Are Fixed-benefit Critical Illness Plans Better than Indemnity-based Plans?
MAS Team | 15 January 2021
Critical illness policies are designed to be useful when a person is struck with a life-threatening illness. Usually, these illnesses have huge treatment costs and bring a change in lifestyle too. Regular health insurance does pay for the treatment costs and post-hospitalisation expenses up to an extent, but the sum insured (SI) may be insufficient to manage all costs. That is why insurance companies have launched a dedicated policy for critical illnesses.
Critical illness plans come in two types—fixed-benefit or indemnity-based. Fixed-benefit plans will pay a lump-sum on diagnosis of the covered illness and will terminate once the payment is made or the policy term is over, whichever is earlier. The premium charged is usually fixed for the entire policy term, or revised at periodic intervals. Life insurance companies sell this type of policy, either as an add-on rider to their life insurance plans or as stand-alone critical illness plans.
On the other hand, indemnity-based policies work similar to health insurance products, i.e., they pay only up to the actual treatment costs and offer lifetime renewal. The premium is not fixed; it is revised periodically, based on the level of risk. This type of policy is offered by general insurance companies.
Now the important question is: Which type of policy should you choose?
Before we delve into that, let us scrutinise the critical illnesses that insurers are willing to cover. These vary from policy to policy but mainly cover risks of cancer, heart attack, stroke, kidney failure, Parkinson’s, Alzheimer’s, lung failure, liver failure, paralysis and coma. As you may have noticed, many of the illnesses mentioned above are usually found in people of older age. But most critical illness plans either stop covering such risks at the old age or hike premiums so steeply that policyholders have no choice but to surrender their policy.
In essence, critical illness policies sold in the market today are not for covering risks that are likely to happen but for those that have a very low chance of happening. To put it in simpler terms, critical illness policies will not be available when you really need them.
So why should you buy an expensive critical illness plan that is rarely going to be useful? For the same reason that you buy a life insurance policy, even though the risk of death before you turn 65 is statistically very low. The point of life insurance is to protect financial risks to dependents, in case of the breadwinner’s early demise. Once the breadwinner retires from formal work, owns enough assets and has no dependents, life insurance is not needed.
The same way, critical illness plans offer you protection against major risks temporarily so that you can save up and build assets that will be enough to pay for such risks in the future. This message is often lost on many who do not save enough for medical emergencies, surrender their unaffordable critical illness plans and end up dipping into their retirement corpus to meet treatment costs.
Once you are clear about the expectations from a critical illness plan, you can start thinking of buying the right plan. As mentioned, there are two types of plans—fixed-benefit and indemnity-based. We believe that fixed-benefit plans are comparatively better than indemnity-based plans. This is because the premium costs are predictable; risk coverage is wide and straightforward; and benefits paid out can be used as per one’s discretion.
Indemnity-based critical illness plans are suitable when the risks are high, such as in old age. But, as said earlier, these plans are often very expensive at old age; premiums only go up every year; and they pay only for actual treatment costs and nothing else. 
Also, if you find fixed-benefit critical illness plans expensive and unaffordable, then do not worry. If you have a health insurance policy with adequate cover, it acts as your critical illness cover as well, albeit at a much lower cost. The only downside is that the health insurance policy may not cover some illnesses; secondly, the premiums at renewal will be affected in case of major claims.
Therefore, do not fall into the trap of critical illness plans easily. If you can afford it, that is great; but if you cannot, optimise your health insurance cover. Lastly, build a separate medical corpus for your future needs when insurance will not be available.