Is there a formula to calculate Critical Illness coverage?

I once attended a seminar that was hosted by doctors. When it came to Q&A, I asked about their views on how to calculate cancer coverage?

One of the doctors took my question, and replied that none of them had the answer. He reminded me that each cancer alone is unique, let alone each illness. However, on his experiences on working with patients, the common financial challenges his patients faced were:

1. Income losses
2. Unpaid loans and debts
3. Hospital bills
4. Chemotherapy
5. Alternate treatment (eg, Chinese treatment, medicines and herbs)
6. Medication

The doctor could not put a price tag on the above factors. Another incalculable factor is the time frame that the patient has to go through. Some stabilizes (or dies) in a year, some 5, some 10, some till old age.

The keyword to this doctor's answer is "assumption". Indeed we have to make assumptions to how much we need to cover and to lat for how long.

Generally, there are 3 main factors to plan for:

1. Income replacement - a serious illness usually takes the victim's job away. These days, there's only so much the employer can do for an ill employee. Also, you may want to consider this income replacement to cover for outstanding loans and debts. Next to ask is, how long do you think you will need? Clients usually say 3 years is reasonable, but it can be unique to you.
2. Hospitalization - A seriously ill patient usually has to go to the hospital. It may occur a few times within a year, or over many years.
3. Medication and other alternate treatment - Medicine and treatment seeked outside hospitalization is a whole new cost altogether. Often, people mistake that once they have hospital insurance, this is taken care of. Consider a heart patient who has to consume daily 5 prescribed pills, each pill costing $4.20 each - that's $21 a day, $147 a week, $630 a month, $7,560 a year! This need is required even after your working years, so insurance planning should have this particular portion covered for life.

How to counter these needs? Here are insurance products that can help:

1. Income replacement - in my professional opinion, is best catered to by term insurance. That's because term insurance is low cost, and does not cover for life. Such arrangements are more cost effective, and in the event the insured retires early, he can simply drop the plan. If he works till age 65, the coverage still stands. Term plans do not have cash value, and I don't think there is a need for that since insurance returns are not attractive anymore.
2. Hospitalization - most easily taken care of by the Shield plans and their supplementary plans. Things to consider would be whether you want the option to choose private hospitals for better comfort, faster response time, better attention, etc. and whether you are willing to pay higher premiums - whether you are hospitalized or not - for total coverage, or save on premiums and co-pay a small affordable portion if the hospitalization occurs. Shield plans also cover some cancer and kidney outpatient treatment.
3. Medication and other alternate treatment - as this need can occur after your working years, it is necessary to have it covered by a permanent life insurance. Such coverage lasts for as long as you live. It also has bonuses added to the coverage, thus serves as a hedge against inflation. While cash value is also accumulated, I personally don't see it as a critical benefit. It's usefulness could be in the event you are in severe need of money like paying off a loan or something, you can withdraw the money but in turn, surrender your plan. Today's insurance market also sees a new permanent life insurance product, whereby the policyholder only needs to pay for a limited number of years, and the coverage lasts the lifetime. This is ideal for those who value having a more free cash flow in his or her senior years.