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Financial Planning > Critical Illness

Critical Illness Insurance


Critical illness insurance may fill the gap between life and disability coverage
Canadians are afflicted by serious medical problems more frequently than you may realize. These statistics are not intended to scare you, but rather to inform you:

  • In 2002, there were an estimated 129,300 new cases of cancer in Canada
  • One in nine Canadian women will develop breast cancer
  • Up to 80% of stroke survivors return to their homes, still requiring assistance for daily living
  • 80% of victims survive an initial heart attack
  • Almost 25% of Canadians have a family member with Alzheimer's Disease

Imagine for a moment what it would be like if you had suffered a serious heart attack last month... and survived! Could you continue to work and provide for your family? The life-saving surgery or treatment you require i.e. Coronary Bypass Surgery can only be obtained by traveling to a clinic in the US, such as the Mayo Clinic - the fee for treatment is $100,000 US. Would your life style or financial health be compromised?

The statistics are clear: People are living longer. And as they live longer, they're more likely to experience a heart attack, cancer, kidney failure, or other illness that can knock them down temporarily, but not necessarily out. Modern medicine knows how to keep people alive and functioning longer, so chances are you can even continue to work once you're stabilized. There is a solution that takes a way the worry of surviving a critical illness... Critical illness insurance provides a hassle free way to provide liquidity to meet the financial needs during medical crises.

Just what is critical illness insurance?

Critical illness insurance was invented by heart surgeon Dr. Marius Barnard, and first introduced in South Africa in 1983. Later it became available, and became very much after, in several other countries; in the UK, e.g., it has become the most popular kind of insurance product. Critical Illness was first offered to Canadians in 1996.

The financial consequences of a serious illness are often worse than that of death. In addition, the chance for a critical illness attack on any of us is much higher than that of death, before retirement.

Critical illness insurance is also referred to as 'living benefit' or 'dread disease' insurance. This is a relatively new kind of policy, that pays you a tax-free lump sum 30 or 60 days after the diagnosis of one of the carefully circumscribed conditions that make the majority of life threatening illnesses. If the insured dies within that 30-day period, the entire premium paid into the policy will be refunded to the designated beneficiary.

Whether the person insured recovers from the disease or not (and when), and whether he/she is able or willing to work during that period, or after, has no effect on the paying out of the benefit. Similarly, payment of the benefit is not tied to any other insurance, and there is no restriction on what it is used for.

Although policies will vary from company to company, critical illness insurance typically pays a lump sum to someone who is diagnosed a specified critical illness or injury and survives for thirty days

It can be bought as a separate policy or as a rider to certain traditional life insurance policies. In certain policies, life insurance and critical illness insurance can be combined:
25-50-75 or a 100 % of the face amount can be paid out as a living benefit, and the amount payable as a death benefit (and the premium as well) is decreased accordingly. (It is worth mentioning though that not all living benefits are the same as critical illness coverage: a living benefit is typically paid when the insured is not just critically, but terminally ill, while for critical illness benefit payment, chances of recovery or longevity are not considered at all, beyond the need for survival for 30 days.)

There is even a unique combination available: critical illness coverage as a rider in universal life plans. The nice thing about this latter solution is that one can pay for the critical illness protection from within the Universal Life policy that is with tax-free money. Critical illness insurance has also appeared as a rider to certain long-term disability plans. The sum of the benefit contracted is usually comparable to that of death benefits in life policies.
It is important to remember, that critical illness insurance is not instead of long-term disability or life insurance; rather, it fills a gap left between the protection provided by those two.

Do you need critical illness insurance?

The logic behind offering this kind of protection is to serve a new need. Life Insurance pays on death, or when the insured is terminally ill, with no long-term living benefits.
Disability insurance pays out over time when you suffer a disabling illness or injury that prevents you from returning to work, and it can replace only a percentage of your lost wages. Disability is insufficient for the added burden of medical expenses. Personal and retirement savings have intended purposes, other than medical expenses, and in the case of a critical illness, these reserves are quickly depleted, and payment for the mortgage, or into retirement or education funds, or life insurance is difficult to keep going, exactly when the need for them would be the greatest.

Long-Term Care Insurance is too restrictive and inflexible many critical illness victims make a full recovery after a lengthy expensive treatment period. . While formally not disabled perhaps, or not for a very long period, people with serious illnesses incur very serious financial consequences. This fact is reflected in the increasing number of bankruptcies in the last few years.

With Critical Illness Insurance, on the other hand, you must survive, but you don't have to be disabled usually for several months or even a few years, depending on the type of disability policy bought to collect. As stated earlier, with critical illness you also don't have to be employed, as you do to collect disability insurance. The payment, is generally made to you in a lump sum 30 days after the diagnosis of your illness, and can be used however you please; to cover significant expenses for recovery not covered by government or group plans, to substitute reduced or permanently lost income, to pay out mortgages, to change lifestyle (change a career, take an early retirement, change place of living, alter a home, take time off to focus on recovery, buy new services, etc.), to fulfill dreams, or to hire someone to keep a small business going during the recovery, to replace a key person, or a co-owner, in a business situation, when that person is forced by a critical illness to give up his/her position or cut back activity in the business, or anything else. You can even take a world cruise.

More realistically, you'll probably use that lump sum to pay for medical expenses not covered under your other insurance plans. You may wish to travel to the US where there are no waits for tests or treatment, to pay for home health care, or to make up your spouse's lost income if he or she takes time off work to care for you. Other possible uses: retrofitting your car or home for a wheelchair, starting an education fund for your children, or keeping your business afloat while you're out of commission. The benefit is also non-taxable.

If you think such kind of disaster will surely avoid you, think again! Think of those people among your relatives, friends, acquaintances, or co-workers who have had such problems. Had it seemed likely previously that they would have such illness? Do not deceive yourself: those statistics are not about them, some miserable other group of people; they are about us. Since the chance of getting into such a situation is really significant for all of us, the need for such kind of insurance is even more important, than the need for life insurance.
Because they are completely different types of policies there is no concern that disability policies and critical illness policies will off set each other. In other words, getting one does not exclude collecting on the other; you can receive payments from both. "Critical illness insurance is supplemental; you won't be penalized."

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