Critical Illness Insurance

For several years now, I have struggled with the idea of critical illness (CI) insurance for my clients as it always seemed too expensive for me to recommend it even though I knew how important this type of protection can be. Recently, and after receiving some additional training and info on the subject, my views have entirely changed. Yes, CI insurance is expensive but there are two reasons I am now strongly recommending it for all of my clients that are the primary income earners in a family and are between the ages of 30-50. Before I explain the reasons, I want to give you a brief idea of what CI coverage entails:

This is a type of coverage that pays a tax-free, lump sum cash amount (like life insurance) to you in full if you become sick with any of the covered illnesses. The cash is paid directly to you to use in whatever manner you wish – you decide how to spend the money whether it’s for medical costs, time off work or even a big vacation or other splurge. People deal with severe health issues differently and there is no limitations on how you spend the payout.

An example of how this coverage would work for your financial situation: If you’re diagnosed with cancer in BC, the average wait time to begin treatment is 4-5 weeks and that wait could be the difference between a successful recovery or not. If you were to have $100K of CI coverage, you could jump on a plane to the US and pay for private treatment immediately. If this greatly increased your odds of survival, many would choose to do this anyways but with CI insurance in place, you would have the financial means to do so instead of having the added stress of financial hardship for your family. The money can also be used during an illness to take the time off work necessary to recover without worrying about how you will pay your bills.

If your cancer is not as severe, you may still need to make weekly trips to Vancouver for your treatment and take significant time off work, both of which will have deep impacts on your finances.

Now back to my reasons: The first reason I am recommending it so strongly is that the basis for the cost being so high is that the odds of claiming on a policy are very high as well. While you have an approximately 2% chance of dying before age 65 (although this risk is covered with your life insurance), you have a 25% chance of suffering a critical illness.

The second reason is that we have the ability to set up critical illness insurance with a “return of premium” option. This means that every last dollar you pay into this plan is fully reimbursed to you after 15 years if you don’t make a claim. So for example, if you pay $75/month for CI coverage and at the end of the 15 years you haven’t made a claim, you could request to cancel the policy and you would receive a tax free cheque in the amount of $13,500. You could of course keep the policy in force longer and your return of premium amount will keep increasing. With this feature in mind, you can set up proper critical illness coverage and (hopefully after not using it) then get all your money back at the end. The only cost would be the potential lost growth if you invested the money instead.

What’s Covered?: Most policies cover a wide range of illnesses including stroke, cancer, heart attack, deafness, loss of speech, major organ failure, multiple sclerosis, parkinson’s, major organ transplant, heart valve replacement, alzheimer’s, blindness, kidney failure, coma, loss of limbs, occupational HIV, paralysis, loss of independent existence and a number of other conditions. The last one, loss of independent existence is a “catch all” that helps to cover many other unlisted illnesses as long as they substantially alter your daily living ability.

One of the best ways to look at this is to compare it to another type of insurance. Most people with a newer vehicle carry collision insurance in case their car is totaled. You pay $50/mo or more for this coverage but in reality, if your car was totaled you would still be ok financially, even if you had no coverage and had to drive a used “beater” around for a year or two. If you were to have a stroke or cancer and had to take a full year off work, plus had significant medical expenses that you had to pay out of pocket, the financial hardship to you would be far greater. The odds of this happening are more likely than writing off your car and the coverage to protect against it could be attained for less money than your car insurance….

Yes, the cost of a plan like this is yet another monthly expense but if you set it up with a return of premium, you can view it as part of your retirement savings. Furthermore, if you’re already putting money away each month or year in your RRSP or TFSA, I would rather see some people decrease this contribution amount and use that money to go against your CI plan. You’ll still get the money back down the road if you don’t claim on it but in the meantime you’ll have protection from an event that could completely destroy your retirement plans. There are many other details of CI coverage that need to be reviewed before setting up a plan but I’m out of space now so feel free to call or email me with any questions!