already have financial cushion due to our own investment portfolio to draw on instead of relying on the insurance payout to support the treatment. Once we are diagnosed with these critical illnesses at that age, the likelihood of survival is low and long term survival is even lower at that point. Our retirement portfolio should be able to be used as a source of funds for the needed treatment and care instead of the insurance payout.
Remember, insurance is meant to reduce risk, not to eliminate it all together (if you want to do that you’ll be paying through your nose for the privilege.)
So think about your risk factors and what you need to protect. In my case, I believe that having this protection after the age of 70 is not worth the amount of premiums that I will need to pay.
[Update 27-Apr-2019] What about instead of getting a Multi-pay ECI, get a single payout at double the sum assured?
Since the insurance company is able to lower their risk exposure by spreading out their payments based on when we are diagnosed with a critical illness, the multipay version of the insurance can provide a cheaper insurance premium.
However, what if instead of getting S$100,000 for the first critical illness and another S$100,000 for the second illness, we get all S$200,000 on the first diagnosis instead? Would that be more worth it for us?
After asking my FA for a quotation, this is the detail of the single payout ECI plan with double the sum assured:
|Premium||S$2,331 per year (fixed)|
|Payment & Protection Term||36 years (till 70 years old)|
|Payout||Single payout on ECI diagnosis|
As you can see, since the plan pays out double the amount and only once and on the first diagnosis of ECI, the premium is more than S$1,000 higher per year.
Although that looks pretty bad, let’s see how that plays out if we invested the premium instead:
Based on this premium, the breakeven point – if invested at 7% p.a. – is around 27 years. At 8% p.a. the breakeven point is a bit over 25 years.
So with this plan, if I am hit with an ECI before I turn 60 years old, the plan would be a better financial choice. If I am diagnosed with an ECI after that, I may be better off if I had invested the money instead since the funds would have grown to be worth more than the sum assured.
Compared with the multi-pay plan break even age for the first layer of 24 (at 8% p.a.) and 26 (at 7% p.a.), it’s surprisingly similar!
However, note that this plan only pays out once. If I am diagnosed with another ECI after the first one, this plan does not pay out anymore while the multi-pay plan will pay again. At this layer, the multi-pay plan will only underperform investments at age 66 (8% p.a.) to 69 (7% p.a.) years old.
So based on the idea that a critical illness has a high likelihood of recurrence, the multipay is a better financial value, which a breakeven point at a much older age.
Here are the summary of the findings
- If the first diagnosis of an ECI is before the age of 60, then either ECI plan is financially advantageous.
- If the first diagnosis of ECI is after the age of 60, then investing the premium would be better for both plans.
- If there is a second diagnosis of a new ECI before the age of 66-69 then the multi-pay makes financial sense. The single pay plan doesn’t make sense here.
- If I am diagnosed with a late stage critical illness or have any recurrence of ECI at any time before the age of 70, then the multi-pay plan provides the best protection.
There you have it, the thought process I had behind my decision to purchase my ECI insurance. I hope it was reasonably easy to follow along.
Personally I think this is a great type of coverage to have given the overall risk of being diagnosed with some form of critical illness throughout our lives.
However, this is just the way I went about rationalising my decision. I’d like to also know if you agree or disagree with what I’ve talked about here.
Do you think ECI insurance makes sense for you? Do you currently have one? Why and why not?
I’d love to hear your perspective, so feel free to put your thoughts in the comments and I’ll respond! If you’d like you can also tweet me @firepathlion to get in touch with me that way!
Until next time.