What Is Critical Illness Insurance?

“People don’t need insurance because they are going to die… They need it because they are going to live.” – Dr. Marius Barnard

Dr. Christiaan Barnard performed the world’s first adult heart transplant in South Africa in 1967. His lesser-known brother, Dr. Marius Barnard, also a heart surgeon, developed critical illness insurance. He developed this insurance because he saw the need to help people who were suffering financially because of hardship from illness. Advances in modern medicine have allowed people to survive — but in many cases, these people suffer financially.

Critical illness has been a very popular insurance product around the world and it continues to be popular in Canada today. It pays one lump sum of money tax-free to an insured person who survives 30 days of a diagnosis and meets the medical definition of a covered condition: cancer, stroke, heart attack, Alzheimer’s disease, aortic surgery, aplastic anemia, bacterial meningitis, benign brain tumour, blindness, coma, coronary artery bypass surgery, deafness, heart valve replacement, kidney failure, loss of independent existence, loss of limbs, loss of speech, major organ failure on waiting list, major organ transplant, motor neuron disease, multiple sclerosis, occupational HIV infection, paralysis, Parkinson’s disease, and severe burns.

You are much more likely to develop a critical illness (like cancer, heart attack, or stroke) than you are to die prior to the age of 65. If you have taken some time and see the value in planning for life insurance if you die, it only makes proper financial sense to plan for if you live.

Why Do People Buy Critical Illness Insurance?

“When your friends and family are sending you a get well card, the insurance company will be writing you a cheque.” – Jim Larmond, 30+ years MDRT producer

Most people in Canada are under the impression that if they are diagnosed with a critical illness, OHIP and the healthcare system will cover all of their associated costs. This, unfortunately, is not the reality. Although there may be a treatment or medication covered by the Ontario Drug Benefit plan (ODB), it may not necessarily be the preferred treatment or medication of choice for your specialist for your specific disease state. When diagnosed with a critical illness, the best things to have on your side is options. In many cases, the ODB plan will first require you to have adequate trials of certain drugs before it will pay for some of the more refined drug therapies. This insurance can allow you to bypass these steps and delays to your most effective therapies regardless of what the ODB plan dictates.

Remarkable advancements in the treatment of various types of cancer have created an environment in our healthcare system where people are now not necessarily forced into traditional forms of chemotherapy and radiation, which, as many of us have seen, can have terrible physical consequences. Pharmaceutical companies have created several new drugs that, in some instances, allow people to avoid putting their bodies through the challenges that chemo and radiation create, and instead give patients the option to take tablets or receive injectable pharmaceuticals that are equally or more effective, but with fewer side effects. The prospect of better treatment with fewer side effects is obviously appealing. Unfortunately, like many advances in technology, while they may make our lives easier, they also make our lives more expensive.

The increased use of some oncology treatments has seen drugs such as Gleevec, Afinitor, Neulasta, and Temodal become household names. The cost of these medications, however, can soar to more than $100,000 a year depending on the treatment plan, your particular type of cancer, and your physical characteristics such as height and weight.

For those fortunate enough to have employee benefits, some or all of this cost may be covered by your group insurance plan. However, more and more group plans are restricting access to these drugs through maximums or plan designs, because in some situations, if a plan is exposed to the risk of these medications, the cost of the plan could become too much to bear for the employer and they are required to change or even cancel the coverage. Your best protection as an individual (with or without group coverage) is to apply for a critical illness (CI) policy, which will give you options in case of diagnosis. Remember, even if you have an unlimited drug plan at work, your coverage may only be at 80%. In this case, your 20% copay could equal up to $20,000+ a year. Most people don’t have that kind of money sitting around, and a CI policy can help soften the blow of either full or partial coverage in these situations.

The money received is provided to you on a tax-free basis, and you are able to use the proceeds as you please. The most common uses are:

• Reduce financial stress, allowing you to focus on recovery

• Pay down debts (mortgage, line of credit, credit cards)

• Pay for any lost income to cover existing monthly financial obligations

• Pay for your partner to take time off from work to help with the recovery process

• Pay for additional expenses incurred during this time (like transportation, accommodations, prescription drugs, or medical supplies)

• Access to shorter wait times or world-renowned care in other countries

• Independent physician or specialist evaluation

• Referral to the most appropriate specialist given your condition

• Coordination of treatment in the Canadian healthcare system

• Payment guarantees for claimants choosing to be treated outside Canada

• Taking your family on a dream holiday if your diagnosis is fatal

The benefit truly allows you to focus your full attention on recovery — both physically and emotionally — so that you don’t have to worry about your immediate financial obligations.

In the absence of a CI policy, what many people are forced to do is to pull money from their savings. What many neglect to realize is the impact this will have long-term on their financial plans for retirement.

Let’s look at an example — a 45-year-old who becomes critically ill.

  • Person A has a CI policy and does not need to withdraw money from investments.
  • Person B has no CI insurance and needs to access $50,000 from their investments.
  • Based on a $10,000 annual investment contribution starting at age 30, and an 8% annual return, let’s look to see what that $50,000 withdrawal at age 45 will cost Person B by the time they reach age 65.
  • Person A at age 65 would have $1,723,168 in investments
  • Person B at age 65 would have $1,140,548 in investments
  • This $50,000 withdrawal will end up costing Person B $582,620!

Have Critical Illness Insurance Sales Increased Recently?

Critical illness insurance in its current form was first introduced in Canada in the early 1990s. Canadian CI sales developed slowly at first, but then experienced double-digit growth in the early 2000s. In 1999, individual premiums in Canada were approximately $10,000,000 in new business premiums. In 2009, they reached just over $90,000,000 in new business premiums. In recent years, much of the new business premiums have come from the return of premium feature that clients are choosing to purchase.

Public awareness of the product continues to slowly increase. One channel that this product has seen a lot of growth in over recent years is in the employee benefits marketplace. Employers are realizing the impact that these diseases can have on employees and their families. The advantage to implementing this on a group benefits plan is that there is typically no underwriting required and employees can qualify for this product regardless of their health (up to non-evidence maximums). And because it is offered on a group basis, usually at smaller amounts, it is on average much less expensive.

In 2009, the average face amount of a policy sold was approximately $84,000. The average issue age in 2009 was 34.5, which is lower than in previous years. This is partly attributable to the emerging juvenile market, which represents close to 10% of new business each year.
Stats from www.actuaries.ca

Tips for Buying Critical Illness Insurance

Here are a few things to consider when choosing the right policy for you.

1. How many covered conditions does the policy have?

2. If you buy a 10-year term policy, can you change or convert the policy into a longer-term policy (like 20 years) without having to provide medical evidence down the road?

3. What return of premium options does the policy have (after 15 years, after 20 years, or at age 65)?

4. Does the policy provide an early assistance benefit?

5. How long are premiums guaranteed for?

6. Does the policy include a second event clause?

7. If you are purchasing a term to age 100 policy, can the policy be “paid up” at some point?

8. Does the policy include Best Doctors?

Best Doctors (www.bestdoctorscanada.com) is a world-renowned network of the best medical specialists. They are available for you to access at your discretion if you are experiencing a medical condition (symptoms or diagnosis) that you would like to receive additional information about. The InterConsultation phase of Best Doctors will confirm your diagnosis and offer alternative treatment options where applicable. Most policies automatically include this option at no additional cost.

Different Types of Policies

The types of policies offered in the individual marketplace are either of short-term or long-term duration. Short-term policies can be for 10 years, which allows the insured to keep the coverage for 10 years, and in most cases, they have a built-in feature to renew the policy every 10 years at the scheduled rate. The other policy, which is more expensive, is the option to keep the policy to age 65, 75, or in some cases, to age 100. Many of the longer-term policies offered in the Canadian marketplace allow the insured to get all their money back if there is never a claim made, which is an attractive feature for most policyholders.

Those who have pre-existing medical conditions can also look at purchasing a non-medical guaranteed issue product, which is only offered from a select few of insurers.

Comparing What Banks Offer

One major supplier of this insurance is lending institutions. People are given the option to purchase mortgage insurance in case they die, and they are now also given the opportunity to purchase Critical Illness insurance to pay off their mortgage. The biggest five differences between banks’ policies and insurance companies’ critical illness policies are as follows.

1. Number of covered conditions: Major banks typically only cover four conditions, compared to most other policies in the marketplace, which cover 22 to 25 illnesses.

2. Rates: In some cases, the banks’ insurance may seem price-competitive, but it’s important to remember that these rates are typically age-banded and will increase according to your age.

3. Options: The bank does not offer a return of premium option to get all your money back if you never have to claim. Most banks’ policies do not include Best Doctors.

4. Changes in health: If you purchase the bank’s coverage and then later experience a change in health, the bank has the opportunity to decline your coverage should you change your mortgage.

5. Decreases in coverage: As you pay down your mortgage, the bank’s CI plans decline at the same amount, just like mortgage life insurance.

What Are Some Options to Consider When Purchasing a Critical Illness Policy?

One of the most popular riders that many people purchase is the “return of premium” option. There are not many insurance policies in the Canadian marketplace that allow you to get 100% of your money back if you never have to use the insurance.

If you think of all your different types of insurances — car insurance, home insurance, term life insurance, disability insurance, long-term care insurance — you pay a premium to be covered, and if you never claim, the insurance company wins. With this option, the insurance will pay you in one of three ways.

1. If you die, your beneficiary will get 100% of your paid premiums back.

2. If you never have to claim, you will receive 100% of your money back at a stated period.

3. If you claim, you will receive the benefit in a tax-free lump sum payment to use how ever you best see fit.

With the continued current low interest rate environment, some insurers have taken this option off the shelves for new policyholders. Insurance companies are realizing that if these interest rates continue, the option to give people their money back would be unsustainable. If you are looking to purchase a policy in the near future, this may be a great option to consider — especially since it may not be around much longer. RBC Insurance took this option off its shelf recently, and other insurers are likely to follow suit.

How Much Does it Cost?

This insurance is not cheap, but there is a reason why. Consider the statistics from the www.cancer.ca website.

• Two out of five Canadians (46% of men and 41% of women) are expected to develop cancer during their lifetime.

• One out of four Canadians (28% of men and 24% of women) are expected to die from cancer.

• It is estimated that in 2013:

o 96,200 Canadian men will be diagnosed with cancer and 39,400 men will die from cancer.
o 91,400 Canadian women will be diagnosed with cancer and 36,100 women will die from cancer.
o On average, more than 500 Canadians will be diagnosed with cancer every day.
o On average, more than 200 Canadians will die from cancer every day.

Unfortunately, we all know someone — whether a family member, relative, or friend — who has suffered from cancer or one of the other covered illnesses.

The cost is based on your age, gender, smoking status, selected amount of coverage, and duration of coverage. Family history can also have a bearing on the cost that you pay for this insurance.

Pricing example: $100,000 Coverage — Term 10 for a 40-year-old male non-smoker

Canada Life — $46.71 per month
Manulife — $48.07 per month
Sun Life — $46.80 per month

The fact will always remain that “Your Health Is Your Wealth”!

Jack Larmond

Biography of Jack Larmond
Jack W. Larmond, B. Comm. (Honours B.A.), GBA, is a consultant at The Benefits Company, which specializes in Employee Benefits and Pension Plans (www.thebenefitscompany.ca).
Jack is also the principal and owner of J.W. Larmond Life Insurance & Benefits, where he is able to assist clients with Life Insurance, Disability Insurance, and Critical Illness planning (lifeinsuranceadviser.com).

With a concentration in finance at the University of Windsor and industry experience since 2006, Jack is able to bring a wealth of knowledge to all of his clients. Jack was exposed to the financial business at a young age, with his father being a top financial planner in Canada. Jack is committed to being a specialist and expert in the areas of employee benefits and assisting business owners, professionals, and families with their life insurance and living benefits needs. He earned his GBA (Group Benefits Associate) designation, which illustrates his dedication to the insurance and employee benefits marketplace. As a broker, Jack is able to help clients plan by having access to all options in the marketplace. Jack has continued to build his clientele with hard work, trust, and unique marketplace solutions.

Jack is very close to his family and friends. He is a true believer in working hard but having a solid work-life balance. Jack is an avid skier, hockey player, and golfer. He has a very positive outlook on life: “What you believe, you will become.”

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  • J Hall
    January 23, 2014 at 4:38 pm

    Critical Illness Insurance really is a misunderstood product.

    A lot of people really miss the boat when reading the definitions. There uis a lot not coverage

    • LSM Insurance
      January 23, 2014 at 6:25 pm

      You make a very good point on the need to properly understand the definitions and exclusions