Anyone can get critical illness — even healthy people like you and me — at any point in their lives. If you think your health plan will have you fully covered in such a situation, think again. Personal health insurance, while important, does not cover many expenses associated with a life-threatening illness, such as long-term care.
This is where critical illness insurance can come in. It provides a tax-free, one-time payment that you can use to cover expenses not covered by your health plan.
Continue reading to find out all that you need to know about critical illness insurance, including how much you need to purchase.
What is critical illness insurance?
Critical illness insurance is a legal contract between the insurer and the policyholder, wherein the former, in exchange for premiums, promises to pay a tax-free lump sum if the insured is diagnosed with a covered illness. The payout is not subject to income tax.
At the time of the purchase, you will have to pick a policy term and the coverage amount, just like you would when buying term life insurance. However, there is one big difference between life insurance and critical illness insurance. The former issues a payout to your beneficiary upon your death, whereas the latter directly pays out to you.
To receive the critical illness benefit, a specialist or qualified physician must make the diagnosis. You can receive the benefit only once. The coverage terminates once you have been diagnosed with a covered condition and made a successful claim. Your policy will list the names of the conditions covered by it, and you can file a claim only if you are diagnosed with one of these conditions. Most critical illness policies include a waiting or survival period. It is defined as the number of days you must survive after receiving your medical diagnosis to collect the benefit amount.
Let’s say you have a $500,000 critical illness policy and file a claim for a covered condition. You will have to wait for a pre-defined period after the diagnosis before the benefit is payable. The waiting period is generally 30 days, but can vary from 0 to 180 days depending on the provider.
The payout acts as a financial lifeline if you are diagnosed with a life-altering illness. It helps you pay off expenses not covered by personal health insurance without draining your savings account.
Doctors say the chances of surviving a critical illness are better than ever before. But the long treatment and recovery often comes at a high price, not just emotionally or physically but also financially. You may have to take long abstinence from work. Your spouse may also need to take time off. Or you may need alternative therapies not covered by your provincial health plan.
How will you manage all these expenses? You could dip into your savings, borrow against your home equity, or rack up credit card debt. But these options may derail your retirement plans. This is where a critical illness plan can come in handy. It provides you with a lump sum to help you cover these expenses and focus on what is most important — your recovery.
What is the cost of critical illness insurance?
Many factors impact your critical illness cost, such as:
- Age – Since younger people are less likely to receive a critical illness diagnosis, they pay less for coverage. All other things being equal, the younger you are, the lower your critical illness cost. For example, $100,000 of critical illness for a 40-year-old non-smoker may cost roughly $70 a month. The same policy may cost only $12 a month for a healthy 25-year-old. Since the rates are fixed for the entire length of the policy term, buying coverage early in life allows you to lock in low rates for many years.
- Health – You can expect to receive a preferred rate if you are in a great shape. The opposite is also true. If your health is less-than-perfect, your cots of critical illness may go up considerably. Health conditions that can bump up your premiums include high blood pressure, high cholesterol, diabetes, etc.
- Family history – Certain illnesses have a hereditary component. That is why life insurers view your family history as an indicator of your future health. If two or more of your family members have died from the same genetic disease (like diabetes, cancer, or heart disease), you may have to pay higher premiums.
- Smoking - Smoking is a major risk factor for many serious health conditions, like heart disease and cancer. For this reason, smokers are usually considered high-risk by life insurance companies. Consequently, their rates are higher — up to two to five times — than non-smoking rates.
- Number of covered conditions – A policy covering a handful of critical illnesses is cheaper than one covering 26 illnesses, assuming the coverage amount and the coverage term are the same.
- Coverage amount - The greater the policy amount, the higher the premiums. So, a policy with a $200,000 benefit will be more expensive than a plan with a $100,000 payout.
- Term Length - The longer the policy term, the greater the chance of a payout.
- Waiting period – The premium rates are inversely related to the waiting period. Policies with longer waiting periods usually cost less.
How much coverage do I actually need?
How much coverage is right for you depends on how much a critical illness diagnosis could impact you financially. While it is hard to pinpoint one’s coverage needs exactly, the following methods can give you a good estimate.
The first method involves multiplying your monthly income by the number of months you would need support. The second method involves calculating your monthly expenses and the shortfall you would experience if you were laid up and could not work. Next, multiply that figure by the number of months your family would need support. Both the methods give you a reliable figure to work with.
Obviously, there are some things you cannot know beforehand, like what the diagnosis could be and its actual financial impact. However, there are many things you do know that can help you make an educated guess about your coverage needs, such as:
- Your current monthly expenses (including essentials such as everyday living bills, mortgage, and food)
- What your monthly expenses will be in the future (as much as you can estimate)? For example, consider things like: do you plan to take out a large debt in future, or do you want to pay for your child’s college education?
- The amount of money you have in your savings account, plus other assets you have that can help offset the need for critical illness insurance
Experts recommend that your coverage should be large enough to support your family if you are unable to earn a paycheck because of illness. As to the question of for how long you would need the protection, that is something only you can answer. Ultimately, it is all about weighing up the cost with the amount of risk you are okay living with.
Alternatives to Critical Illness Insurance
Critical illness insurance is restrictive because it covers only a limited number of health conditions. If you do not like this aspect of it, you may want to consider any of the following two alternatives.
In the simplest terms, disability insurance covers your paycheck. It is a legally binding contract between the insurer and you, whereby the latter, in exchange for premiums, agrees to pay you a monthly benefit if you lose your ability to work due to illness or injury. The insurer will pay the monthly benefit until you are fit enough to work or the policy term ends, whichever is first.
This life insurance product is designed to act as an income replacement tool. It replaces part of your income — usually up to 70% — if you are laid up and cannot work. You do not need to submit any bills to receive the monthly payments, which you can spend however you like.
Disability insurance covers nearly all conditions that can impact your ability to work. These include:
- Back pain
- Heart Disease
- Musculoskeletal disorders
- Physical injury
However, each provider defines disability differently, so ensure you understand the terms of your policy before signing up. Also, pre-existing conditions are usually not covered.
As is the case with other life insurance products, it may make sense to buy disability insurance coverage while you are young and healthy. Insurers usually reserve their best rates for these applicants.
Other factors that can impact the premium rates include gender, smoking status, occupation, coverage amount, and how the policy defines disability. Smokers pay considerably more for coverage, which should come as no surprise. What is surprising though is that women receive higher premiums than men — the opposite of what happens with life insurance plans. This is because women tend to make more disability insurance claims than men. People with hazardous jobs also pay higher premiums (no surprise, again). Lastly, expect the cost of coverage to be more if your policy follows a broader definition of disability.
Long-Term Care Insurance
Long-term care insurance covers the cost of long-term care you may need following a chronic health condition, a disorder (like Alzheimer’s disease), or a disability. Just like critical illness insurance, you must survive a pre-determined period before benefits become payable.
Most policies provide benefits when you are unable to do at least two of the six activities of daily living. These activities are:
- Toileting (the ability to use the restroom without assistance)
- Transferring (the ability to get in or out of a bed without assistance)
Most long-term care plans care received in the following places besides your home:
- An adult daycare center
- An assisted living residence
- A nursing home
Depending on your plan, you may two options for receiving benefits:
- reimbursement for qualifying expenses incurred on any given day (up to the predetermined daily limit)
- receive preset monthly payments
As with other life insurance products, the cost of long-term care insurance depends on several factors. These include your age and health, marital status, gender, choice of the insurance company, and coverage amount.
A critical illness policy provides you with a tax-free lump sum if you are diagnosed with a life-altering illness. Because a life-threatening illness can have a huge financial impact, critical illness insurance is worth the cost for most Canadians. You can use the payout to cover out-of-pocket medical and healthcare expenses, although there is no law stating that you cannot use the cash benefit for other purposes.
With different kinds of critical illness plans available, finding the right one is not hard, especially if you have a trusted independent broker like Dundas Life guiding you. We can help you find coverage that is both suitable for your needs and affordable.