Is Critical Illness Return of Premium a Good Deal?

The total amount of critical illness premiums sold in Canada in 2012 was $623.7 million, and more and more have optional return-of-premium riders. 

Return-of-premium riders pay back the insured’s premium cost if he or she does not make a critical illness claim within a prescribed length of time. To that end, return-of-premium can be when the policy term expires without use, like at the end of 75 years on a Term 75, or at different intervals, such as 10 years or 20 years. Return-of-premium can also be to the estate upon the insured’s death. This rider is not as expensive on death. 

We sat down with critical illness insurance expert Paul Lalonde, a financial planner for over ten years and the co-founder of Twin Power Financial, to ask him whether acquiring the return-of-premium rider is worth it to the client.

Is return-of-premium a good deal? Is it something you’d recommend?

“Assuming their need is being met and they have the ability to pay for the rider, I highly recommend those clients take advantage of the rider. If you do the math (your broker can for you), what the rider will return to you financially can be an amazing rate of return on your money for what the rider cost you.”

What are the advantages and disadvantages of return-of-premium?

“The advantage is, if you do not end up making a critical illness claim, you get fully reimbursed for all the premiums you’ve paid during the lifetime of the insurance contract. You’re lucky because most people wish all insurance could do the same. I often say this to my clients. ‘In 20 years, one of two things will happen. Either you will suffer a critical illness, as defined in the contract, or not. If you do, you will get a large sum of money when you need it the most and if not, you get your money back guaranteed.’ In essence, it ends up being a forced savings account over the long term, while giving you much-needed insurance during that span.

“Of course, the big disadvantage is the rider can be costly. The first step is to get the much needed coverage in place and only if possible, add the rider. Coverage should not be sacrificed just because the rider is expensive. The only other disadvantage is you only get what back you paid in with no interest. This can be seen a lost potential to some, but I view it as you having had the cheapest costing insurance possible for a policy that never went to claim.”

Why have some companies stopped offering the return-of-premium feature?

“Honestly, I’m surprised not all companies have left this feature. The outcome for the insurance company is that either they pay out a claim that is thousands of per cent higher than the premium received, or reimburse the client every single penny put into the policy at the end of the term. In reality, the insurance company takes on all the risk and all the client loses is interest on the money they could have earned in the process. In this low interest rate environment, that’s like getting the insurance nearly free. In many ways, it sounds too good to be true, but for some reason, insurance companies continue to offer it.”

What do you think is the future for return-of-premium policies?

“Currently, Canada is the only country in the world that offers lifetime guaranteed premiums on Critical Illness. I believe there will never be a better time than now to buy. As prices continue to increase, premium guarantees will be limited and riders, such as return-of-premium, may become a thing of the past.”