What are critical illness plan?

There are two types of health plans: indemnity and defined benefit plans. A basic health insurance is an indemnity product that covers hospitalisation expenses, pre- and post-hospitalisation expenses and listed day-care procedures.

Defined benefit policies pay a stipulated sum on an insured event. A critical illness policy is a defined benefit plan that pays the total sum assured on diagnosis of an insured critical illness; it doesn't matter what the hospital bill is. Also, most of the plans terminate after the first claim; few plans cover multiple critical illnesses but mostly cap the number of illnesses they can cover.

A critical illness policy helps cover incidental expenses and supplements your income in case you are unable to work: a plausible fallout of a critical illness.

The caveats

You need to keep in mind some caveats, the most important being the waiting period.

Most health plans come with an initial waiting period. A critical illness plan has that and another specific one: the survival clause.

This kicks in if a policyholder is diagnosed with a critical illness. Most insurance companies have a survival period of 30 days and it's only after the policyholder has survived this period that the claim is settled.

Some plans may waive off this clause.

What you need to do

The most challenging aspect of buying a critical illness policy is understanding what is insured. It's not just looking at the number of critical illnesses covered and going for the one with the maximum number of illnesses covered, but also about understanding the exact definition of the illnesses to avoid unpleasant surprises at the time of making a claim. For instance, a critical illness plan covering cancer may not cover the early stages of cancer.

The second thing to understand and think about is how you buy a critical illness plan. These policies can be bought as a rider—on a base policy like a life insurance policy—or as a standalone policy. But as a rider, the policy exists only till the time the base policy exists. Surrender the policy and you end up forgoing the benefits of a critical illness policy.

Unlike a health insurance policy, a critical illness policy requires minimal paperwork because the insurer concerns itself with the diagnosis of the ailment.

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