Critical illness insurance
Also written Critical illness policy · Critical illness cover
A defined benefit policy that pays a lump sum when the insured is diagnosed with a specified disease such as cancer, heart attack or stroke and survives a minimum period — no payment on death.
In plain language
A health insurance policy pays the hospital. A critical illness policy pays the patient.
It provides a lump sum benefit if the insured contracts certain specified diseases such as cancer, heart attack, stroke, kidney failure or multiple sclerosis. It differs from life insurance in that there is no payment on death, and payment is usually subject to a minimum survival period after diagnosis.
The lump sum can be used in whatever way the claimant chooses — to generate income, to repay a mortgage, or anything else. That is the point the workbook presses: most people think of critical illness cover as a small extra sum for items health insurance does not cover, and there is a lack of awareness about its importance as an income replacement policy.
How it works
It is a defined benefit policy, not indemnity. The workbook's Table 1.1 classifies it with life insurance: the exact loss of earnings from a critical illness is difficult to ascertain, so a pre-fixed sum is paid rather than a measured loss.
| Health insurance | Critical illness | |
|---|---|---|
| Type | Indemnity | Defined benefit |
| Pays for | Actual hospitalisation expenditure | A lump sum usable for lost income or any other purpose, including hospital bills |
| Claim paid | On incurring covered hospitalisation expenses | On contracting the pre-specified illness and surviving the stipulated period |
How much cover. The amount required has to be calculated like life insurance — an income replacement calculation. Such a large sum will normally not be available as a rider on a health policy, only as a standalone critical illness policy or as an accelerated sum insured rider on a life policy.
Riders on life policies. A critical illness rider pays a pre-specified sum on diagnosis and survival for 30 days. If the life cover is reduced by the amount paid, it is an accelerated sum insured rider, which is cheaper than one that pays independently of the death claim. The workbook notes that, in most cases, a term policy with an equal accelerated critical illness cover is cheaper than a standalone critical illness policy from a general insurer.
Multiple policies. As defined benefit policies, multiple critical illness policies all pay, irrespective of how many the insured holds. They also pay wherever in the world the illness occurs, since the event is easy to verify.
A worked example
Illustrative figures.
Anil, 40, earns Rs 18,00,000 a year and supports his wife and two children. He is diagnosed with cancer and cannot work for about two years.
| Cover | What happens |
|---|---|
| Family floater health policy, Rs 10,00,000 | Pays Rs 7,50,000 of treatment bills — the actual expenditure |
| Critical illness policy, Rs 36,00,000 | Pays Rs 36,00,000 once he survives the stipulated period after diagnosis |
| Term insurance, Rs 1.5 crore | Pays nothing — Anil is alive |
The health policy protected his savings from the hospital. It did nothing about the Rs 36,00,000 of income he loses over two years off work, the home loan EMIs that continue, or the children's fees. The critical illness lump sum is sized for exactly that — two years of income — which is how the workbook wants the cover calculated: like life insurance, not as a token add-on.
Now change one fact. Anil's critical illness cover is instead a Rs 36,00,000 accelerated sum insured rider on his Rs 1.5 crore term policy. The rider pays Rs 36,00,000 on diagnosis, and his life cover falls to Rs 1.14 crore. Cheaper, and the income replacement is identical — but the family's death cover is now smaller, which may need topping up once he recovers.
Why NISM asks about it
Chapter 3 (Non-Life Insurance Products): 3.1.2(e) describes the product and 3.3.1 compares it with health insurance; Chapter 1, Table 1.1, classifies it as defined benefit; Chapter 2 covers the critical illness and accelerated sum insured riders. Expect indemnity versus defined benefit questions, the no-payment-on-death feature, and why the cover should be sized like life insurance.
Common exam traps
- No payment on death. That is life insurance, not critical illness insurance.
- Defined benefit, not indemnity — it pays the agreed sum regardless of the hospital bill.
- Multiple critical illness policies all pay.
- An accelerated sum insured rider reduces the life cover by the amount paid.
- The survival period is not stated consistently. The critical illness rider in Chapter 2 and the product description in 3.1.2(e) both give a minimum survival of 30 days after diagnosis; the comparison table in 3.3.1 says 15–30 days. If an option says 30 days, it matches the product descriptions; 15–30 days matches the table.
- Size it as income replacement, not as a small top-up to health insurance.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Accelerated sum insuredA critical-illness or disability rider that pays out of the same sum assured as the life cover, so a claim reduces the death benefit — cheaper than a rider that pays an amount over and above the life cover.
- Defined benefit insuranceA policy that pays a pre-fixed sum on the covered event, without trying to measure the actual loss — the opposite of an indemnity policy, and how life insurance itself is structured.
- Human Life ValueThe present value of the income a person is expected to earn over their remaining working life that is available for dependents — the upper bound on how much life cover is justified.
- Personal accident insuranceA policy paying a defined sum where the insured sustains bodily injury solely and directly from an accident caused by external, violent and visible means — covering three grades of disablement.
- Principle of IndemnityThe principle that insurance should restore the insured to the financial position they were in before the loss — no better — so that insurance can never be a source of profit.
- Term insuranceLife cover for a fixed period: if you die during the term your nominee receives the sum assured, and if you survive it nothing is paid back. It is the cheapest way to buy protection.
- Asset protection needThe need to protect assets already built up from theft or destruction — the third of the workbook's three insurance needs, alongside income replacement and income protection.
- Cashless claim paymentAn arrangement where the insurer pays the hospital or garage directly once a claim is approved, so the insured does not have to pay first and claim reimbursement later.
- Directors and Officers liability insuranceA liability policy covering board members, management and supervisory staff for personal liability and defence costs from claims alleging a wrongful act committed in the course of their duties for the company.
- Family floater policyA single health insurance policy covering several named family members under one shared sum insured, instead of separate policies for each — cheaper, but the pool can run out for later claims.
- Overseas travel insuranceAn indemnity policy providing medical, financial and other assistance during international travel, reimbursing up to a stated maximum, and sometimes compulsory for entry to certain countries.
- Income replacement needThe insurance need that arises from a risk to the earning ability of an asset, including a person and their life, met by life, critical illness, accidental disability and annuity products.
- Waiver of premium riderA life insurance rider, bought for an extra premium, that is triggered where a disability or a loss of income makes it difficult for the policyholder to pay the premium.