Tuesday, 14 October 2014

Sickness, Injury and Death – Are you ready? Critical Illness Insurance

During my last posting, we discussed Disability Insurance so now on to Critical Illness insurance.  Thanks to all the people contributing to this posting, especially Andrew Tsoi-A-Sue, Principal, Eckler Ltd; Liz Horn, Program Manager, Insurance, RBC Wealth Management Financial Services Inc.;   and to my distribution list and Rob Carrick’s readers for answering my survey

Let’s get started.

Insurance has been around since ancient times but Critical Illness Insurance is a relatively new product.  It has only been in existence since the early 1980’s when Dr. Marius Barnard, a heart surgeon from South Africa, worked with an insurance company to design a product to help with the financial health of people surviving a critical illness.  For those of you outside of Canada, this may be called Dread disease insurance, Trauma insurance, serious illness insurance, or living assurance.

So what is Critical Illness Insurance or CI for short?  It’s an insurance product where the insurer typically pays the policyholder a lump sum cash payment if they are diagnosed with one of the critical illnesses listed in the insurance policy. 

(A)  Purchased via Group plan or individually.  A person can purpose a policy through a group benefits plan (e.g. from your employers’ benefit package) or can be bought individually.  According to Andrew Tsoi-A-Sue, Principal, Eckler Ltd. <Disclosure: Andrew is a co-worker of my wife Ellen>, “most of the new Critical Illness implementations (offered via group plans) are employee-paid and probably less than 20% (of employers offer this).”  

Stats are not easy to find on who has CI but below are results from my survey.   The sample set was relatively small (~70 people) but it does give us a feel.  It shows ~55% have CI vs. ~45% don’t and for those having it, a little over half received it through a group plan.

     (B)   Illnesses covered.  There is only a specific set of illnesses covered under each policy.  It can be as many as 26 and you’ll see common ones such as heart attack and cancer across all of them but the actual list of illnesses will differ between insurers.   The list can also be significantly smaller with a group plan compared to an individual. 

(C)  Confirmation via doctor’s diagnosis.  This is required as a policy condition to show you have a specific illness before you get paid.  Insurers have specific tests and results to meet their criteria for each illness.  There is a benchmark  set of illness definitions that most Canadian insurers use,  but you’ll want to get an understanding of what the insurer considers the definition of each illness.

(D)  Survival Period.  This is the minimum time period the policyholder must be alive for after the diagnosis and is typically 30 days.

(E)  Access to specialists.  Most policies provide access to a health care resources, specialists etc. who are available to review your medical records to confirm your diagnosis or some could go farther in making them available for more than just a second opinion. You’ll see some insurers use the “Best Doctors” organization for this value-added service.

(F) Return of Premium.  You can pay extra to have a feature called “Return of Premium” where if you live to a certain age (e.g. 75) or have paid into the plan for, say, 15 years and haven’t made a claim, you can get back all your premiums.

How do you decide whether you need to buy CI and how much?  This is a very complicated question.  Here are some things to consider:

(1) How do you feel about risk?
a.      Is there family history of health issues?  Some of the survey respondents gave this reason for buying coverage.
b.     How do you feel about to risk related to getting a critical illness vs. unexpected death vs. others?  This is a very individual decision and it comes down to what helps you sleep at night.  My wife, for example, hates to fly even though she knows the probability of something happening while flying is so much lower than during her daily commute to work.
c.   The chances of getting a critical illness are generally higher than a premature death but the impact could be greatly different.  Here’s a couple of sample links for more reading on your “chances” - Premature Mortality from The Conference Board of Canada, Cancer Statistics at a glance from the Canadian Cancer Society.

     (2) Group vs. Individual and Amount of coverage.  “Typically coverage (for a group plan) is for smaller amounts and covers few illnesses.  Downside is no cost control (i.e. premium amount not locked in) and you lose coverage when you change employers.  Recommend using it as a top-up to an individual policy so when you move employers you still have your base coverage.”  From Liz Horn, Program Manager, Insurance, RBC Wealth Management Financial Services Inc. <Disclosure: Introduced by my RBC financial advisor.  Haven’t bought any insurance products through RBC >  
     Some good points but how much do you really need?  CI is trying to fill the other financial gaps left after considering your disability insurance.  For those of you that like detailed calculations I found an interesting calculator to help you plus a listing of expenses that you may have.

(3) Who will be affected?  If you’re single with no dependents then the answer is pretty straightforward.  If you’re married and or in a domestic partnership and with kids the answer gets more complicated.  Someone reminded me it’s not only the main breadwinner you need to think about. What about the case when there are children and the one of the partners is the sole childcare provider?  If the partner providing the childcare gets sick, the breadwinner could also be greatly affected.

     (4) Is CI more or less important to you than life insurance or disability insurance?  This depends on many variables.  For example, if you’re single with no dependents, CI and disability insurance would be more important.   Also, disability insurance is income based and replaces a portion of you income and require ongoing proof of income loss to keep getting the benefit and ends when you start getting income again whereas CI is typically a one-time payment and it’s not associated with your income.  

     Liz Horn suggests “a good idea is (to use Critical Illness) as a top-up for disability insurance because there is not the same kind of waiting period (e.g. 90 days) and therefore you can get more flexibility on a going back to work decision.”

(5) How can I get the most benefit for my money?

a.      To limit your costs, perhaps you don’t need the Return of Premium  option.  According to Liz Horn, “(you) get back all your premiums paid but the cost of this is 30-40% higher than just the base coverage.  It’s a forced savings plan but you lose the opportunity cost on the money. In the end, it’s about how much budget you have – the Return of Premium option is attractive to many people and if you can afford it, it makes sense...”
b.     Starting your policy when you are younger can be a lot less costly since the insurance companies know the older you get and not yet had a critical illness, the probability is higher so they will charge you more.
c.      Look at the differences between costs of a term (i.e. set period of time) policy vs. a permanent policy.  

I’m going to have to cut this off now.  

There is so much information on this topic I could fill multiple postings but my objective was to increase everyone’s (including my own) knowledge on the topic and I hope I have done that.   As for myself, my wife and I made the decision years ago to not get critical illness insurance due to the expense of the premiums and our ability to cover unexpected expenses.  In the insurance industry, people would say we are “self-insuring”.  After researching this posting, I’m going to re-look at this decision.

Here are some upcoming topics I’m thinking about.  If you have any ideas for a future topic please feel free to post a comment (anonymously if you’d like) or email me: How product pricing affects our buying behaviour, Life Insurance, Long term care insurance, Lifelong Learning Plan, Post-Secondary Education costs.

James Whelan

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Monday, 28 July 2014

Sickness, Injury and Death – Are you ready? Part 1

I apologize for not posting anything for months.  Let’s just call it an unplanned sabbatical.

During my last posting “New Year Resolution: Stop Over-Thinking Your Money!”, I did a book review that talked about some simple financial rules to follow.  

Rule#1 was “Disaster-proof your life” or getting straight to the point – “Sickness, Injury and Death – Are you ready?”  This post is the first in a series on financial protection for the unexpected that for most comes in the form of “insurance”.  If you’re like a lot of people, talking about insurance is about as exciting as watching paint peel.  It lacks the sexiness of investments and is not even as exciting as saving which at least you can measure how you’re doing and have an end goal.  Insurance has a totally different sort of objective.  It’s about protecting yourself “just in case” something happens but hoping nothing does.  Kind of the reverse of winning the lottery because if you win, you lose and we want to make the amount you lose smaller.

I’m going to discuss the different types of insurance including some observations plus at the same time doing a review of the current insurance for my wife and I.  The last time we did any changes was 2009 so we’re due for a review.  This is a large topic so I’ll need a few posts to cover it.  All of these posts will be from a Canadian point of view but for any of you in other countries it would be worth checking if you have   comparable insurance.

Let’s get started with Disability insurance.  This is insurance to replace your income if you become disabled.  A payment is made to an insurer for coverage (“the premium”) and then if you become disabled, you get a monthly payment to replace a portion of your income.  With this insurance, there is normally a “wait period” or “elimination period” until your first payment.  This type of insurance can come from individual insurance plans, group insurance plans, special purpose plans or government plans.  Let’s talk a bit about each one.

Government Plans.   Here is a summary of three government plans you might be covered under:

Canada Pension Plan (CPP) Disability Benefit.  This is coverage if you are disabled and unable to work for a long period of time.  For this benefit, you must meet the following 3 conditions. 
  • have a severe and prolonged disability
  • be under the age of 65
  • meet the CPP contribution requirements.
There is an approximately four month period for the government to decide if you get coverage and the maximum monthly amount for 2013 was $1,212.90 or $14,554.80 annually.    It’s good this coverage exists but it doesn’t help the majority of people needing assistance with a lessor disability, there’s the 4 month gap in wages you’ll need to make up while you are waiting and most likely the total amount paid will be significantly less than your original pay.  It’s good to have additional coverage to cover the “buts”.  Benefits may also be available for your children if you’re receiving this benefit.   If you work in Quebec, there are similar benefits under the Quebec Pension Plan.
Employment Insurance Sickness Benefits.  This is coverage if you are “unable to work because of sickness, injury, or quarantine” and provides up to 15 weeks of coverage.  A summary of the conditions to be met are:
  • Employed in insurable employment (i.e. you are paying EI)
  • If not for the sickness, injury or quarantine you’d be able to work
  • Your weekly earning are reduced by > 40%
  • You have worked for a minimum number of hours before the claim

If you’re eligible, you should get your first payment within 28 days of your application but there is a 2 week waiting period for this benefit to start when you wouldn’t be paid.  As of January 1, 2014, the maximum weekly amount is $514 or $7,710 for the maximum 15 week period.  There are lots of rules and conditions for this coverage so I recommend going to the website link to read more.  For those of you covered by a group plan, most likely your coverage would be partially or totally covered through the short-term disability (STD) benefit.  

Workers Compensation Insurance.  This is coverage, if you are injured while at work. Each province and territory has its own Workers’ Compensation Board with slightly different rules and guidelines.  I could spend a whole posting just talking about this one type of insurance but for our discussion here I’ll try to summarize the key points.
  • Compensation starts after the injury occurs and most boards don’t have a waiting period.
  • The benefits received could be affected if you are getting disability benefits from CPP or QPP
  • Benefits cover income loss, as you’d expect, but also things like health care benefits and compensation due to permanent impairment

Group Plans.   If your employer provides a group plan, you could have coverage for short-term (STD) and/or long-term disability (LTD) insurance.  My employer provides both.  Here is what my coverage looks like:
  •  66.7% of earnings, up to a maximum benefit of $1,350/week for up to 17 weeks.  Waiting period is 0 days for hospitalization and accident related disability and 15 days for illness.
  • 66.7% of first $3,000 of base salary, plus 45% of any excess amount beginning after 17 weeks of disability, to monthly maximum of $10,000.

So if I was getting paid $1000/week, after my accident I would get $667/week for both the short-term (0-17 weeks) and the long-term (after 17 weeks).  For the STD or LTD insurance, you may be paying for this through a deduction on your paycheque.  This isn’t necessarily a bad thing.  If your employer paid for this, it would be considered a taxable benefit and you’d have to pay tax on either the premium they pay for you or on the amount paid to you if you need to use this benefit.   Some other variations, you could see in your coverage:
  • Integration with Employment Insurance (EI) benefits:
    • The plan is comparable to Employment Insurance (EI) benefits so the employer gets a reduction in their EI premium since you won’t be applying for EI. 
    • The plan covers the periods before and after the EI benefits and may or may not cover the EI benefit period if EI declines to pay you benefits.
  • Different percentage paid out (e.g. 70%)
  • Different periods of payment (e.g. 15, 17, or 26 weeks)
  • Different waiting or elimination period (e.g. > 0 days for accident and hospitalization )
  • Taxable status.    If the employer pays any portion of the premium, the entire benefit is taxable.
  • See here for more on this. 

Individual or Special Plans.   Individual plans are offered by a lot of insurance companies and may be worth looking into if your employer doesn’t offer a group plan or you are self-employed.  You may also have coverage via other plans like auto insurance or creditor insurance.  A guide to disability insurance by the Canadian Life and Health Insurance Association provides a good overview of disability insurance and some useful worksheets to determine if you have enough coverage.

Okay.  I think this is enough for now.  We still have to talk about Critical Illness insurance but that can wait for another posting.   As for my own coverage, both my wife and I are covered by group plans and have a low amount of debt and no other special needs so we have enough for now.  I’d recommend trying the worksheet in the guide I mention above to assess your own coverage. 

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Saturday, 11 January 2014

New Year Resolution: Stop Over-Thinking Your Money!

Happy New Year everyone.  

I have to admit I’m not a big one for large New Year’s resolutions since without the proper plan to achieve them, quite often, they are doomed to failure.   A plan to me would be made up of major goals and getting to them via evolutionary changes (e.g. small changes/targets).   This is a technique I use daily in my non-blogger job where I communicate a long term vision for a specific project to people and then get them focused on the short term.  A big part of this is determining what is important and continually adjusting priorities as circumstances change.

I just finished reading a personal finance book that fits perfectly into this type of thinking and has a lot of great information you can use for a personal finance plan for the coming year. 

The book is called “Stop Over-Thinking Your Money! The five simple rules of financial success” by Preet Banerjee.  You may remember I mentioned Preet in a previous posting “Buying cars on credit… what does it cost you?” after I saw him speak at the Financial Literacy Educators Summit put on by the Investor Education Fund.  He did a great presentation on that occasion and now has used some these skills in this book to explain some key financial planning principles in a very straight forward way.  Don’t let the title mislead you.  There is thinking involved.  The main aim of the book is get people to take immediate steps to improve their financial health and avoid getting overwhelmed by all the financial and investing information out there.  You may have heard some people refer this as avoiding “analysis paralysis”.  Preet equates our level of planning to school grades and assesses most of us as near a C- and suggests if you follow the rules in this book, you can get to an easy A.   After reading the book, I have to agree.

The book is roughly divided in half with the first talking about five key rules and the second half giving some more advanced information.  Let’s look at the five rules first:

Rule1: Disaster-proof your life.  Good information here about life/disability insurance, wills, power of attorneys and emergency funds.  I’m sure I’m like a lot of people in thinking talking about this is a bit of a snooze and not nearly as sexy as discussing investing.  Before you jump over this chapter though try answering the following questions.  If you can’t give specific enough answers to prevent “keeping yourself up at night” thinking about it, choke it down and read it through.  You won’t be sorry.
  • If I was not able to work for the next 3-6 months, how would my family and I pay for our living expenses?
  • If I died tomorrow, how would my family survive financially?
  • If I’m too sick to make decisions or I die, who can legally make decisions on my behalf and will my money/assets be handled like I want?

Rule2: Spend less than you earn.  Great information on savings and budgeting and one of the pillars of all personal finance.  One of the key themes I like (rephrasing in my own words) is: If you have no savings, why are you wasting your time worrying about how your investments are doing?  I’ve met quite a few people who like to discuss how certain investments are doing but never mention their savings.  

Rule3: Aggressively pay down high-interest debt.  Some good strategies on lowering and eliminating credit card debt.  This is a major problem for many people and could be a priority in many people’s plan for this year.

Rule4: Read the fine print.  Some good advice here on knowing the details on what you are signing.  I’ll admit reading the fine print is always a painful one for me.  Sort of like taking Buckley’s cough syrup.  You know it’s good for you but want to avoid it.

Rule5: Delay consumption.   Many people suffer from “consumption-itis” and this rule talks about some of the underlying causes and strategies for improving your situation.  This is an ongoing teaching point with my children on waiting until you have the money to pay for something and differences between needs vs. wants.   

  The second half of the book has more advanced information on Investing, Financial Advisors and Insurance.  There are two parts I particularly liked here:
  • Financial Advisors.  Many people would benefit from a financial advisor but end up with one not fitting their needs.  My first financial advisor seemed more interested in making money from me and not advising.  I was much more careful, years ago, when I found my second one and did use many of the techniques mentioned in this section.  I ended up interviewing him for an hour and a half using the similar questions mentioned in this chapter.  If you’re asking yourself why I would talk to him for so long and/or want to avoid other pitfalls, the section is for you.

  • Insurance.  This section in particularly good at explaining the principles and types of insurance.  Makes it easy to understand for those without much background and a good refresher for others.

After reading these rules, you could end up with a large “to-do” list.  The big question is where to start?  I’d recommend making the list, putting priorities next to each and start from there.  There is lots of good information on helping you decide on priorities in the book.  Still overwhelmed because you have too many high priorities?  Break them up into smaller pieces and go through the same exercise as again.

After reading this book, here is what I have on my plan for the coming year:
  • Review my life and disability insurance coverage.  I know I have some of both but it’s been years still my wife and I have looked at it and life is always changing so maybe this doesn’t fit any more. 

  • Review my regular savings plan.   I do have regular automatic monthly saving with periodic top-ups during the year but again haven’t really looked hard at the amounts for a couple of years.  I suspect I’m not saving enough.

During a future posting, I'll discuss my review of my insurance coverage.  If have any questions or comments on any of the above or have ideas for a future topic, please feel free to post a comment (anonymously if you’d like).     

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