Should you fall ill or suffer an injury, critical illness insurance will pay out a one-time, tax-free benefit to cover you financially through this period.
You can purchase critical illness insurance coverage as an add-on to a standard health or life insurance policy, or you can buy it as an entirely separate policy altogether.
With critical illness insurance, you are free to use the payout as you like. However, you will only receive the benefit if your condition is covered and you meet certain requirements outlined in your critical illness insurance policy.
Critical illness insurance pays slightly different than disability insurance which supplements your income instead of giving you a lump sum of money.
Continue reading to find out how critical illness insurance works and if it is worth it for you.
What is Critical Illness Insurance?
Critical illness insurance gives you a tax-free payment if you are diagnosed with a serious illness that is protected by your critical illness insurance policy. Critical illness insurance is sometimes also called a dread disease policy or critical illness insurance cover.
Generally speaking, the insured receives the cash benefit only if they survive a certain period post-diagnosis. This is the waiting period. Most policies have a 30-day waiting period. Some may involve longer periods, such as 90 days.
The payout can help you cover medical expenses associated with a serious illness. For instance, an illness that is not covered by your traditional insurance. That said, you can use the payment for non-medical expenses as well, such as childcare. The money is yours to spend as you see fit.
Some critical illness policies cover only a limited number of illnesses. Others, protect against a wide range of medical conditions. You can buy critical illness insurance as an underwritten policy or a guaranteed issue policy. For an underwritten policy, you need to take a medical test. For a guaranteed issue you will only be required to answer a few health questions.
The amount of benefit you receive may depend on your illness. The more serious the prognosis, the greater the chances of you receiving the full benefit. If your condition is less serious, the insurer may only issue a partial payment. And in the event of a treatable condition, you may not receive any benefit at all.
How Does Critical Illness Insurance Work?
Critical illness insurance works much the same way as other life insurance products. You agree to pay the insurer a certain amount every month, and in exchange, the insurer promises to provide coverage in the event of an illness or injury.
You can buy a basic critical illness insurance policy that covers only a few conditions or a comprehensive policy that offers financial protection against as many as 26 conditions, depending on your situation. The payout may also vary from one policy to another. While some critical illness insurance plans offer a benefit amount of $25,000, others pay as much as $500,000 if you become critically ill.
Besides the coverage amount, other factors that affect the cost of critical insurance are:
- Your age
- Your overall health
- Other personal risk factors, such as the family’s medical history
- Your smoking status
- The number of illnesses covered by the policy
- The number of people covered by the policy
- Whether you buy the coverage as a stand-alone policy or a supplement to an existing life or health insurance plan
Some insurers may ask you to undergo a physical medical exam or answer some health questions as a part of their screening process. Others may promise guaranteed coverage, particularly if you already have a life or health insurance policy from that carrier.
Your critical illness insurance policy will list the illnesses that it covers. The following information is also included:
- Definitions of the conditions or illnesses covered
- How long is the waiting period (if there is one)
- When you qualify for a benefit payment
- The percentage of the total benefit amount you are paid
- What happens if the disease reoccurs
You can spend the payout how you like. You can use it to cover personal expenses. Or you can use it to cover health care costs, such as:
- In-home care
- Health insurance co-pays and deductibles
- Treatment costs not covered by your health insurance
Why Should I Get Critical Illness?
Critical illness is a safety net you create for yourself and your family that you can fall back on if you become ill. If you are diagnosed with a critical illness, you can focus on your recovery rather than worry about its financial consequences.
Statistics show that critical illnesses are more common in Canada than many believe. There are more than 50,000 stroke diagnoses and 200,000 cancer diagnoses in a year. Though survival rates for such illnesses are improving, recovery is usually a slow, complicated process. In some cases, financial constraints mean people resume work before they are completely fit to do so. Which, in turn, may interfere with their recovery and even increase the risk of recurrence.
Critical illness insurance can cover you in such a scenario. You can take as much time off work as you need without draining your savings.
- If I become critically ill, will I be able to pay out-of-pocket expenses without exhausting my savings?
- Will I able to maintain my lifestyle while taking time off work due to a serious illness?
If the answer is ‘No’, critical illness insurance could make sense for you. This may be especially true for those who are at greater risk of critical illness, either due to their lifestyle or family medical history.
What is Covered by Critical Illness?
So, what does critical illness insurance cover?
Critical illness covers conditions such as cancer, stroke, and heart conditions. However, some policies also include uncommon conditions. These may include:
- Alzheimer’s disease
- Parkinson’s disease
- Multiple Sclerosis
- Cystic fibrosis
- Major head traumas
- Severe burns
However, chronic health conditions, like asthma, are usually not covered. Also, coverage generally does not extend to pre-existing illnesses.
Having said that, each carrier has its own guidelines about which conditions are covered, and which ones are not. So, before you sign up, do not forget to check what is included in your specific policy.
What are the Benefits of Critical Illness Insurance?
A serious illness affects far more than your health and wellbeing. It can put a lot of financial strain on you and your family. For instance, you may have to dip into your life’s savings to pay for medical expenses.
This is where critical illness coverage can prove useful. By providing you with a lump-sum payment, it can help you in a difficult time without exhausting your savings.
Is There Underwriting for Critical Illness Insurance?
Insurers use a medical test to find out what kind of risk you pose to them. This information, in turn, helps them decide your insurability and set your premium rates. So, yes, if you want a traditional critical life insurance policy, you will need to undergo a medical test.
However, some insurers offer coverage that does not require a physical exam. All you have to do is answer some simple eligibility questions. But keep in mind such policies are more expensive than those requiring a medical test.
What Does Critical Illness Insurance Cost?
As is the case with other life insurance products, the premium rates for critical illness insurance policies are unique to the applicant. Even if two people are of the same age and gender, their premium rates can be different. While you cannot do much about your age and gender, healthy lifestyle habits can help you qualify for lower rates.
The cost of critical illness insurance depends on the following factors:
- Age – The cost of critical illness insurance goes up as you age. As you grow older, your risk of suffering an injury or developing a critical illness increases.
- Coverage amount –The premium relates to the benefit amount. When the premium goes up, the benefit also increases. For example, for young people who do not need a hefty payout, the premium can be close to $10 a month. Older applicants who need higher benefit amounts may have to pay 10-12 times that amount or even more.
- Health – Life insurers reward healthy applicants by offering them more affordable rates.
- Family’s medical history – Certain diseases, such as diabetes, tend to run in families. You may have to pay more for coverage if you have a family history of certain illnesses.
- Smoking status – Smoking is neither good for your health or your pocket. Smokers tend to pay several times more than non-smoking rates. That is because they are at a greater risk for several health conditions, such as diabetes and cancer.
- Hobby – A dangerous hobby (like skydiving) or a risky job (like truck driving) can bump up your premium rates.
- The number of illnesses covered – Some plans are basic providing coverage for only a handful of conditions. While other policies are far more comprehensive and cover as many as 26 conditions. The greater number of illnesses a policy covers, the higher its premium is likely to be.
Critical illness insurance provides you with a lump sum payout if you become critically ill. Since severe illnesses like stroke or heart attack generally incur costs greater than average medical costs, a critical illness policy can help you pay for those costs not covered by a traditional health policy.
If you have life insurance, you can buy a critical illness rider for more comprehensive protection. Alternatively, you can buy a stand-alone critical illness policy. Dundas Life works with some of the top-ranking life insurance companies in Canada and can help you find the right coverage for the best value.
Steven has a deep background in life insurance. At Dundas Life, he's helped 1000s of clients find the right insurance coverage while also training dozens of insurance advisors during his career. Previously at Finaeo, Steven oversaw compliance and coaching for over 350 independent insurance brokers. Steven is also rated the #1 Insurance Agent in Toronto on Rate-My-Agent.