Cancer insurance, anyone?
The proper name for this type of coverage is critical-illness insurance. But a fact sheet from one insurance company in this line of business shows that cancer accounts for 68 per cent of payouts for CI policies, followed by heart attack at 13 per cent and unspecified other conditions at 8 per cent.
According to another insurer, two out of five people are expected to develop cancer and 63 per cent will have a survival rate from diagnosis of five years or more. The Canadian Cancer Society says cancer is the leading cause of death in this country and responsible for 30 per cent of all deaths. Cancer insurance, anyone?
Call it whatever you want, but critical illness insurance is kind of a mystery. It's a product that should sell itself, but it does so just barely. Sales in 2014 totalled $112.3-million, up roughly 3 per cent annually since 2004 but down from the peak year of 2012.
Here's a possible reason: Critical-illness insurance is expensive and the industry prefers to sell big policies over the small ones that would be more accessible for the masses. Think small and CI starts to make sense on even a limited budget.
CI pays out a lump sum of money if you meet the hyper-strict definitions of the diseases covered by your policy. The money is not taxed if paid with after-tax dollars, which would be the case if you had a standalone, personally owned policy. If you have a group plan at work, ask your HR department if your benefits would be taxable.
To enquire about critical-illness insurance is to experience the classic insurance hard-sell. To see what I mean, check out Critical Uncovered , a new website from Great-West Life to raise awareness of critical-illness insurance. There's a video about a 30-year-old mother who bought CI at 26 and was later diagnosed with cancer (she's now in remission). "Having critical-illness insurance money allowed us to not think about our finances or worry about when I was going back to work," she says.
There's also an "are your prepared" quiz on the site that asks whether getting a serious illness would make you worry about paying your everyday expenses and medical treatments, losing your home, having to delay retirement and reduced future income. Nice scare tactics, guys. Get cancer, lose the house.
What I couldn't find on the site was a word about the cost, and that's a reminder of a key point of financial literacy. When they don't mention the cost, it's because they're afraid it's a deal breaker.
To be fair, critical-illness coverage is a complex product in which premiums are tied to your personal and family health history. But it's still possible to provide some guidelines on policy costs. Quotes for one major insurer provided by an agent show a 32-year-old woman would pay $35.38 a month for a 10-year $50,000 CI policy with an option to return premiums at age 65 if she doesn't get a critical illness. At 42, the premiums rise to $78.47 a month; at 53, the cost is $175.84.
Even $25,000 in coverage can be helpful if you're critically ill, particularly when you consider how much gross income you'd need to generate that much after tax. But insurers barely acknowledge that you can buy small amounts of coverage. They prefer you to think in grandiose terms of paying off your mortgage or replacing your full income for a period of time. In fact, you don't necessarily have to think so big in buying CI coverage.
Disability insurance, whether your own policy or a group plan at work, can help you cover expenses while you're unable to work. It's not an ideal replacement because there will be a waiting period before payments start, but you can bridge that gap with the money you have safely put away in an emergency fund. Two more lines of defence in case of a critical illness are your tax-free savings account and registered retirement savings plan. Finally, as a last resort, there's a line of credit.
Buy some CI in case you get sick, but make sure the cost fits your budget. It's quite okay not to buy the big policy your insurer suggests.
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