Critical Illness Insurance: How It Works and Is It for You?

Canada defines a critical illness as a life-threatening or life-altering illness or condition. Getting diagnosed with a critical illness devastates the patient and their support network. Based on data by the Government of Canada, about 1 in 12 adults live with a diagnosed heart disease. The study also predict that 1 in 2 Canadians would have a cancer diagnosis in their lifetime. It can wreak havoc on a person’s personal finances.

When a critical illness strikes, the patient often has to take longer periods of time off work. This leads to a loss of income. But there are also other costs involved like medication, day-to-day housekeeping costs, travel costs, childcare, etc. With this dual impact of lower income and higher costs, a household’s savings can erode pretty quickly. Buying critical illness insurance can reduce a lot of the financial pressures that arise with a critical illness.

What is critical illness insurance?

Critical illness insurance (CII for short) is a lump sum payment provided on a tax-free basis by an insurer to the patient if they get diagnosed by a medical professional with a specific ‘covered illness.’ A covered illness refers to a condition that the insurer would pay out claims for if the policy buyer is diagnosed with such a condition.

Each CII policy differs in terms of the illnesses that are covered under it. The goal of having critical illness insurance is to offset the financial anxiety and pressures, such as lower income or rising costs. In this way, you can focus on your path to recovery rather than have to stress about finances.

The lump sum payment provided to you can be used at your discretion. While there are no limits on what you can use the insurance money for, some uses include:

• Paying for special medical treatments that are not covered by the Canadian public health system can often be expensive
• Replacing lost income as a result of quitting your job after getting critically ill
• Paying for various costs such as groceries and childcare costs 
• Hiring medical help such as an at-home nurse
• Purchasing home accessibility modifications such as ramps, stairlifts, etc
• Paying for transportation and accommodation costs if you are seeking treatment outside of your city or town of residence

How does it work?

Just like a regular insurance policy, critical illness insurance requires the buyer to pay premiums. The premiums are usually paid on a monthly basis.

Insurers calculate these premiums based on several factors related to your unique medical history and risks. As a result, many providers ask for a complete medical test before you receive a price quote.

Once you provide the required information, the insurers offer you a list of covered illnesses to choose from. This list may exclude diseases or conditions that you had. For example, if you had a stroke or heart attack, you may not be eligible to cover that condition in your policy.

Once you choose your policy and the coverage that you feel fits best with your health profile, you start paying premiums. As long as you continue paying your premiums on time, you are eligible to receive the lump sum critical illness insurance benefit if you contract one of the critical illnesses under coverage.

Here is something to remember: your illness has to match the definition of the illness stated in the contract.

The survival period

Most critical illness insurance policies come with a concept called the ‘survival period.’ This survival period refers to the minimum time that a person must survive after diagnosis with a critical illness before paying out the claim.

In most cases, the survival period is 30 days. However, varies by illness and your provider.

There is a logic for a survival period. If the patient survives past the survival period, their need for the insurance payout is greater. They have to pay for treatments or other medical needs as part of their recovery. If the patient passes away during the survival period, then the life insurance payout replaces the critical illness insurance payout.

There are instances of paying out the lump sum even if the patient passes away before the survival period elapses. In those cases, a beneficiary receives the lump sum benefit through an optional add-on to the insurance policy. This is a Return of Premium Upon Death (ROPD).

How are premiums calculated?

The annual or monthly premiums depend on a few factors. The most notable ones are your age, health profile and the characteristics of the insurance policy.

Age

As with life and disability insurance, there are benefits to buying a critical illness insurance at a younger age. This is when you are not as much at risk of getting a critical illness that is life-threatening or life-altering. 

Health

Your general health is a major driver of your premium. Regardless of whether the insurer makes you complete a health exam or self-identify your medical history. A healthy, fit person with no prior history of major illnesses or conditions will obtain a cheaper rate of premiums. Similarly, a non-smoker will likely receive lower premiums than a smoker, all other things being equal.

Term length

Longer terms reduce the monthly or annual premiums, and vice versa.

Coverage

The more comprehensive your coverage, the more you have to pay in premiums. Most insurers offer a basic package with coverage over prevalent illnesses or conditions (such as cancer, stroke or heart disease). However, the insurance policy buyer can opt for additional coverages based on their preferences and lifestyle.

Riders

If you have additional coverages or clauses (such as the Return of Premium Upon Death or ROPD) to your policy as a means of downside protection, these ‘riders’ may come at an extra cost and reflects a higher premiums.

Family history

The health of your birth parents and siblings is another major consideration. The insurance company would take this into account when quoting your premiums.

Major Critical Illnesses

The Canadian Life and Health Insurance Association (CLHIA) publishes the Critical Illness Benchmark Definitions. Many major Canadian insurers have now adopted these definitions within their own policy frameworks as well but always read your contract carefully. Commonly covered illnesses include aortic surgery, aplastic anemia, bacterial meningitis, benign brain tumor, blindness, cancer, coma, coronary artery bypass surgery, deafness, dementia, heart attack, heart valve replacement or repair, kidney failure, loss of independent existence, loss of limbs, loss of speech, major organ failure on waiting list, major organ transplant, motor neurone disease, occupational HIV infection, paralysis, Parkinson’s disease, severe burns, stroke.

How to choose your critical illness insurance plan

Your critical illness insurance plan is unique and specific to you. As such, it isn’t advisable to copy someone else’s plan.

They may have a different set of circumstances to you which makes their plan futile for your needs. To determine the coverage you need, you should assess your own budget, financial commitments, lifestyle and medical history. 

What is your budget?

Make sure that you do not commit yourself each month by paying an excessive amount of insurance premiums. Create a personal finance budget that has all your inflows and outflows each month. Then you can determine what you can afford to pay in premiums.

Think about what commitments you have in terms of childcare payments, mortgage, rent, etc. If you become incapable of working due to a critical illness, what impact would the loss of income have? Select an insurance plan to ensure that you can continue to meet your and your family’s financial commitments.

What is your lifestyle?

Depending on the lifestyle you live, you can pre-emptively select a certain type of critical illness insurance plan. For example, if you are a smoker or live a sedentary lifestyle, you may want to add coverage for diseases that can result from that. It is helpful to be as honest with yourself as possible. This way you can opt for the best type of coverage for you and your family.

What is your medical history? 

If you or someone in your family has a history of a critical illness, it may be helpful to seek insurance for that illness. Some diseases are more hereditary than others, so it is worth checking whether your family have faced any critical illnesses.

Do you already have this insurance? 

You should keep in mind that many employers already offer collective insurance packages as part of employee benefits plans. Check with your employer’s benefits provider to see if you already have coverage for critical illnesses.

If you do, you can forgo the purchase of a new policy. You can also buy the coverage you need that is not already covered by the employer’s benefits plan.

While most benefit plans include life insurance, not all plans include critical illness insurance. Remember that there is a difference between critical illness insurance and life insurance. You receive critical illness insurance while you are still alive. In comparison, your beneficiaries receive life insurance upon your death.

Should you buy critical illness insurance?

The choice of buying critical illness insurance is a personal one that can vary from family to family. One of the main considerations to make is what would happen if you suddenly got a critical illness wherein you could not work anymore. Consider this:

• Does your spouse or partner make enough to keep your house or aparment paid?
• Would there be negative consequences to your household?
• Is your family dependent on your salary?

If you feel that your family is dependent on your salary, then getting critical illness insurance is a good choice to make. Particularly if you work in a dangerous job or have a medical history of a particular critical illness.

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Ultimately, buying critical illness insurance comes down as much to emotion as it does to finances. If you have seen someone suffer a critical illness before and face financial problems, you are much more likely to purchase critical illness insurance to ensure that your family remains protected.

If you are an entrepreneur, then there is certainly a good reason for buying critical illness insurance. Most employers offer benefits plans to their employees, which offer several types of coverage over primary health needs. As a self-employed professional, you may not have access to the same benefits. This makes critical illness insurance valuable in shoring up your lost income if you were to encounter a critical illness suddenly.