Deciding how much critical illness coverage you need

We live in a very fast-paced and highly competitive era. As a result, stress has become a very common occurrence. Stress could result in increased risk of serious illnesses such as heart disease and stroke. To relieve the financial burden of medical expenses resulting from serious illnesses, many purchase critical illness insurance. However, how much critical illness coverage is enough? This article summarizes the potential expenses incurred in the unfortunate scenario if you were to suffer from a critical illness.

How much critical illness insurance coverage should I buy?

What amount of coverage should I purchase? The main purpose of buying an insurance product is to provide financial support for medical and living expenses should you suffer from a serious illness. Purchasing insurance would help to reduce the financial burden on yourself and your loved ones. In general, the recommended amount of coverage to purchase is about two to three times of your annual salary. However, such a concept of calculation may not be enough. On top of medical expenses, you should also estimate your living expenses, as this expense varies from person to person. Below are some points which you can use to measure your coverage needs and help fill your protection gap.

1. Medical expenses

Critical illness insurance typically offers a lump sum compensation and has no usage restrictions. You can better understand the expense of treating some frequent critical illnesses when choosing the amount of coverage to buy. For instance, a colonoscopy, colon resection surgery, anesthesia, physician costs, hospitalisation expenses, and medicine, might cost up to HKD 200,000¹. An additional monthly fee of HKD 20,000 will be needed if targeted therapy is required². Let’s assume that the sum insured is three times one’s annual salary, where we use the median annual salary of HKD 20,000 as an example, the sum insured would be HKD720,000. While HKD720,000 may seem like a large amount, it may not be enough to cover a few years of medical expenses. When calculating the required amount of critical illness coverage, we also need to take into account any coverage that we already have from our personal medical insurance or group medical insurance.

2. Living expenses incurred during treatment

Certain types of insurance such as medical insurance, hospitalisation insurance and outpatient insurance only provide coverage for medical expenses. However, when it comes to treatment expenses, medical expenses are not the only expense incurred during treatment. We should also take into account our daily living expenses such as purchasing healthy food to maintain one’s physical health and hiring a helper to take care of the household chores. It is also important to include certain fixed expenses such as monthly rent and education expenses for your children into your calculation.

Here is an example on how you can calculate the amount of coverage you need:

Example: Assuming a 35-year-old married man with HKD 30,000, monthly income with no company medical insurance and has a home mortgage to pay, he might think about buying a critical illness insurance policy with a sum insured of HKD 300,000, which provides a lump-sum payout when diagnoses with critical illness.

Summing up the medical expenses and living expenses, the total expenditure across three years is approximately HKD 1,640,000. Should he rely on the payout from the critical illness insurance, he would still have a shortfall of HKD 1,340,000 in protection. Thus, in general, it is recommended to use a time period of three years when calculating the amount of critical illness coverage required. The example above is a rather general one. You should consider all the expenses listed in the article above to get a more accurate and comprehensive estimate of the ideal coverage amount.

Do I need to increase my coverage amount if I already have savings critical illness insurance?

As the name suggests, a savings critical illness insurance plan includes a savings component. As compared to a term critical illness insurance plan, the premiums will be proportionately higher for the same coverage amount. A savings critical illness insurance plan is more suitable for those who have a larger budget and want the cash value of the policy. However, as the optimal coverage amount increases as you age and go through different life stages, and together with inflation, this policy which you have taken up many years ago may no longer have enough coverage. Thus, it is necessary to continuously review one’s policy, protection needs and coverage amount.

Is it always better to have more coverage?

Many people would assume that more diseases are covered at higher coverage amounts. Most would also think that higher coverage would help them to better cope with the financial burden of suffering from a critical illness. However, higher coverage means higher premiums, which may exceed your budget. Additionally, while some policies claim to provide coverage for over a hundred diseases, it is important to consider if such a benefit meets your needs. According to FWD's claims report in 2020, the "big three diseases" of cancer, heart attack, and stroke accounted for 90% of FWD's critical illness compensation in Hong Kong in 2020. This could imply that the extent of disease protection may not need to be over extensive.

Having a critical illness plan together with a medical insurance plan which reimburses your medical expenses allows you to have a two-in-one financial protection against critical illness insurance. Insurance helps to financially protect yourself and your loved ones. It is important for one to carefully assess the economic expenses of falling ill and purchase a suitable critical illness insurance and medical insurance to avoid any gaps in protection.