You may have heard of Critical Illness (CI) Insurance through your Insurance Advisor or at the bank when applying for mortgage insurance. A relative newcomer to the insurance industry, CI insurance originated in South Africa when a heart surgeon by the name of Dr. Barnard found that, although he was able to help his heart attack patients live longer, their finances were suffering due to the debilitating cost of the medical treatment and post surgery care. He developed an insurance concept in response to this need that would provide financial assistance to the patient allowing him/her to recover without having to worry about the cost of care or how they were going to meet their everyday financial obligations while they were off work.
CI insurance first came to Canada in 1995 and is only starting to become known thanks to the advisor and banking networks. There are essentially two ways one can purchase CI. The first is as a personally owned policy through the advisor network. In this case, the client has full control of how the proceeds are used since these policies pay out a lump sum in the form of a cheque upon diagnosis of a critical illness as long as the patient survives a period of 30 days. The funds can be used to pay for medical care not covered by OHIP such as experimental drugs or for care sought outside of Canada. Other possible expenses that could be covered include mortgage payments and other monthly obligations that may otherwise fall behind if the patient is unable to return to work right away.
The second method of purchasing CI insurance is through your mortgage provider when you renew or apply for a new mortgage. The policy is tied to the mortgage and any proceeds are used strictly for paying off the mortgage or continuing your mortgage payments for a set amount of time, usually up to one year. As you can see, there is less flexibility as you do not control how the proceeds are allocated. For this reason, it is well worth the time and effort to apply for personally owned coverage through an Advisor.
The three top illnesses covered by CI are Heart Attack, Stroke and Cancer. These three illnesses alone represent over 85% of the claims for CI insurance. Most companies start with these three in their base policy, adding over 21 additional illnesses to their more comprehensive plans. There are also several options that can be added to enhance protection. One option that is worth mentioning is the return of premium rider. With this rider, the insurance company guarantees they will refund all your premiums paid to a specific date as long as no claims were made. The contract is surrendered at the time you decide to exercise this option and it is available as early as 10 years into the contract. The return of premium feature makes it easier to purchase CI coverage knowing that if you do not become ill, you will get all your money back.
Unfortunately, not everyone is a good candidate for CI insurance. For instance, individuals who have a family history of critical illness will have a harder time obtaining coverage, particularly if two or more direct family members have suffered from a critical illness in the past. However, in general, if you are in your 30’s or 40’s, have a family that is dependent on you, or you are single and would not have the resources to care for yourself and meet your ongoing obligations if you were to become critically ill, then it is highly recommended that you consider a personally owned CI insurance policy. My advice is to discuss CI insurance with your Advisor so that he/she can determine whether you qualify for this important coverage.
Unlike home or car insurance, Disability and Critical Illness insurance are not compulsory and many people hesitate to purchase these important policies due to the cost and the possibility that they may not even end up using the coverage at all. The insurance industry is aware of this fact and has come up with a solution called a return of premium option that makes buying these policies easier both psychologically and financially.
The better quality Disability policies generally provide a return of premium option in one of two forms. The first option involves the return of 50% of your premiums on surrender of the contract as long as the contract was in force for a minimum number of years, usually 10. The calculation of the return of premium is based on just about all the premiums paid into the policy including the policy fee and the amount paid for all riders including the return of premium rider itself. Any claims made during the life of the policy are deducted prior to calculating the amount owing. If claims exceed a certain percentage, the return of premium will not be available. In this case, the client will have paid an extra premium for the chance that he may not have claimed. This can be viewed as insurance on insurance. The real benefit is realized when the client makes very few or no claims during the life of the policy. In this case, the return of premium rider is a good investment.
The second type of return of premium is fairly new in the industry and involves a return of half of the premiums paid after periods of either 7 or 8 years throughout the life of the contract. If a return of premium option is exercised, the policy continues in force as long as the client continues to pay the monthly premiums. You can either withdraw the funds in cash or you may opt to leave the funds on deposit with the insurance company who then draws from those funds to pay future premiums for the next 7 or 8 years.
Generally, the cost to add the return of premium option on a Disability policy ranges from 25-50% of the cost of the rest of the premium with the return of premium on surrender being at the lower end of the scale and the return of premium after 7/8 years being the most costly.
Critical Illness policies also offer a return of premium option in two forms. The first is a return of premium at death should the cause of death be other than a Critical Illness. The additional premium for this option is minimal, costing about half a percent of the total premium. In addition to this, you can also choose the return of premium on surrender of the contract with the stipulation that the contract must be in force for a minimum number of years, usually 10. You must specify at the time of application which return of premium option you want, and the earlier the option date, the more expensive it will be. For instance, a return of premium option that can be exercised as early as year 10 will run you about 70% of the base premium, whereas choosing the option at the expiry of the contract will cost about 45% of the base premium, depending on your age at the time of application. Although Critical Illness return of premium is quite costly, it is, in fact, a win-win situation. If in the unfortunate event you become critically ill, you will receive the full benefit, but if you don’t end up claiming on the policy, you will receive all of your premiums back. You want to make sure, however, that if you choose the return of premium option, that you fully intend to keep the contract in force until at least the first option date, otherwise, all those extra premiums will have been paid for nothing. One other thing to note is that many companies are now offering the return of premium on a scaled basis. What this means is that if you choose a return of premium option after 10 years, you will receive 50% of your premiums back in year 10, 60% in year 11, 70% in year 12 etc until the full 100% becomes available in year 15.
Although adding a return of premium option on your Disability and Critical Illness contracts can add significantly to the cost, it does provide for peace of mind that at least you will receive part or all of your money back in the event that you do not end up claiming on your policy. This cannot be said for auto or home insurance, yet, we as consumers have become accustomed to paying these premiums. So it follows that if you insure your house and your car, why would you not insure your health and future income earning potential when the out of pocket cost is 0%-50% of the actual premiums?