Critical Illness Insurance
Critical Illness Insurance
Although there are differences between the products offered by insurance companies, critical illness insurance policies tend to have the following characteristics:
• once individuals are diagnosed with an illness that is specifically outlined in their policy, they will receive a lump sum payment from the insurance company
• the amount received is normally tax-free, if the premiums were paid with after-tax dollars
• there is a waiting period, normally 30 days, between the diagnosis and the receipt of the payment
• a diagnosed individual receives the payment, whether or not they are able to continue working
Selecting a Critical Illness Policy
There are numerous options available to individuals purchasing critical illness insurance and although the cost of premiums is important, it is only one factor. Issues to consider include:
• the amount of coverage
• types of payments
• time frame
• types of coverage – basic or comprehensive
• refund of premiums
• beware the fine print
The amount of Coverage – One of the more difficult decisions is to determine the amount of coverage if one is diagnosed with a critical illness. The size of the policy could be as low as few thousand dollars or as high as a few million. As the payment will be received shortly after the diagnosis, the funds could be used for numerous purposes, such as:
Replacement of lost income – The funds can be used as life insurance in case of death, or income replacement if the individual survives and is unable to work for an extended period of time.
Payment of medical bills – Although the provincial health care system may cover most bills, critical illness insurance can pay for services outside of Canada or experimental drugs that are not currently covered by government plans.
Pay off debts – Individuals may have to remortgage their home or reduce family savings to pay for the cost of care and lost income resulting from the illness. The proceeds of the policy can pay off existing debts, thus ensuring your family will not be financially decimated should the disease be fatal or restrict the individual from rejoining the workforce.
Quality of life – If the insured individual only has a short period of time to live, the proceeds could be used for a final trip or achieving some other personal objective.
Types of Payments – The standard practice is for the insurance company to make a lump sum payment. However, one could select a policy that pays an amount for medical treatment only. This option reimburses individuals who seek out the best treatment anywhere in the world. There are three circumstances in which an individual may purchase this type of plan:
1) to get access to experimental drugs that are not covered by provincial health care plans;
2) to gain access to a world-renowned specialist who resides outside of Canada; or
3) payments to foreign hospitals allow individuals to get immediate treatment, rather than waiting their turn for treatment in Canada.
Time Frame for Coverage – One must determine the time period to be covered by critical illness insurance. Typical options include selecting coverage for a specific period of time, such as ten years, to a specific age such as 65, or for the remainder of one’s life. Some individuals are less concerned with coverage after retirement as they believe they will have acquired sufficient assets to fund their family’s retirement, plus the provincial health care plans will pay for basic medical costs. The time frame selected will impact the level of premiums paid. For example:
Ten-year renewable term – Provides coverage for a ten-year period, but upon renewal, the rates will increase
Termination at a specific age – These plans require a level stream of premiums until a specific age, such as 65. Once the term has expired, the individual may no longer be able to acquire coverage
Permanent insurance – This provides lifetime coverage and results in higher premiums than the other options
When selecting a coverage period, individuals have a difficult decision to make. Their greatest need for the protection offered by critical illness insurance is during their working years when individuals have family obligations. However, the greatest likelihood of suffering a critical illness is during the last few years in their life. Should individuals pay the higher level of premiums for lifetime coverage?
Types of Coverage – Most plans have two levels of coverage – basic and comprehensive. Although there are variations by the provider, the basic plan normally covers heart attacks, strokes and cancer. The definition of cancer may include all types of life-threatening cancer, or it may be restricted to specific types, such as breast, lung or prostate cancer. A comprehensive policy may cover less common diseases such as:
• Alzheimer’s
• blindness
• brain tumours
• comas
• coronary artery disease
• HIV – job-related or blood transfusions, but not unsafe sexual practices
• kidney failure
• loss of speech, limb or hearing
• Motor Neurone Disease (ALS)
• multiple sclerosis
• Parkinson’s disease
Since the basic plan covers the most common deadly diseases, many individuals select this option as it results in reduced premiums compared to the comprehensive coverage. However, before making their selection, individuals should consider the following two factors:
1. Does the increased cost of premiums for comprehensive coverage provide the purchaser with an additional comfort level? It would be horrific if an individual purchased critical illness insurance, but did not select the disease that ultimately led to his or her death; and
2. Does the individual have a family history of any specific diseases? If so, it should be included on the list of covered illnesses.
If an individual has a family history of a certain disease, this must be fully disclosed in the application for critical illness insurance. The concept of a family history of a disease can easily be misunderstood. For example, if a cousin and a great aunt died of cancer, does that mean there is family history issue? It is important to understand the insurance company’s definition of family history and ensure the applicant makes a full and complete disclosure. If such facts are not revealed, the insurance company may not have to pay. If an individual does have a family history of a certain illness, it may lead to either non-coverage or higher premiums.
Refund of Premiums – Certain insurance companies offer some options related to a refund of premiums. Available options include:
• full refund of premiums if the policy is never used
• refund of premiums if the insured should die between the period the illness is diagnosed and receipt of the lump sum payment
Selecting this option will normally increase the cost of the premiums.
Read the Fine Print – Insurance contracts are complex documents and often difficult to comprehend. Even though an individual may believe they are covered for a specific illness, the policy may contain numerous restrictions and exclusions that result in the insured being unable to collect on the policy. For example, most basic policies cover cancer, heart attack and stroke. One company that offers such protection made the following comments in their literature:
Cancer – It does not include malignant melanoma to a depth of .75mm or less, skin cancer that has not spread beyond the deepest layer of skin, Karposi’s sarcoma or a diagnosis or investigation leading to a diagnosis that occurs within 90 days of the commencement of coverage
Heart Attack – It does not include “an increase in cardiac biomarkers and/or enzymes due to coronary angioplasty unless there are new elevations of ST segments in the involved ECG leads considered diagnostics for an acute myocardial infarction.”
Stroke – It does not include Transient Ischemic Attacks which are temporary ischemic episodes that interrupt the blood supply to the brain.
This “fine print” can impact the coverage. If one purchases basic coverage and is diagnosed with cancer, or suffers a heart attack or stroke, given these exclusions, are you covered? The unfortunate issue is that an individual may purchase critical illness insurance, have the illness and then not collect as it does not meet the definition as outlined in the policy. Who is best to explain the policy, your agent who is attempting to make a sale or your doctor who understands the necessary medical jargon?
