Plan B: Critical Illness Insurance
This article was written
by Michael Kane and reproduced from the Vancouver Sun, May 14, 2005
Given the choice, would you rather have a heart attack and lose your home, or have a heart attack and lose your mortgage?
Hopefully you won’t have a heart attack at all, but common sense suggests you need a contingency plan to cover the mortgage if you can’t work because of a serious illness.
More and more people are surviving the onset of the three big killers – cancer, heart disease and stroke, but life insurance only pays out when you check out. It won’t pay the mortgage while you are fending off the grim reaper.
Disability insurance may replace your lost income, but it won’t rid you of what is likely your biggest debt and what could be your biggest worry at a time when you should be concentrating on getting well.
Critical illness insurance, however, pays a lump sum on diagnosis of dread disease, tax-free money that can be used for any purpose, including paying down the mortgage. Alternatively, you could use the payout to modify your home for disability, pursue alternative or faster treatments abroad, or even pay for a trip to take the waters at Lourdes, or blow it all at Vegas, if that’s your thing.
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Critical illness insurance was invented in 1983 by Marius Barnard, a South African doctor and brother of heart transplant pioneer Christian Barnard, because he saw his patients “dying for a living” by being forced to earn income despite poor health.
The product has been slow to take off in Canada compared to markets like the U.K., Ireland and Australia, partly because many Canadians have never heard of it, and partly because many don’t qualify for coverage because of pre-existing conditions.
Some insurers no longer sell the product because they did not make money from it, or not as much money as they could from other lines, says Adolpho Franco, the Victoria-based organizer of the third annual World Critical Illness Insurance conference held last month in Toronto.
Although more than 30 companies still offer critical illness insurance, all but two of the major re-insurance companies have quit the Canadian market for fear they would lose money by offering such benefits as guaranteed flat premiums on coverage to age 75, or return of premiums when there is no claim after 15, 20 or 25 years.
Until last year, buyers could get their payments back if they had no claim at the end of 10 years. Franco believes many bells and whistles will be eliminated over time, as they have in other markets.
While that trend, coupled with sharply higher premiums, is slowing sales, Franco expects the product to rebound in time, as happened in Britain last year. There, insurers have accepted standardized definitions of core conditions – eliminating the concern that a heart attack at one company wouldn’t be recognized as a heart attack at another company.
For now, Canadian buyers need to check the fine print to find out, for example, if they are covered for cancer or “life-threatening cancer,” or if their insurer will pay out for a heart attack but not on diagnosis of coronary artery disease.
Franco expects more re-insurers to return to the field as definitions are clarified and more consumers settle for low-cost short-term products which offer no return of premiums and allow the insurers to increase premiums when the term is up.
In Australia, where three to five times more policies are sold, the product is limited to annual renewable term which means premiums keep rising every year.
In Britain, where 17 percent of the working population uses critical-illness insurance, primarily as mortgage insurance, most policies are sold as five-year terms, which means rates can change every five years.
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For now, at least, the Canadian insurance marketplace still offers fixed premiums to age 75 or even 100, and the option of return of premiums after 15 claim-free years or longer.
Before choosing critical illness insurance, note that it pays out only on diagnosis of specific diseases.
You won’t get anything if you die as the result of an excluded disease or an accident. If you have dependents, you still need life insurance.
Other articles included this month:
Investing in a Time of Flat Returns – Five strategies for advisors to consider
Return to November/December 2005 The $$$ Maker Report
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