Critical illness protection premiums (reflecting the higher probabilities of the occurrence of such life threatening illnesses than that of death) are 2-3 times higher than what the cheapest term life premiums would be; on the other hand, critical illness protection is much more affordable and available than disability insurance protection. (The comparison makes more sense with life than with disability insurance, because of the lump sum payment method, and because less consideration is given to previous income level, profession, ability to work, or the fact whether the person insured is actually working or not any time; if one of the contracted conditions is diagnosed by doctors, the benefit is paid after 30 days, provided the person is alive then.) For details on critical illness insurance, click here

An example

In our hypothetical case, Joe (40 years old, nonsmoker) can buy a basic critical illness policy (that is one that covers risk from cancer, heart attack and stroke) with $400,000 benefit for $1,604 a year from one company. That policy is renewable at guaranteed prices until age75. In the second decade of the policy, the annual premium will increase to $ 4,216, in the 3rd one to $ 6,684, and over the age of 70 he will have to pay $ 10,580 annually.
For some additional premium (only $ 24 annually in the first decade), he can ensure that the accumulated premium paid into the policy will all be paid back in case he dies and the living benefit lump sum is not paid (i.e., it's a sudden death and the 30 days elimination period is not fulfilled, or if the cause of the death is something not covered by the policy). He can also choose a level payment option so that he can avoid the considerable increase in the premium when older. If he wants this option, he has to pay $ 2,728 annually during the whole life span of the policy, up to his age 75.
If he wants the coverage for the other illnesses as well, he has to pay $1,932 annually (instead of $1,604) in the first ten years.
He can buy a similar policy from another company. In this case, the initial annual payment for the comprehensive coverage is $ 1,894, and this amount will increase to $ 5,326, $ 10,174, and $ 13,898 in the consecutive decades, respectively. With this policy, a rider can be bought that ensures that 25% of the premium is paid back at the end of every tenth year if the policy is still in force.
To make the comparison more digestible, I put the cost of half of the available policies into the table below:

Annual premium at various ages	Product 1	Product 2	Product 3	Product 4	Product 5	Product 6	Product 7	Product 8	Product 9	Product 10
40-	1,628	1,894	1,901	1,960	1,995	2,010	2,055	2,134	3,064	3,627
50-	4,376	5,326	4,181	5,588	4,291	4,170	4,463	5,254	3,064	3,627
60-	7,276	10,174	7,145	8,628	8,955	8,810	7,231	10,362	3,064	3,627
70-	11,840	13,898	9,885	12,992	19,559		13,283	23,014	3,064	3,627
Total paid until age 70	132,800	173,940	132,285	161,760	152,410	149,900	137,490	177,500	91,920	108,810

• Product 8 pays the whole contracted amount ($400,000) if the person insured dies; all the other policies refund only the premiums paid in such a case.
• Products 1 & 9 provide only basic protection (cancer, stroke, heart attack), while all the others provide protection from all the usual illnesses built into critical illness policies.

In the last line of the table, we can see that Product 9 & 10, while not very attractive in terms of initial premium, are the less costly on the long run.
Until now, however, we have not considered the time value of money, that is the effect of inflation. If we suppose a 4 % average annual rate of inflation, then the sum of the so-called 'present values' of premiums paid in various years in that 30 year period makes the comparison more meaningful. Below you can see the cost of these policies in terms of today's money:

in 30 years; present value

66,680

85,494

67,376

81,592

75,755

74,634

70,604

87,832

55,101

65,226

Of course, if different time horizon or different inflationary assumption were applied, we would receive somewhat different numbers.

Let's suppose Joe has a twin brother Jack who is a smoker. His much worse chances for a disaster-free life are reflected in the numbers below. In the first row, you can see his initial annual premiums for the same policies; in the second row, the present value of the costs of keeping those polices in force for 30 years are given:

initial premium	3,204	3,978	3,985	3,880	4,479	4,386	4,243	4,622	7,348	8,143
in 30 years; present value	179,254	225,925	174,719	210,702	216,023	200,052	173,193	191,057	132,143	146,440

The effect of smoking status is very conspicuous. Let's see the effect of age and gender as well. Joe's younger sister (Jane, 25 years old, nonsmoker) would incur the following initial annual premiums and total discounted costs (with the assumption of 4 % inflation again) in a 30 year period for the same policies:

initial premium 720 526 453 832 1,195 1,130 551 846 1,044 1,199 in 30 years; present value 20,088 22,545 17,003 23,902 30,591 27,722 19,240 23,863 18,774 21,562

  Back to list of examples

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