CRITICAL ILLNESS

By László Kramár of asset.aid.com  Also see this comparison between critical illness and disability insurance

Critical illness insurance was invented by heart surgeon Dr. Marius Barnard, and first introduced in South Africa in 1983. Later it became available, and very much sought for, in several other countries; in the UK, e.g., it has become the most popular kind of insurance product recently. It was first offered to Canadians in 1996.

The financial consequences of a serious illness are often worse than that of death. In addition, the chance for a critical illness attack on any of us is much higher than that of death, before retirement.

Critical illness insurance is also referred to as 'living benefit' or 'dreadful disease' insurance. This is a relatively new kind of policy, that pays you a tax-free lump sum 30 or 60 days after the diagnosis of one of the carefully circumscribed conditions that make the majority of life threatening illnesses. If the insured dies in that 30 day period, the premium paid into the policy is paid back to the designed beneficiary.

Whether the person insured recovers from the disease or not (and when), and whether /s/he is able or willing to work in that period, or after, has no effect on the paying out of the benefit. Similarly, payment of the benefit is not tied to any other insurance, and there is no restriction on what it is used for.

It can be bought as a separate policy or as a rider to certain traditional life insurance policies. In certain policies, life insurance and critical illness insurance is, in a way, combined: 25-50-75-100 % of the face amount can be paid out as a living benefit, and the amount payable as a death benefit (and the premium as well) is decreased accordingly. (It is worth mentioning though that not all living benefit is the same as critical illness coverage: living benefit is typically paid when the insured is not just critically but terminally ill, while for critical illness benefit payment, chances of recovery or longevity are not considered at all, beyond the need for survival for 30 days.)

There is even a unique combination available: critical illness coverage as a rider in universal life plans. The nice thing about this latter solution is that one can pay for the critical illness protection from within the UL, that is with tax-free money.

Critical illness insurance has also appeared as a rider to certain long term disability plans.

The sum of the benefit contracted is usually comparable to that of death benefits in life policies. 

Basically, this insurance product is not instead of long term disability or life insurance; rather, it fills a gap left between the protection provided by those two. You need it not because you are going to die today, but because you are going to live. (To learn about another relatively new type of insurance, long term care insurance, brought about by medical advance and changing demographics

The logic behind offering this kind of protection is to serve a new need. People are not covered by traditional life or disability policies in the increasingly frequent cases of surviving life threatening illnesses, and for an increasingly long time. In those cases, death benefit is obviously not paid, and monthly payment of disability insurance benefit may not be triggered or continued either. It is because for that to happen, the person must be disabled - usually for several months or even a few years, depending on the policy bought -, that is not necessarily the case at all when a life threatening illness occurs.

While formally not disabled perhaps, or not for a very long period, people with dreadful diseases incur very serious financial consequences. This fact is reflected in the increasing number of bankruptcies in the last few years.

 There may be a need, e.g.,

• to cover significant expenses for recovery not covered by government or group plans,
• to substitute reduced or permanently lost income,
• to pay out mortgages,
• to change lifestyle (change a career, take an early retirement, change place of living, alter a home, take time off to focus on recovery, buy new services, etc.),
• to fulfil dreams, or
• to hire someone to keep a small business going during the recovery,
• to replace a key person, or a co-owner, in a business situation, when that person is forced by a critical illness to give up his/her position or cut back activity in the business.

In case of a critical illness, reserves - that have other intended purposes, in the first place - are quickly depleted, and payment for mortgage, or into retirement or education funds, or life insurance is hard to keep going, exactly when the need for them would be the greatest.

Since the chance of getting into such a situation is really significant for all of us (see my primer and the collection of more detailed data for some facts), the need for such kind of insurance is even more general than the need for life insurance.

If you think such kind of disaster will surely avoid you, think again! Think of those people among your relatives, friends, or acquaintances, who have had such problems. Had it seemed likely previously that they would have such illness? Do not deceive yourself: those statistics are not about them, some miserable other group of people; they are about us. In the UK, the average age of people making heart attack, cancer, or stroke claims in the past three years was 41. A quarter of claims were from individuals under 35. According to Canada Life's Irish Division, 10% of their claims came form people younger than 30, 23% came form people between age 31 and 40, and 52% from people between age 41 and 50.

There are two basic kinds of coverage:

one that includes

• heart attack,
• stroke and
• cancer,

that is the most frequent life threatening conditions, and the other that may include also

• coronary artery surgery,
• multiple sclerosis,
• kidney failure,
• paralysis,
• blindness,
• deafness,
• dismemberment, and
• major organ transplant.

One company has added five more conditions (Alzheimer's disease, Parkinson's disease, coma, loss of speech, and severe burns) recently to the above list, and others have started following suit.

In other words, the list does not include everything, but the overwhelming majority of life threatening illness occurrences are included. (To some extent, the name of this new type of insurance is a misnomer. Since several of the benefit-triggering occurrences - severe burns, loss of speech, coma, deafness, blindness, dismemberment, organ transplant, major head trauma - result, or can result, from accidents and injuries rather than illnesses, it is more correct to speak about 'critical conditions' as situations that are covered by this kind of policy.) There are, of course, quite circumspect definitions for those conditions that trigger paying benefit; also, applications for critical illness coverage, similarly to disability insurance, are much more closely scrutinized from the point of view of the health history of the individual and his/her family than with life insurance applications.

An important exclusion is cancer occurring in the first 90 days of the policy. In such a case, the premium is paid back and the policy terminates.

Since payment of the benefit is linked to well-defined medical conditions only, there is less room for claim debates between insured and insurer than can be the case with disability insurance plans sometimes.

There are about a dozen insurance companies in Canada you can buy critical illness insurance from. The lists and definitions of basic conditions of their policies are quite similar, but definitely not the same; their prices are spread on a wide spectrum. If you buy without shopping around first, you may easily end up with a policy for which you pay hundreds and thousands more than necessary over the years.

Critical illness insurance is available for Canadian residents between age 18 and 65, but the policies can usually be renewed until age 75, or can be even for life. This kind of insurance can be accessible for people who otherwise cannot, or cannot easily, buy any health insurance, such as homemakers, new job entrants, contract or part-time employees, home entrepreneurs, or those who have been declined.  It is not a perfect substitution for disability protection, just like disability protection is not a substitution for critical illness protection, but when it's the only protection available, it's especially worthwhile.

There are both renewable 10 year term, and level priced policies available, up to age 65, 75, or 100. The face amount is between $10,000 and $1,000,000; usually not more than five times of annual income plus unpaid mortgage of the person is allowed. For people in certain occupations some companies charge somewhat higher premium. The maximum protection for someone without own income (if spouse has decent income) is about $250,000. A single person without a T4 tax slip can probably buy not more than a $100-150K policy.

Unlike with life insurance policies, the free looking period usually is not 10 but 30 days. Another difference from life insurance is that with critical illness policies usually there is only more restricted (or none) temporary coverage from the application date until the policy is issued.

Beside the availability of disability premium waiver, one can buy a child protection rider as well that covers all the existing and future kids until age 21. The covered conditions in this case are those that are the most frequent life threatening situations specifically with children.