CRITICAL ILLNESS INSURANCE: THE BASICS

You can fool yourself
You can cheat until you're blind
It can happen to you
It can happen to me
--- Yes, It Can Happen

89% of Canadians have a family member or close friend who has suffered from a critical illness. Yet only 51% have a financial plan in place (Ipsos-Reid, June 2005).

What is a Critical Illness?
A critical illness or condition includes Alzheimer’s disease, aortic surgery, benign brain tumour, blindness, cancer, coma, coronary artery bypass surgery, cystic fibrosis, deafness, dismemberment, heart attack, heart valve replacement, kidney failure, loss of independent existence, major burns, major organ transplant, motor neuron disease (Lou Gherig’s disease), multiple sclerosis, muteness (loss of speech), occupational HIV, paralysis, Parkinson’s disease or stroke.

The "Big Three" are cancer, heart attack and stroke.

No matter how well we take care of ourselves, we could be affected. Marketing material invariably shows the scary statistics.

The Financial Risks
Thanks to medical advances, we are more likely to survive a critical condition. What about our finances? There are many costs that government or other health plans exclude. Here are examples:

• faster or better treatment at a foreign hospital
  
• cost of experimental drugs
  
• home renovations or new vehicle (e.g., to accommodate a wheelchair)
  
• travel and accommodation costs of family members especially if you travel to another city or country for treatment
• cost of a family vacation or some other dream
  
• offset income lost by you or family members during your treatment or recovery
  

If your condition arose from work pressures, you may want to take a less stressful --- lower paying --- job upon recovery.

The Financial Planning
So how do we plan to deal with the costs?

Canadian financial planning for critical illness

• Use savings (54%)
  
• Mortgage or sell their house (17%)
• Get help from children (5%)
• Get help from other family members (2%)
• Sell other items (1%)

source: Ipsos-Reid, June 2005

Using savings or home equity (71%) creates another problem: less money for retirement. Getting help from family hurts their future finances too.

What is Critical Illness Insurance?
As you might expect, insurance is available to offset the financial risks of a critical illness or condition. A lump sum (e.g., $50,000 to $2 million) is payable 30 days after diagnosis. This money can be used any way you want.

Coverage is available to age 75 or even 100. Premiums can increase every 10 years or stay level. If you're fortunate to not suffer a critical illness, you can get a return of most or all of your premium, which you can then use for retirement income. The specifics vary among products.

Critical illness insurance has only been available in Canada since 1996 and the taxation is unclear. Since you buy coverage with after-tax dollars, the basic benefit is likely tax-free (as with disability income insurance). Is the return of premium option tax-free? This isn't certain.

Complications
Since term life insurance is considered a commodity, you can generally pick the lowest price from a major company. Critical illness insurance is different.

• definitions vary among companies and the medical language makes comparisons difficult
• the conditions covered vary --- some products insure over 20 conditions
  
• very few advisors are knowledgeable about the products
  

How would you feel if your heart attack meets the definition of Product B but you bought Product A and get nothing? One strategy is to buy coverage from two companies to increase the chances that one will pay.

What if you suffer a critical illness but don't have insurance because your advisor didn't tell you about it? You can start suing. Or be proactive, get educated and take action now.

Picking the right product is not easy. And too few Canadians buy coverage which could benefit them.

Other Resources
By coincidence, today's Toronto Star has an article about insurance policies that benefit the living. Naturally, you can find more information online (or ask here). For example, criticalillnessinsurance.ca is more educational than most.

Links

• Why critical illness insurance remains unsuccessful
• Can "cancer" be more harmful than the disease? (The Globe and Mail, Dec 2011) [new]

Losing Ground: Investing For Retirement

Every child had a pretty good shot
To get at least as far as their old man got
But something happened on the way to that place
--- Billy Joel, Allentown

When my son was 3 years old, we noticed that our coin jar was getting lighter and his piggy bank was gaining weight.
"What are you doing?" I asked.
"Saving for retirement," he replied.

Jeevan is now 12 and still careful to save his money. He bought his first term deposit recently. Not everyone starts saving so young. Why did he? He was alarmed by my tales about people I came across who

• had no pension plan
  
• lost money because of poor investments
  
• were working but not saving for retirement
• dipped into RRSPs due to job loss, disability or illness
  
• didn't repay money they took from their RRSPs to buy a home
  
• retired but didn't realize they'll likely run out of money
• retired, ran low on money and were forced to work again
  

Monkey hear, monkey fear, monkey save. We didn't need Grimm's Fairy Tales. If you're alarmed by the fear of running out of money during retirement, join the club.

As you might guess, there are publications geared at institutional investors and pension plan sponsors. The current issue of Canadian Investment Review looks at the typical Canadians instead.

Company Pension Plans
If you're among the 40% of the workforce with a company pension plan, you're fortunate. Money is being set aside for you. Ideally, you'll have a plan that pays you a specific lifetime benefit based on your years of service and your salary around the time you retire (defined benefit plan). Many employers prefer the less-expensive defined contribution plans, which transfer the investment risks to you. As with RRSPs, you make the investment decisions and your pension income depends on the value of the savings.

On Your Own
The remaining 60% have no company pension plans. Do they have the discipline to save?

I see small business owners who struggled for years and are now seeing some success. So they start the saving game late. Or spend instead of saving. It's their way of rewarding themselves for toiling in the lean years. They think their businesses will survive and become increasingly successful. So their plans to save slip into the future.

The study, Losing Ground, by Keith Ambachtsheer (University of Toronto) and Rob Bauer (University of Maastricht) shows that investing in mutual funds can chop retirement income by 22% to 64%, depending on what the fund charges.

We'll each have different solutions such as investing "better" (whatever that means to you), saving sooner or buying more lottery tickets.

So put away Grimm's Fairy Tales. Turn out the lights. Think about Losing Ground before you retire.