Critical Illness Protection

Nancy Philip CFP, CLU and Paul Philip CFP, CLU
October 27, 2011
Written by Nancy Philip CFP, CLU and Paul Philip CFP, CLU
You may have heard of critical illness insurance. It’s an interesting product that has been gaining popularity, partly because it was not designed by an insurance company but by a doctor. Dr. Marius Barnard is a surgeon who was part of a team that performed the world’s first heart transplant in 1967. Barnard saw first-hand the financial hardship his patients suffered when going through a critical illness. He lobbied the insurance industry to introduce a new type of “living benefit” to cover the financial impact of a critical illness. He argued that, as a medical doctor, he can repair a person physically but only insurers can repair a patient and their family’s finances. He felt families needed access to a financial product that could help when hit with random and sudden major health issues such as cancer, heart attack or stroke. In 1983 the first critical illness policy was launched in the U.K. and in the 1990s the concept came to Canada.

Fast forward to today, and increasingly we see the medical profession saving lives of people who in the past may have died from their illness. With future advances in medicine and treatment, this positive trend is likely to continue. Unfortunately, the patient and their family are often left to deal with huge emotional and financial consequences of their survival.

(Statistically in Canada today, 90 per cent of heart attack victims and 75 per cent of stroke victims survive the initial event, and the overall cancer survival rate has doubled in the past 30 years.)

LIFE IS RANDOM
No one likes to think that a serious illness could happen to them but the truth is it can affect anyone at any time. Think for a moment of super athletes like Lance Armstrong, Saku Koivu and Mario Lemieux, all diagnosed with cancer at a young age. Michael J. Fox was diagnosed with Parkinson’s disease before age 40. Healthy young singers like Sheryl Crow and Melissa Etheridge have survived breast cancer. Most recently, the leader of the NDP party, Jack Layton’s sudden battle with cancer became public. None of us knows for sure what our future holds, but having a strategy to deal with whatever life brings is smart planning.

HOW CRITICAL ILLNESS INSURANCE WORKS
One of the benefits of being designed by a doctor and not an insurance company is that critical illness insurance is straightforward. If one of a wide list of serious illnesses occurs, including but not limited to cancer, heart attack or stroke, then, after a waiting period – usually 30 days after the diagnosis – you receive your tax-free lump sum insurance benefit. It’s black-and-white. If you suffer an illness that is contractually covered and the waiting period is satisfied, then the claim is paid.

WHAT IT DOES
Recovering from illness costs money. Treating and coping with illness can mean significant and often unexpected costs. The real magic of this product comes from the variety of ways you can use the money and the impact it can have on you and your family’s life. No two health or personal situations are the same. You get to choose what options and choices are best for you. Some of the unique ways people have used their funds to get through that difficult period are:
  • finding the best heath care available;
  • accessing alternative care and non-traditional treatments;
  • hiring a nurse or caregiver to help at home;
  • paying a mortgage or getting help with debts;
  • providing income when they couldn’t work or a loved one couldn’t work because they accompanied them to treatment;
  • protecting retirement plans and assets;
  • making sure their business survives;
  • reducing workload while in recovery;
  • retrofitting a home or vehicle with assistive equipment;
  • taking a family vacation;
  • lessening emotional and financial impacts on the family.
Keep in mind, cancer and serious illnesses do not just impact the person who receives the diagnosis. The reality is the whole family suffers from the illness. If you recall a major health issue that you or someone close to you went through, you would likely agree that the spouse, children, even parents and siblings, are also impacted tremendously.

RECOVERY WILL BE YOUR FIRST PRIORITY
Having the funds to deal with a serious illness is important. However, money is only part of the solution. When a person finds out that they have been diagnosed with a serious illness, immediate access to the very best medical advice and treatment is crucial. Most insurers include, in their plans, access to a service that can help you find the best medical advice, services and facilities available for your condition. This service often includes:

  • World-class medical second opinion service – co-ordinates working with your physician to obtain the medical information needed for top medical specialists to evaluate and communicate their findings. This helps both you and your doctor to access the very latest in medical advances from leading medical institutions in Canada and the U.S., including Duke University Health System, Mayo Clinic and UCLA Healthcare;
  • Medical co-ordination service – help identify and select the best hospital or specialist, and arrange appointments, transportation and accommodation.
Think for a moment about the peace of mind that comes from knowing you are doing everything possible to recover and have the very best minds working on your behalf. Some insurers include access to this service not only to you but to your spouse and children and it’s not dependent on making a critical illness claim.

STRATEGY: GET YOUR MONEY BACK, NO MATTER WHAT
Most people see the value and the real benefits critical illness protection can provide at a time when they need it most. What they don’t like is paying insurance premiums. A strategy to consider is to include on your plan a 100 per cent return of premium feature. Set up this way, if you stay in great health and do not use the insurance you will receive 100 per cent of your deposits back at the specified age, for example 65 or 75 years of age dependent on the plan setup.

Most people have some emergency funds sitting in a savings or chequing account earning little to no rate of return. In the example above, think of it as “parking” $1,500 a year with the insurance company. In return, you have a fully funded catastrophic health spending account with $100,000 in it. If a serious illness happens, you have access to $100,000 tax-free to use as you see fit. If you are fortunate, remain in good health and do not need to use the account you get 100 per cent of your money back to use for your retirement. In this example, there would be no actual out-of-pocket cost as the $1,500 came from an account that was not earning any interest. You either get the $100,000 at claim time or 100 per cent of your deposits back at age 75. In addition, if you die before becoming eligible for a claim or your return of deposits, 100 per cent of the premiums paid are returned to your estate. Some plans even have a long-term-care plan built into them.

Case study
Consider the following example for a 40 year old non-smoker:
  • Tax-free cash benefit if diagnosed with a critical illness: $100,000
  • Annual premium: $1,500
  • Tax-free deposits returned at age 75 if no claims: $52,420

IN SUMMARY

Almost everyone knows someone who has been diagnosed with cancer, heart attack or stroke. What is unfortunate and unpredictable is that it is sometimes the healthiest person they know. There is often no rhyme nor reason to it.

If you are diagnosed with a critical illness, recovery will be your first priority. Having a critical illness plan in place when you need it most lets you focus on what really matters – getting better. Critical illness plans can be set up in a variety of ways and customized to suit your individual needs. Speak with a financial advisor today about this valuable addition to your financial plan.

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