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I live in Singapore.

I'm in my mid-20s and I currently have medical insurance that covers hospitalization bills. This amounts to roughly USD 250 per year. However, I lack Critical Illness insurance and Total Disability Income insurance. I asked my financial agent, and he told me that I need to pay roughly USD 3600 per year to be insured for all 3 cases.

I'd just like to ask if this is a reasonable amount to pay? Why the sudden expensive jump in the amount I need to pay?

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    What country are you in? (Note - a US person would naturally write $250 and not think to append US. – JoeTaxpayer May 24 '13 at 16:45
  • I live in Singapore. – catandmouse May 24 '13 at 17:24
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catandmouse, this question is very difficult to answer without specific details regarding the policies you've mentioned.

However, in general, Critical Illness and Total Disability policies pay one or both of:

1) a lump sum cash payment, and/or 2) an ongoing series of payments

whenever the conditions of the policy are met.

One reason it's difficult to explain the increase in cost is that these terms differ. Most plans will list a number of conditions they consider to be "critical" (often things like terminal illness, cancer, organ failure, debilitating diseases), as well as under what circumstances you'd be considered disabled and unable to work, which can vary. Also, the amounts that are paid out often vary by policy.

Additionally, some policies are structured to provide payments for the rest of your life (such as if you were blinded or lost both hands, etc.) in cases where you could not reasonably be expected to continue working. If these policies have these type of lifetime payments, it would certainly increase the cost compared to if they only provide a one time lump sum payment.

It's also very likely that part of the cost is due to the issue of adverse selection. Even though disability events are rare, each claim is very expensive. For example, if you are an office worker, you are much less likely to be disabled than if you work in a factory. Therefore, the type of people who would choose to purchase an optional disability coverage typically feel that they are much more likely to need protection against disability than the average person. As a result, the cost of insurance is often high because you are pooling your individual risk with a group of insureds whose risk is much higher than average. It would be much cheaper if you could pool your risk of disability with the entire population in general, but many people do not buy this coverage as they do not feel they have a significant risk of becoming disabled.

Generally, speaking, your premiums go toward covering claims, administrative expenses, reserves (savings the insurance company builds up to pay for claims in the future), and the insurance company's profits. However, without knowing the company's loss ratio (the percent of revenue they pay out in claims), as well as the payments for each type of critical illness and disability (these should be in your policy), as well as how likely they consider you to experience one of these events (actuarial and underwriting tables), it is very difficult to say whether these amounts are "reasonable".

In the USA, most publicly held companies do publish some of these figures. So for example, you might be able to find out that a particular company pays 80% of its revenues in claims, has 10% administrative expenses, pays 5% in taxes, and makes 5% in profits.

I hope this helps. Best of luck!

  • +1 for mentioning adverse selection; it's one of the least understood aspects of the health insurance market, in my opinion. – John Bensin May 24 '13 at 18:04
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    @JohnBensin Yeah, this is one of the reasons that some people don't like ACA and others love it - it takes a number of these types of costs and charges everyone a little for them (even those who will never file a claim) instead of charging a few people a lot for them. – JAGAnalyst May 24 '13 at 18:17
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    I agree. I work with a few health economists and follow the field quite a bit, and as a whole they're simply baffled as to how people on the left and right disagree with a mandate to purchase insurance. Adverse selection is not a problem that solves itself! – John Bensin May 24 '13 at 18:19
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    Hehe, don't get me started. You'd be surprised how many people I meet who want their premiums refunded because they didn't have a claim in the past year. It can be tough to explain to people what they are really paying for. – JAGAnalyst May 24 '13 at 18:25

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