Insuring against critical illness

How CI policies work, and whether you qualify

Deanne Gage 31 December, 2012 | 7:00PM

You get what life insurance is all about, but lately you've been hearing about different types of insurance coverage -- ones that pay if you get sick but don't pass away. Critical-illness insurance is one that comes up frequently.

CI insurance pays out a lump sum for the amount of the policy 30 days after you are diagnosed with a critical illness like a heart attack, cancer or stroke. More than two dozen illnesses are usually included in your policy. Once the amount is paid, the policy is over. If you become critically ill and unfortunately die within the 30-day period due to any cause, your family will get back all the premiums you paid on the policy but not the policy face amount.

In comparison, disability insurance is based on your earned income and pays only if you're off work and under medical supervision, usually after a 90- or 120-day waiting period. You're paid a percentage of your earned income on a monthly basis up until age 65, based on the definition of disability within the policy.

Some people may find CI insurance more flexible because you receive the full policy amount upfront, which can range from $25,000 to $2 million. The average policy sold in Canada is for approximately $80,000.

You can spend the money however you desire, whether it's paying off bills, taking time off work or exploring alternative medical treatment in other countries, says Mark Halpern, a certified financial planner (CFP) and president of illnessPROTECTION.com in North Toronto.

"It provides people with options that they would not normally have," he says. "If somebody has lots of their money in cash or other liquid investments, that's fine but with something like their RRSP they are going to pay half of the withdrawals in tax. And when they recover, they can't put the money back inside their RRSP."

Disability insurance can be tough for self-employed professionals to qualify for since they must prove they have an earned income and it can take years to establish consistent income stream, he notes. Meanwhile, CI isn't income-tested at all. This makes it a great alternative for entrepreneurs, blue-collar workers and stay-at-home spouses.

How do I qualify for CI insurance?

You'll have to go through a traditional underwriting process that not only looks at your individual health but also that of your family, Halpern notes. That's because the chances of collecting on a CI policy are considerably higher than on a term life policy, for example (one in three for CI versus two out of 100 for term life insurance prior to age 65).

Take June, a 40-year-old healthy woman who wants a CI policy. Unfortunately, both of her parents were diagnosed with type 2 diabetes in their 50s. June is likely to be declined for CI, or she may have to either pay higher premiums or have certain exclusions added to the policy. While some may opt out of CI at that point, Halpern recommends considering the many other serious illnesses that are still covered under the policy.

The good news is once you've been approved for a CI policy, you can customarily renew it after 10 years, 20 years, or to age 75 or 100 without requiring future underwriting.

How much will I pay in monthly premiums?

Halpern says that depends on the client, their age, gender, smoking status and current health plus the amount of the policy and the type of policy. Let's take a 45-year-old man who is approved outright for CI and wants a $200,000 policy. He can expect to pay around $130 a month for a 10-year term policy.

What riders are available for CI insurance?

About 40% of CI policies have return-of-premium riders (ROP) attached to them. ROP works like this: if you pay premiums for 15 years without a claim, you can opt to get your principal back but without interest. Just one catch: for this rider, expect to pay 50% more for the policy. But some are willing to bet big bucks that their health will stay strong.

"I'm not always sold on ROP because sometimes people sell down their actual insurance needs just to accommodate the costs," says Halpern. "If you have a claim, you've overpaid for the insurance and you forfeit the return of premium rider so you don't get those premiums back."

At the end of the 15 years, you can opt to continue the policy or cancel the policy since you've now accumulated enough money and have paid off all debts.

What if my illness isn't covered?

For years, this was the big issue consumers and advisors alike had with CI insurance policies. People took out policies, filed claims and some were denied due to their illness just falling through the "definition" cracks. Halpern says it's less of an issue now since all insurance companies who offer CI now have the same standardized definitions for illnesses. That's why he suggests sitting down with an experienced insurance advisor or certified financial planner who can walk you through all the nuances and possible exclusions of each severe disease listed.

I have CI insurance but can no longer afford it. What are my options?

You can cancel the policy outright, says Halpern, but that's not a strategy he recommends due to situations he saw occur with two of his own clients this year. One was a new father who was healthy and looking to save money. He cancelled his $100,000 policy and six months later was diagnosed with testicular cancer.

The other client cancelled his policy because of the cost and thinking that he was healthy. He ended up getting cancer and his original policy would have paid him $500,000. It's a hard call since you just don't know where you'll end up on the health curve. But before cancelling completely, Halpern suggests reducing the amount of coverage as a way to cut costs.

About Author

Deanne Gage

Deanne Gage  Deanne Gage is a Toronto-based writer who has specialized in personal-finance issues since 1999. A recipient of several journalism awards, including one from the Investment Funds Institute of Canada, she is also a former editor of Advisor's Edge and Advisor.ca. She can be reached at deannegage@gmail.com.