Risk Management: Critical Illness Insurance
The year was 1998 it was a beautiful Sunday afternoon in the month of May. I then received the call that I will never forget. My father who was only 58 years old at the time had just been admitted to North York General, in Toronto. What brought him there was that afternoon he had a major brain seizure which we later found out was caused by a level four brain tumor.
My father had always been responsible with his financial planning, he was a Chartered Accountant by profession and he was very conservative with his financial affairs. What happened in the months that followed were: he had to sell his tax practice, live off of savings until he could start collecting from his disability insurance policy, put his affairs in order and go through numerous cancer treatments in both Canada and the United States, to try to prolong his life.
My father had purchased more than adequate life and disability insurance. If he had lived to age 65 he would have received over $900,000 in after-tax disability benefits. His disability insurance provided a hefty monthly income, what his disability and life insurance policies did not provide was a lump sum that was desperately needed for the expensive cancer therapies he received in Virginia. A huge financial burden would have been lifted off my parents back if someone had introduced the concept of the critical illness insurance to my father and explained its importance as a part of risk management during the financial planning process, when he was well.
The personal story that I just related is not a unique one. It is a sad fact that many of us know or will know someone who has or will suffer from a critical illness. Despite medical advances, critical illness is still all too common. Being diagnosed with a critical illness doesn’t only spell emotional and physical turmoil. It can also mean financial disaster for all those involved. If you are unable to work due to a critical illness, or if you have to give up work to look after a parent, spouse or child with a serious medical condition, you could quickly find yourself struggling to meet your financial obligations such as the mortgage and other regular bills. All this at a time when you may be having to find additional money to pay for medical treatment.
The first critical illness insurance was introduced by Dr. Marius Barnard. Dr. Bernard, was the brother of Christian Barnard the first doctor in the world to perform a successful heart transplant surgery.
Dr. Marius Barnard realized that many patients who had heart transplant surgery performed by his brother, suffered financially from the loss of their income and the increase in their expenses due to the high cost of treatment and their new lifestyles. To alleviate this financial burden he approached an insurance company in South Africa to create the first critical illness insurance, which would financially support patients before, during and after treatment by providing a non taxable lump sum benefit, paid out when a critical illness was diagnosed. Fortunate for us, because of Dr Barnard’s foresight, critical illness insurance can now be purchased in Canada.
One of the most important things to be aware of when choosing a critical illness policy is the list of illnesses and conditions covered by the policy, as this varies from one insurance provider to another. The illnesses covered vary from policy to policy, but they usually include six core conditions: cancer, heart attack/coronary bypass surgery, kidney failure, major organ transplant, multiple sclerosis and stroke. The total number of conditions now covered exceeds some 30 different conditions.
Is having Critical Illness insurance coverage worth the cost? Or is it better to self-insure yourself if you become critically ill?
Responsible Canadian adults have invested the time and money planning for their retirement. But what would happen to those wonderful plans if these individuals had heart attacks or strokes or were diagnosed with cancer today or a few years from now? How would their retirement plans be affected? Let’s look at an example…
Imagine a couple named John and Joan Williams, both are 40 years of age. John is a dentist and Joan is an accountant. Both have made maximum contributions to their RRSPs for the last fifteen years and neither own critical illness insurance. One day Joan finds out from her doctor that she has inflammatory breast cancer, the news is devastating. The good news is Joan has been accepted into a gene therapy trial program at Scripps Mercy Hospital, in San Diego that has had promising results for women with her same condition. However, the treatment will cost $100,000 US, and it is not covered by the Williams’ provincial medical insurance nor their private medical and dental plans. The only place where they can come up with this money fast is from their RRSPs.
Between the 20% US/Canadian exchange rate and a top marginal tax rate of 46% the Williams will have to collectively withdraw $223,000 out of their RRSPs to pay for Joan’s gene therapy. Joan responds terrifically to the treatment and is in full remissions from her cancer, after one year. Now lets fast forward 25 years, Joan and John are now 65 and are about to retire. They never regret withdrawing money out of their RRSPs for Joan’s treatment but wished that 25 years earlier they had owned a critical illness policy on both their lives. For a monthly premium of approximately $60 Joan would have received a non-taxable lump sum benefit of $125,000 from owning a critical illness insurance policy. The opportunity cost that the Williams lost by taking $223,000 out of their RRSPs twenty-five years earlier at a compound growth rate of 7% per year would have added $1,210,317 to their retirement nest egg. I honestly believe that any one who benefits from owning a critical illness policy would never complain about its premiums or say that they own to much insurance coverage.
Unless you can self insure yourself for critical illness, we all need to own our own critical illness policies. However to make sure you receive the right advice and are sold the right policy, you should consider your agent’s experience and professional qualifications. Certified Financial Planners (CFP) and Chartered Life Underwriters (CLU) are technically competent in the area of Critical Illness Insurance. These individuals who have attained either the CFP or CLU designations must continually meet education, examination, experience and ethical standards. A CFP or CLU familiar with your overall financial situation can provide you with useful advice concerning what type and how much critical illness insurance you should own.