Critical Illness: How much is enough?

Financial advisors often face the challenge of quantifying the “right” amount of cover for a critical illness benefit. While there is no scientific method to accomplish this, a number of considerations are useful to ensure all the relevant factors are addressed.

Critical illness cover is designed to mitigate the financial consequences of lifestyle changes brought on by the diagnosis of a covered critical illness. “These changes will be determined by the insured’s current lifestyle and the potential loss of income due to suffering the illness,” explains Farai Muronda, actuary at Liberty. “As such, each person’s level of cover will depend on the expenses needed to sustain their current standard of living, as well as the impact an illness could have on their career and earnings potential.”

Which illness?

Francesco Joshua, Head: Risk Solution, Metropolitan Employee Benefits adds that the various critical illnesses will each have a different impact on future earning capacity and the need for additional medical care, private care or even child care for minor dependants. “The amount of cover would also depend on the trend in medical costs and cover, and whether there will continue to be a gap between claims and recoveries. In addition, other sources of funding which may be in place should be considered.”

Craig Harding, Managing Director of Altrisk, agrees. “Statistically 75-90% of critical illness claims revolve around cancer, heart disease and stroke. Thus, consideration needs to be given to whether the client is at risk for any of these diseases by looking at the family history and any pre-existing conditions. The broker can then consider possible scenarios if the client were to contract any of these identified illnesses and what the potential financial and medical implications would be.”

Understanding the objective

Petrie Marx, actuary in product development at Sanlam suggests that clients consider their reasons for taking out critical illness cover, and try to attach a value to that. “An amount in the region of one or two times the annual income is usually considered appropriate, but this depends on the client’s objectives.”

Francois Tranter, Head of Risk Technical Marketing at Momentum Risk and Savings, adds that, generally, clients should base the decision on affordability, after considering a few guidelines to determine their objectives.

“For example, does the client want to make provision for expenses not covered by a medical aid; move to a more expensive medical aid option; or have access to the latest medical technology in the event of a critical illness? Perhaps the client wants to make provision for child care, the services of a driver or domestic servant, or unpaid leave for a spouse while recuperating from a critical illness? Perhaps the objective is to ensure the client will be able to work fewer hours, change to a less stressful job, or retire earlier following a critical illness?”

The role of the broker

The starting point is a thorough financial needs analysis, which the financial intermediary will use to estimate the likely financial impact of a critical illness on a client’s lifestyle,” notes Patrick Sheehy, Head of product management at Glacier by Sanlam. “With the advancement in medical science and the associated costs of treatment, it is vital that the amount of critical illness cover is regularly re-assessed.”

“Often, the decision rests around affordability,” says Muronda. “Advisors should counsel clients to purchase critical illness cover according to how much they can afford, and regularly review this amount.”