Difference between critical illness and life insurance policy

Insurance has become an integral part of our financial plan given the coverage benefit it provides. An insurance policy compensates us against any financial loss faced due to premature death, ill-health and other unforeseen emergencies. A life insurance plan and a critical illness plan are two important insurance plans which find relevance in our lives. While a life insurance policy covers us against the risk of premature death, a critical illness plan provides financial assistance in case we suffer from a critical illness. While both these plans are important, are they same?

Comparing a critical illness plan with a life insurance one is like comparing apples and oranges. While both are insurance plans covering specific risks, they are very different from one another. Let us understand how?

What is life insurance?

Life insurance is an insurance policy which primarily covers the risk of premature death and the financial loss suffered thereof. The policyholder chooses the plan tenure and the coverage amount. If the life insured dies during the chosen tenure, the chosen Sum Assured is paid. If, the plan matures, the maturity benefit would depend on the type of plan selected.

What is critical illness plan?

A critical illness plan is a health plan under which specified critical illnesses are covered. If the insured suffers from any of the covered illness during the term of the plan, the chosen Sum Insured is paid.

Read more about benefits of critical illness policy

Difference between the two

A life insurance plan and a critical illness plan are two different plans which cover different risks. Here are some important points which highlight the differences between a critical illness plan and a life insurance one:

  • Contingency covered

A life insurance plan pays a benefit if the life insured dies during the term of the plan. Thus, it essentially covers the risk of premature death.

A critical illness plan, on the other hand, covers the risk of suffering a critical illness.

  • Coverage amount

There is, usually, no upper limit in choosing the Sum Assured under life insurance plans. The minimum Sum Assured usually starts from Rs.50, 000 or Rs.1 lakh and there is no maximum limit. Moreover, the Sum Assured for life insurance policies should be selected based on one’s financial requirements.

Critical Illness plans impose a limit on the Sum Insured offered. The maximum allowed Sum Insured is, usually, around Rs.10 lakhs – Rs.25 lakhs. The choice of the Sum Insured depends on the policyholder and should be done based on the expected medical costs which would be incurred in case of suffering any major illness.

  • Plan variants and need fulfillment

Life insurance plans come in different variants. There are term insurance plans, traditional endowment and money back plans, pension plans, market-linked ULIPs, children plans, etc. While term plans help in income replacement, pension plans build a retirement corpus. Child plans help create a secured financial future for the child while ULIPs fulfill the need of wealth creation. Thus, different life insurance plans fulfill different needs and the policyholder can choose any type of plan as per requirement and financial need.

Here is how life insurance works

There are no variants of a critical illness plan. The only notable difference between different critical illness plans is the list of illnesses covered. Different plans cover varying number of critical illnesses. Moreover, critical illness plans do not fulfill any other need except providing funds for facing a critical illness.

  • Benefits paid

A life insurance plan pays a death benefit or a maturity benefit. The benefit might be paid in lump sum or, if chosen, in instalments (annual or monthly). Moreover, various plans also pay bonus and loyalty additions.

A critical illness plan pays a lump sum benefit only if the insured is diagnosed with any of the covered illnesses. There is no maturity benefit payable under these plans.

Here are the benefits of a critical illness plan

  • Term

Life insurance plans are long term plans ranging from a term of 5 years to whole of life. Critical Illness plans, on the other hand, are offered as one-year plans and can be taken for a continuous period of 2 or 3 years too.

  • Premiums

Since life insurance plans provide a wider scope of coverage, the premiums are higher than those charged for critical illness plans.

  • Tax benefits

How can we forget tax benefits of insurance plans? In case of life insurance plans, premiums paid are tax-free under Section 80C and the benefits received are tax-free under Section 10 (10D). There is an upper limit on the exemption of premiums and the limit is Rs.1.5 lakhs.

Premiums paid for critical illness plans are tax-free under Section 80D. The maximum exemption allowed is up to Rs.60, 000 if you also cover your dependent parents who are senior citizens.

So, life insurance plans and critical illness plans are widely different from each other. You cannot substitute one for the other. Both these plans serve a different need and should be included in your financial portfolio.

Read more about Separate health insurance plans for parents of floater?

Read also An anatomy of an health insurance plan

Read more about Dejargonizing health insurance terms

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