Critical Illness Insurance:
Bridging the Gap
This article was written by Diana Angelozzi, CFP, and reproduced from Standard Life's monthly newsletter dated November, 2002.
A serious illness can be devastating. While medical advances have greatly improved the chances for survival, surviving a serious illness may come with substantial costs. Dr. Marius Barnard, South African physician and pioneer in the field of critical illness once said, "the outcome of a major health crisis is more likely to be survival than death...that having survived, the cost of living is higher than the cost of dying." From this came his well-known observation: "People need insurance, not because they're going to die, but because they're going to live."
Fortunately, there are insurance products to provide financial aid in these circumstances, and each one plays an important role in a financial plan. A product which has been getting quite a bit of attention lately is critical illness insurance. Critical illness coverage provides a lump-sum benefit when an insured is diagnosed with an illness (or condition) covered by the plan, provided the insured survives a certain length of time (typically 30 days) after being diagnosed. The lump-sum benefit can be used to spend as the insured chooses.
To understand where critical illness fits into the insurance puzzle, it helps to first examine all the pieces.
Disability Insurance
Disability Insurance typically provides a weekly or monthly income should a disability arise from an accident or illness (including a critical illness) that prevents the insured from performing the essential acts of his/her own occupation or any other occupation for which he/she is reasonably suited.
Disability Insurance income is usually set as a fixed amount or a percentage of the insured's income (typically 50 to 75%). This means that after suffering a critical illness, an insured's income diminishes. While income decreases, regular expenses such as mortgage, car payments, household bills and children's education do not drop accordingly. In addition, because of the nature of disability insurance income, no lump sums are available to pay major medical or non-medical bills resulting from the illness.
Furthermore, the average disability plan typically has an elimination period of 60 to 90 days. Some illnesses may leave an individual "disabled" (as defined in a disability insurance plan) for less than 90 days. This would mean that during the elimination period there would be no income paid from a disability insurance plan. For example, consider the typical heart attack victim. Most heart attack victims go back to work within one to three months after having a heart attack. With a typical elimination period of 60 to 90 days, a Disability Insurance plan will pay an income for a very short period of time (if any). On the other hand, a critical illness insurance plan will pay a lump sum benefit if the heart attack victim survives 30 days.
A critical illness policy can also provide a cushion to fill the gap between earned income and that available under the disability plan, or provide ready cash for expensive drugs, medical procedures and treatments not covered under corporate or government plans (such as treatment out of Canada). It can also be used to pay for extensive renovations needed to accommodate a wheelchair or customize rooms such as the bathroom.
Long-Term Care
Insurance
Long-Term Care (LTC) insurance provides benefits when an insured suffers a loss of functional capacity and needs the assistance of another person to perform the necessary activities of daily living. Long-term care plans usually pay a fixed amount for each day the insured requires home health care or is confined to a nursing home.
The fixed income paid from a Long-Term Care plan may not be sufficient to cover the required nursing healthcare. A critical illness plan may provide a lump sum benefit to supplement the income paid from a Long-Term Care plan and/or can be used to pay for medical or non-medical bills resulting from the condition.
Some critical illness insurance plans also list Loss of Independence as one of the conditions covered. This means that the state of health that would trigger income payments from a Long-Term Care plan would also trigger a lump sum payment from a critical illness policy that lists Loss of Independence as a critical illness. Even if the loss of independence is not the result of a critical illness, the coverage will supplement payments from a Long-Term Care plan.
Terminal Illness
Insurance
Terminal Illness insurance is a benefit provided under some life insurance policies in which an insurer advances a portion of the policy's death benefit provided that the insured is suffering from a terminal illness and is expected to die within a certain period of time (usually 12 months).
More and more individuals are surviving critical illnesses, and therefore may not be eligible for this benefit. In the case where an insured is eligible for this benefit, the death benefit from the life insurance policy is reduced by the terminal illness benefit that was paid in advance, including any applicable interest charges on the payment advanced. A critical illness plan can provide a lump sum benefit while keeping the death benefit intact for its original purpose -to provide a benefit to the beneficiaries in case of the death of the insured.
Savings/Investments
There are other sources that can be used to provide an income when an individual is diagnosed with a critical illness, such as registered and non-registered savings, investments, or the savings portion of a life insurance policy. However, these assets are usually established to serve a specific purpose, such as providing an income during retirement. If these assets are depleted, they will not be there for their original purpose. Furthermore, considering the additional costs a critical illness can bring, these investments may not be enough. In the words of Dr. Barnard: “We can replace your kidney but your savings will have to be completely removed.”
A Win-Win Proposition
Critical Illness coverage pays out a lump sum benefit when an individual is diagnosed with a critical illness. What happens if the insured dies without being diagnosed with a critical illness? All premiums paid are returned. This feature usually forms part of the policy at no extra cost. As an add-on, an option can be added to the policy where all premiums are returned upon the expiry date or a portion of the premiums paid are returned if the policy is surrendered at certain years during the life of the policy. This makes critical illness insurance a win-win proposition...a lump-sum payment if you need it...your money back if you don't.
One Piece of the
Puzzle
Notwithstanding its benefits, Critical Illness is not intended to replace other types of insurance. It is designed to take care of a one-time event (a critical illness) rather than provide an ongoing income. Make sure that you are aware of all your options and that you make choices taking all the facts into account. Call me if you have any questions or concerns.
Other
articles included this month:
Pension
Plan Perplexities – In current chatter about pensions, worry-inducing terms
like “shortfall” and “underfunded liabilities” keep cropping up. Is there really trouble ahead, or is this
just part of a perfectly normal cycle?
Return to Jan/Feb 2003 $$$ Maker
Report