Eight years ago a client bought a critical illness insurance policy due to her family’s history of breast cancer, only to claim on it six years later for an entirely different and unexpected reason. She was diagnosed with a very aggressive version of multiple sclerosis.
Today, she credits her critical illness payout for allowing her and her husband to take three months off work so they could move to where she could receive an experimental procedure that has allowed her to walk again without assistance. Her workplace disability insurance made up for some of their lost income, but it wouldn’t have been enough to cover the extra expenses they incurred.
Without the treatment she had, she would be in a wheelchair right now and wouldn’t be able to work. They would have had to sell their house and move into a condo, which would have been a financial disaster.
Critical illness insurance can be effective at covering costs that disability insurance doesn’t. A critical illness policy can also be for someone who isn’t eligible for disability insurance, for example, a stay-at-home parent. It helps with the financial hardships that come with a critical illness diagnosis; the cost of medical treatment or for a spouse to take time off work.
Unlike disability insurance, which protects your income to age 65 and generally kicks in after 90 days of disability, critical illness insurance pays out a lump sum in the event of critical illnesses such as cancer, a stroke or a heart attack. Then critical illness insurance becomes that line of defence for those that don’t want to cash in their RRSP and undermine their long-term savings.
To qualify for a critical illness lump sum payout, you have to survive a waiting period. This is normally 30 days. You do not want to rely solely on it as you won’t receive any more money beyond the lump sum. This is why disability and critical illness coverage go hand in hand.
Critical illness insurance premiums can be expensive, for example a $200,000 policy with a 15-year term for a healthy 35-year-old man would cost about $80 a month. It really comes down to what’s affordable and it usually doesn’t makes sense to over-insure. A realistic lump sum amount that would make a difference to most people would probably be around $50,000. Some plans may offer return of premiums paid on death, and plans are available that offer the option for the return of premiums paid after a certain period.
As this client said, because she purchased her critical illness policy at the age of 25, it only ended up costing her $6 a month in premiums. “That’s a couple cups of coffee”. “It was well worth the security and the safety of not having to worry about finances when something tragic is happening in your life.”
I owned a large critical illness policy up until age 65, cashed it in as I no longer needed that much coverage. The return of premium was tax free and I got a smaller plan to help offset any future direct expenses not covered by my Seniors Blue Cross plan.
Everyone’s needs are different, but even a plan for $50,000 paid out as a lump sum tax free will provide some financial breathing room if stricken with a critical illness.
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