Peter Boys, Boys Financial Services

Why do we need Critical Illness & Disability Coverage?

critical illness

Many Canadians still don’t understand the financial risks of suffering a critical illness or disability as compared to dying. Statistically, only 6% of us are at risk of dying prior to age 65, whereas 26% have the possibility of suffering a critical illness and 34% of becoming disabled. It’s ironic that most of us understand the need for life insurance but balk at having critical illness (CI) or disability insurance (DI) coverage.

Critical illness provides a lump-sum payment to a policy owner facing cancer, heart attack, stroke or a range of other maladies that varies by contract. It came about almost 30 years ago when the renowned South African heart surgeon Marius Barnard became frustrated watching patients’ financial struggles as he treated them. So he convinced insurance companies to create this product.

To understand the need for critical illness coverage one first has to understand where it fits from a financial risk perspective. We buy life insurance to protect those we leave behind if we die prematurely, whereas critical illness and disability insurance provide us with tax-free replacement income if we can’t work.

Critical illness pays out almost immediately: Once the covered person survives beyond the first 30 days they can just concentrate on getting better. Compared to having no coverage, people may end up with difficulty making their monthly mortgage payment and other bills.

The price of critical-illness insurance has gone up fairly rapidly due to aging baby boomers, with cancer, heart attack and stroke being three the primary claim conditions. For some it may be better to consider smaller coverage amounts as there’s no use in getting a policy you cannot afford to keep. Although most policies cover more than two dozen different illnesses, policies that cover only heart attack, stroke and cancer which account for about 80% of all claims are more economical.

The longer you wait to buy coverage, the more expensive it becomes: Premiums can be prohibitive for someone in their late 50s, almost double than for someone in their late 40s. Non-cancellable coverage may be the best type for some because the terms don’t change. Guaranteed renewable are the next tier, but don’t guarantee a set premium on renewal. The price difference of the two products is between 8 to 10 per cent. To really reduce costs, consider a 10-year term, which could cut premiums by about 40 per cent.

Today there are some innovative insurance options that combine life, disability and critical illness all in one policy, which make it ideal for mortgage protection. These offer a pool of coverage which can pay out a monthly disability benefit, a cash lump sum critical illness amount or a life payout net of any DI or CI amounts paid out.

For business owners or high net worth individuals, there is the option to add a return of premium rider. The business can pay the base CI premium and the individual can pay the rider cost. This means they will get all their premiums paid back tax-free if there has been no claim.

Considering that the average Canadian family now has a debt to income ratio of almost 164%, it highlights the need for the breadwinners to have sufficient critical illness and disability coverage. Without coverage, many of them would face financial disaster if laid off for two months or more by a critical illness or disability, or they may be forced to cash in their RRSPs or other savings.

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