Updated: Mar 1
I’m writing this at 3am in the morning in Tokyo, Japan at Hareda Airport. It’s 2 hours before the first train – and my brain is basically on fire.
Thankfully, you can get pretty productive with a Caffeine Mocha in you and a bowl of Spicy Ramen.
As a Critical Illness specialist, it’s important to be flexible and yet provide valid scientific and reasonable justification for recommendations since Critical Illnesses vary significantly in duration and severity.
Especially if it becomes a potential conflict of interest for the consumer - such as suggesting higher sum assureds, longer duration of insurance terms – that typically entail higher commissions for myself.
One such concept that allows this is the distinctions between Direct Losses and Indirect Losses.
What Are Direct Losses? (The 5-Year Rule)
The primary reason for the purchase of a Critical Illness, or Early Critical Illness policy is due to the loss of potential income experienced by the non-insured.
Despite a strong hospitalization plan providing some backbone and preventing complete financial destitution in the form of medical bills, not having a Critical Illness plan can be potentially far worse.
For example, even Early Stage Liver Cancers can require more than a 39-month length of follow up, observations, tests and treatment.*
I think we can all agree that it would be extremely challenging, usually impossible - to continue employment in the face of the length and intensity of such life-saving treatments.
In other words, most people become unable to work when undergoing a Critical Illness, and thus they require some kind of protection in place.
Some of the risks that come about from not having insurance in place are:
1) Inability to pay off general, or consistent expenses: e.g. food expenses
2) Inability to pay off or contribute to larger liabilities: e.g. mortgage payments
3) Inability to carry out future plans: e.g. Retirement
Since it is often asked how much insurance a person should purchase, a Consultant will typically tag a sum assured to the direct loss estimated using the 5 YEAR RULE.
As a CI specialist, I can verify that some of this math is statistically verifiable – typically from the Seer Database maintained by the National Cancer Institute.**
While cancers tend to vary in significance and also have different post-remission effects (e.g. reversible organ failures tend to require lifetime maintenance beyond the assumed 5 year period), it is a reasonable baseline for loss prevention from Critical Illness or Early Critical Illness.
And of course, LIA supports this.
But how about Indirect Losses? (>5 Year Rule)
So the 5 year rule (+liabilities) is a good rule, but... The problem that I’ve been beginning to see from experience is a wide range of Indirect Losses.
The Income Replacement Calculation only accounts for a potential 5 year period of not working.
It doesn't account for...
1) Career Opportunity Cost:
Imagine if you're Lawyer A - a high flying lawyer making $100,000/yr - and you get a Critical Illness that takes you out of the workforce for 5 years. Thankfully, you're insured for $500,000 because of consultants like yours truly.
Your Career Opportunity Cost could be calculated by:
a) The Five Years of Increments that you FIRST missed out: ($5000 + $10,200 + $15,762 + $21,550 + $27,628) = $80140
b) The Five Years of Increments you WILL(LAST) miss out. Since most careers end at a certain point (e.g. retirement age), you would look at the last 5 years that you could have worked before retrenchment or retirement.
If Lawyer A was only due to work 10 more years prior to Cancer, now he could only work 5. The 5 years of Increments he would have missed out on are: $34,000 + $40,710 + $47,475 + $55132 + $62889) = $240,206
That's a lot of money.
According to MAS***, medical inflation is expected to rise at NINE POINT THREE PERCENT (9.3%) next year.
That's a LOT higher than the average medical inflation in Southeast Asia (7.1%) and Core Inflation in Singapore (1.9%)
A lot of income replacement financial assessments tend to work primarily on core inflation - or worse, not at all.
This may be fine because utilizing a suitable budget and not overpaying for insurance is a problem that both consumer and consultant alike face.
...But it may result in a serious long term deficit in actual needed income if you can't make the claim amount larger than it currently is.
3) Lack of Income for Other Medications, Treatments or Necessary Equipment:
Most Finance Groups tend to understate the costs of these things. I've actually detailed some of these expenses in a previous article below, but these are some of the core expenses that your medical insurance won't cover that SHOULD be covered on top of your Active Income Replacement...
Basic Necessities: Typically the types of Food you can eat becomes reserved, and may be more expensive. For transport, you would veer away from public transport to reduce risks to your already compromised immune system.
Experimental/Alternative Treatment: Experimental treatments are outside the range of claimable insurances. If you want to know why people would resort to experimental treatments, you should watch more Medical Dramas.
Expedited Treatment: Expedited treatments usually require more money - speed is of the essence when combating disease. For example, some people go overseas to expedite their treatment - especially if there's a long queue for the surgical table, but that will cost you out of pocket.
Necessary Equipment and/or Help: Some Critical Illnesses may require you to hire assistance, especially if you are temporarily/partially paralyzed or incapacitated but not enough to qualify for Total and Permanent Disability. You may also need aids - for hearing, seeing, mobility, feeding...
Repercussions: Should You Invest Your Critical Illness Payout?
In conclusion, we can see two things:
1) Firstly, Indirect Losses are real - and manifest in many different ways.
2) Secondly and more importantly, Indirect Losses are calculable and manageable. Most Indirect Losses occur over an extended period of time and percentage increase (attributed to increment or inflation of kind).
As a result, it makes sense to invest your Critical Illness Payout should you not be using it to clear off large debts.
At the very least - since your payout is subject to inflation, it is inadvisable to keep that money on hand in cash. This is something that people who have claimed critical illness policies have actually learnt to do.
My other specialty lies in investing, which has hopefully been fairly obvious by this particular point.
So it was a natural instinct to consider investing the solution to such problems.
Of course, you could always simply consider increasing your current insurance coverage.
Either way you decide to resolve your potential problem in future, you need to account for the potential shortfalls in your own Financial Planning through and through.