Critical Illness Insurance

Critical illness insurance (CI) seems to be something most people know only a little about, but it can be a great addition to life and disability insurance when it comes to income protection. When the benefits and advantages of critical illness insurance aren’t clear, it’s often the first type of insurance eliminated by someone evaluating their insurance needs. But when the value is put into perspective, many people refuse to go without.
 
 
The Origins of Critical Illness Insurance
 
 
Critical illness insurance was “invented” in South Africa in the 1980’s by Dr Marius Barnard (part of the team that performed the first human-to-human heart transplant). Barnard recognized that with modern medical advancements, more and more people could actually survive critical conditions… but what he later found was that many of his patients then didn’t have the funds to pay for elements to assist in having the best probabilities of survival including:
 
 
  1. Assistance with removing the burden of immediate liabilities (mortgage, debts, hospital bills, etc.)
     
  2. Additional/alternate medical costs not paid for by government or private plans.
     
  3. Alterations to a survivor’s home to accommodate their new physical condition.
     
  4. Covering day-to-day expenses from a longer period of time off work; something employers may not cover.
     
  5. Not being able to work as many hours or work in the same profession, causing an income shortfall.
     
  6. An extended holiday with loved ones to celebrate recovery.
     
  7. The Benefits of Critical Illness Insurance
 
As mentioned, CI helps offer the policy holder another layer of income protection and the peace of mind knowing that finances have some protection at an already difficult time. Some of the benefits of CI include:
 
 

  • Payment of a lump sum amount based on the insured suffering a covered “critical” condition. CI covers the major illness such as cancer, heart attack, stroke and kidney failure; some policies can cover up to 26 different conditions.

     

  • As the CI policy holder, you can receive the payment for yourself, to spend as you like and when you see fit.

     

  • Financial protection, allowing you to focus on your treatment, any additional medical care, if needed, and your recovery.

     

  • At an additional cost, CI policies offer flexible options for the return of your premiums, should you live a healthy, illness-free life. The return of premium money can be put towards your retirement or other expenses.

     

  • If you are a business owner, you can help protect your business against the instability of a key employee becoming sick.

     
  • CI coverage helps protect you from liquidating assets or impacting your retirement savings plan in the event of a serious illness.
 
Risk to Investment Planning
 
 
You’ve worked hard to accumulate some investments – that’s fantastic! But what would happen to all your hard-earned investments if you didn’t have critical illness coverage? Here’s an example… a 45-year-old has long-term savings in place, but no CI policy. They are diagnosed with cancer and, after successful treatment, need to access $50,000 as part of their recovery, and their only option is to borrow from their RRSP. How will this impact their investment planning?
 
 

  • Withdrawal cannot be recontributed, so contribution room has been lost/wasted.

     

  • Any investment assets sold may have dropped in value.

     

  • Assuming a marginal tax rate of just 35%, the gross amount required to be withdrawn from the RRSP would be around $77,000 to achieve the net amount of $50,000.

     

  • There is lost compound growth opportunity on the withdrawn funds. Had the $77,000 not been withdrawn, assuming a pre-tax annual growth rate of 5%, it would have added another $204,303.92 to the RRSP’s value by age 65!

     

  • Retirement may need to be delayed and/or a lower retirement income taken.

     
It Won’t Happen To Me… Will It?
 
 
If you’re still on the fence about the importance of purchasing critical illness insurance, here are a few stats to consider:
 
 

  • For a 35-year-old in good health, 31% of men and 23% of women will suffer a critical illness before age 65. (1)

     

  • 2 in 5 Canadians are expected to be diagnosed with cancer in their lifetime. (2)

     

  • At Sun Life Financial in 2021, In 2021 in Canada, 77% of critical illness claims were paid to those under the age of 61, with just 23% being to those aged 61 and above. (3)

     

  • Over 1.5 million Canadians are living with cancer or are cancer free for up to 25 years after a cancer diagnosis. (4)

     
Factoring these stats, just 8% of Canadians have critical illness insurance (5) – this at a time when a healthy young individual could attain coverage to age 65 for a $50,000 tax-free lump sum payout for less than $50 per month. (6) With earlier detection of certain illnesses and better treatment options, doesn’t that just make sense?