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Critical illness insurance: because trouble never comes alone - DFSIN - SFL

Critical illness insurance: because trouble never comes alone

When a critical illness suddenly turns a family’s life upside-down, it’s not uncommon for them to promptly receive a second blow: the financial shock. But there are ways to handle that.

September 16, 2021

Cancer, heart attack, Alzheimer’s, Parkinson’s, multiple sclerosis… While all of us have witnessed distressing situations caused by a critical illness, it’s easy to underestimate the consequences that this type of condition might have for our own lives. Out of all these consequences, the financial stress placed on the affected person, their spouse and their family could be especially severe.

In fact, studies show that a great many people would find their financial reserves depleted within six months. That’s more time than is generally recommended for an “emergency fund,” but much less than what might be required for the duration of a serious illness.

Four pie charts illustrating the number of months that Canadians think they could last before running out of savings if they became critically ill. The data are as follows : 6 months or less: 42%; 6 to 12 months: 22%; 12 to 24 months:13%. More than 24 months: 22%.

Which raises the question: what then? Often, there is no other choice than to dip into savings intended for other purposes, notably retirement and children’s education, which could jeopardize the future for the whole family.

A source of immediate capital

One solution to consider in order to avoid this kind of situation is critical illness insurance. Unlike disability (or “wage loss”) insurance, which generally provides a replacement income until the person is able to return to work, critical illness insurance is designed to provide quick access to a tax-free lump sum.

The person can then use this capital to maintain their standard of living, to cover unexpected expenses, to pay for specialized treatments – i.e., to cope with the illness without compromising their existing savings and financial plan.

A simple process

The principle is generally the same for all products of this type: once an insured is diagnosed with a covered illness, the insurer will pay out the designated lump sum, which could be from as low as $10,000 to several million dollars. In some cases, the insurer will also cover specific expenses, such as access to specialized physicians and state-of-the-art medical resources, for example.

However, critical illness policies may differ with respect to the medical conditions covered and the application clauses in effect. A general recommendation is to study the insurer’s proposal carefully, especially when the premiums are low: this might indicate that the policy contains a large number of exclusions. As well, if critical illness insurance is offered by an employer, it might be a good idea to review the details to determine whether additional personal insurance should be considered.

The table below gives an idea of the coverage provided by a policy protecting against over twenty conditions deemed critical.

Table with an informational list of health problems that may be covered by critical illness insurance. The different categories are: cancer / tumour, neurological problems, accidental and functional injuries, cardiovascular problems, major organs, and other.

The fine print

One area where policies may differ concerns premium payments.

To begin with, it is usually recommended to consider this type of insurance early in life (for example, when you start a family) because, just as for life insurance, the cost may increase with age, while insurability may diminish.

Next comes the choice of term. In this respect, most policies work like term life insurance: they provide coverage up to a certain age and set the premiums for terms of 10 or 20 years. This means that the annual cost of the policy will only increase after 10 or 20 years. It is also possible to choose coverage that is payable “To 100,” which would level out the cost over the years, and likely for the person’s lifetime.

A number of policies also include return-of-premiums features. Depending on the options selected, the insured could recover up to 100% of premiums paid if he or she remains in good health or decides to cancel the policy. As well, in the event of the insured’s death, the survivors could receive some or all of the premiums paid or a percentage of the insurance benefit.

“Is it for me?”

Clearly, critical illness insurance can be used for a variety of needs, and a good first step would likely be to review all the options with a financial security advisor.

There remains one question: wouldn’t it be better to put the premium money into an investment portfolio instead? Perhaps – if your savings capacity would allow you to invest in your home, your RRSP, your TFSA, your children’s RESPs, your business projects and an investment account that would give you access to hundreds of thousands of dollars, tax free, at any time – even within the next year.

Otherwise, critical illness insurance might prove to be a much more effective source of financial leverage.

The following sources were used to prepare this article: 
Desjardins Assurances, “Health Priorities”; “Health priorities - 10 Pay”; “Health priorities - To 100.” 
Head Research, “Critical Illness Insurance.” 
Investopedia, “Critical Illness Insurance: What Is It and Who Needs It?.” 
MoneySense, “Critical illness insurance: Is it worth it?.”