Understanding Critical Illness Insurance

This is a guest from Ray at www.financialhighway.com. Ray is a Toronto based financial enthusiast who works in the investment industry.

Understanding Insurance without a competent insurance advisor can be difficult, however majority of people understand the basics of insurance. A fairly new type of insurance is Critical Illness Insurance (CI), I personally believe CI is one of the more important type of protection to need.

Critical Illness Basics

CI is slightly different than life insurance, CI is falls in the category known as a living benefit since the survivor gets the payout.

Critical Illness policy pays a lump sum in case of a critical illness, each policy has a list of illnesses it covers these lists differ from insurer to insurer but almost all of them have the top three illnesses; heart attack, stroke and cancer. The payments are tax-free and can be used for anything you wish. Some use it to get medical help overseas others use it to pay down debt, go on a trip take time of work to recover etc. There are no restrictions as to how to use the funds and no receipts are needed to get the funds.

Why is it important?

Out of any insurance policy you would buy, statistically CI is the one you are most likely to claim on. The chances of a Canadian suffering from a critical illness are 1 in 3! If you look at stats for cancer, heart attack and stroke you will realize that the chances of suffering from one of these illnesses are very high and chances of survival have been consistently increasing. Those who do not survive the illness will hopefully have life insurance to take care of their families, but those who survive could potentially face severe financial hardship.

The help they need might not be available in their province or country, waiting times maybe too long where in US they could get the treatment faster, they may not be able to work for long period of time and fall behind on bills. There is enough emotional stress when one goes through a critical illness, having CI can help offset some of the financial stress and help focus on recovery.

CI Underwriting

The underwriting requirements for CI are somewhat stricter than for life insurance. If you have an immediate family member who has suffered a critical illness it will be harder to get insurance, often you will have exclusions or premium increases, if you have two immediate family members who suffered from a critical illness your chances are even lower to get coverage.

Is Disability insurance same as CI?

Many are under the wrong assumption that disability insurance is the same thing as CI, however this assumption is wrong. Disability insurance replaces your income when you suffer from a disability; CI is not a replacement of income; it gives you a lump sum regardless of your income or ability to work.

If the doctor determines you can go back to work, even though you do not feel ready your disability payments will stop. There is also a waiting period for disability payments between 30-120 days; usually it is about 60 days. With CI there is no waiting period, however there is a 30day survival period; you have to survive the illness 30days before payment will be made. There are many other differences between the two types of protections, it is important to understand that the two policies are not same.

How much does CI cost?

Since the chances of claiming on a CI policy is higher than life insurance the cost of having a policy is also higher, however many insurance companies now have a Return Of Premium (ROP) feature available. In simple terms if you reach a certain age (usually 65 or 75) and do not make a claim you will receive all your premiums back without any interest and tax free. You will be paying an extra premium for this feature however many believe its generally worth it.

Life and Critical Illness combined

Many companies now also offer a combination of life and Critical Illness insurance. In this type of policy you would select a value for your life insurance and than select a percentage of that as an advance in case of critical illness.

Example

$100,000 Life & CI combo plan, you select $50,000 as CI advance. If you suffer a critical illness and make a claim you would get $50,000 without any survival period, and you would have $50,000 remaining as death benefit when you die your beneficiary will get the $50,000. If you do not make a CI claim your beneficiary will get the full $100,000.

This type of plan is becoming more popular as the cost is much lower than two individual policies.

This is just a basic overview of Critical Insurance, I encourage everyone to at least take a look at CI and speak with an Insurance advisor about the amount of coverage you would need.