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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