Critical Illness

Critical Illness Insurance

What is a Critical Illness?

“Critical illness” generally refers to a serious life-threatening illness or disease like:

  • cancer,
  • HIV infection,
  • heart attack,
  • kidney failure,
  • stroke,
  • multiple sclerosis,
  • Alzheimer’s, and
  • Parkinson’s.

What is critical illness insurance?

Critical illness insurance pays you, the person insured, a lump sum amount:

  • if you are diagnosed[1] with a covered life-threatening medical condition,
  • your illness or disease meets the requirements under the policy for benefits to be payable, and
  • you have survived for a specified period after diagnosis.

Do you need critical illness insurance?

Critical illness insurance is ideally suited for the family breadwinner where a critical illness would be financially devastating. If you’re retired or financially independent, then you probably don’t need it.

If you’re still working and can’t afford to retire, then consider:

  • How likely is it that you might have a heart attack, stroke or cancer? (1 in 2 people contract heart disease and 1 in 3 develop some form of life-threatening cancer)
  • If you still have to work when you suffer with a life-threatening illness or disease, will it affect your level of responsibility or career prospects? (How will your boss perceive your illness/disease?)
  • How long do you plan to be off work with your heart attack, stroke or cancer? (90% of people who suffer a heart attack end up back at work within 60 days even though this may put their lives in jeopardy)
  • Will you have the energy or strength to ever go back to work on a full-time basis and be just as productive as you were previously?

What are some problems with critical illness insurance?

  1. Cost

It’s not cheap. But with proper advice and a strategy to deal with a critical illness, the cost can be manageable.

The premium cost varies based on the quality of the definitions, the exclusions or other provisions that enhance or detract from the policy, the financial strength of the insurance company, and the insurance company’s policy servicing and willingness to pay claims as opposed to “manage claims”.

  1. Contract Complexity

Critical illness policies are not easily comparable – although there has been some standardization of terms.  It is not just a matter of price when looking at policies.  You should understand the insurance company as to their history of claims and percentage of claims paid.  And you should understand the difference in policy provisions to appreciate if you are getting good value for your money.

Ultimately, you need to understand under what conditions will a diagnosis be covered and compare from one policy to another.  In comparing policies consider:

  • different terminology used;

For a heart attack, you may see different terms from one policy to another like cardiac markers, cardiac enzymes and cardiac biochemical markers.

  • different degrees or advancement of the disease or illness before one policy pays compared to another;

For breast cancer it must be invasive with lesions of at least 0.70 millimetres whereas in another policy it might be at least 1.0 mm in depth.

  • some policies may pay partial benefits while others don’t pay anything;

For breast cancer, some may pay partial benefits for in-situ cancer (this is cancer that has not spread to other tissue) whereas other policies won’t pay anything.

  • different diseases or illnesses covered.

In one policy only 7 critical illnesses might be covered whereas another might cover 23+ illnesses and diseases.

You’ll also need to review carefully all other policy provisions to understand the implications on the quality of the contract. For example:

  • is the policy cancelable by the insurer?
  • can the insurance company change the premium rates?
  • most contracts state that a benefit will be paid only if the insured survives at least 30 days after diagnosis of a covered condition. And some contracts extend this 30 day period for diagnoses of cancer or other illnesses;
  • many plans provide a full refund of premium without interest at death if no benefit has been paid. Whereas some plans pay you interest on the premiums.
  1. Funds not payable until illness/disease has become advanced

If a cure is your goal, then your best chance to cure yourself is by getting the illness/disease treated early. At this stage benefits from your critical illness policy are likely not yet payable when your chances for curing yourself are greatest. So you’ll need to plan on having the capacity to raise cash from other sources for living needs and for treatment-related costs (like going to a private clinic across the border, getting a pet-scan done at a private facility, or for alternative/naturopathic consultations and the cost of natural herbs/medicines).

The value of a critical illness policy is where you end up living after your illness as your funds from work might otherwise be expected to decrease. This coverage gives you the option to take it easier and not worry about money.

  1. Critical illness insurance proceeds may be subject to income tax

A critical illness policy is not considered an insurance contract under the Income Tax Act and there are no specific provisions addressing the taxability of benefits. As such there is some question to whether benefits received may be taxable as regular income (like interest income) or if it is tax-free proceeds.

Although the taxation of benefits might still be an issue, it may be possible to manage the potential tax risk. For example, if the policy is held as part of a company private health and wellness plan and benefits are used only for medical related expenses.

For individuals, one may have a more defensible case for non-taxation of proceeds where the critical illness policy is a rider to a life insurance policy that provides early access to the death benefit as opposed to being a standalone policy.

Even for a separate standalone policy, you might find that this issue resolves itself through legislation or through a court case. In the worst case if benefits are taxable, you would likely only be subject to tax on the amount of proceeds in excess of the amount of premiums you’ve paid.

Critical versus disability and life insurance

Critical illness insurance is not a replacement for adequate life or disability insurance coverage.

Life insurance protects against your untimely death. But in a critical illness, your life insurance might not help if you live for several years after a critical illness.

Disability insurance provides a regular income should you become unable to work. However, the following medical illnesses that might qualify for disability claims don’t qualify for critical illness claims:

  • musculoskeletal conditions and mental nervous disorders;
  • bad backs, carpal tunnel syndrome, severe depression and debilitating arthritis;
  • accidents causing injuries (broken limbs, whiplash, sore backs, crushed vertebrae, memory loss).

The next step

If you are interested in learning more about critical illness insurance or whether a policy might make sense for you, please call me. I provide financial planning at no extra charge to clients of Lycos Asset Management Inc. that I service. I can be reached at (604) 288-2083 (x2) or by email at steve@lycosasset.com.

 

 

Written by Steve Nyvik, BBA, MBA ,CIM, CFP, R.F.P.

Financial Planner and Portfolio Manager, Lycos Asset Management Inc.

 

[1] Diagnosis may be required by the insurance company to be made by an approved medical professional specialist.

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