The current darling of the insurance world is critical illness insurance, insurance that pays a fixed amount if you develop one of the covered conditions such as heart attack, cancer, or stroke (*). This seems like a great product for everyone but there are myths I want to bust today and we’ll get to the asterisk soon.
I recently launched an online Canadian critical illness calculator that compares premiums, benefits and contractual clauses. To develop the quote calculator I had to read many policies in painful depth. As a result of that reading, I’m cautious about the simplistic industry claims of ‘have a heart attack, cancer or stroke and receive $100,000 or get all your premiums back’. Let’s get to the myths…
Myth #1 – (*) Get $100,000 if you have a heart attack, cancer, or stroke.
It’s entirely possible to have a heart attack and NOT get paid, same for cancer, same for dozens of conditions. Let’s look at the definition of a heart attack as an example. The insurance companies do not use the consumers’ definition of heart attack or even the medical industry’s definition- they use their own. Here’s the definition of heart attack from The University of Maryland Medical Center:
A heart attack occurs when blood flow to a part of your heart is blocked for a long enough time that part of the heart muscle is damaged or dies.
Reads like a heart attack definition to me. But here’s a definition found in a critical illness insurance policy:
Heart Attack means the death of heart muscle due to obstruction of blood flow, that results in the rise and fall of biochemical cardiac markers to levels considered diagnostic of myocardial infarction, with at least 1 of the following:
- heart attack symptoms;
- new electrocardiogram (ECG) changes consistent with a heart attack
- development of new Q waves during or immediately following an intra-arterial cardiac procedure including, but not limited to, coronary angiography and coronary angioplasty.
Exclusion: No benefit will be payable under this Critical Illness Insured Condition for elevated biochemical cardiac markers after an intra-arterial cardiac procedure including, but not limited to, coronary angiography and coronary angioplasty, in the absence of new Q waves.For greater certainty, ECG changes suggesting a prior myocardial infarction does not satisfy the above definition of Heart Attack.
The diagnosis of heart attack must be made by a specialist.
At a minimum you should notice two ‘outs’ for the insurance company. First “due to obstruction of blood flow,” means that only heart attacks resulting from the obstruction of blood flow are covered. Second, there are testing requirements in the definition; biochemical markers, ECG’s and Q waves. If your tests and results do not fall into the above rigid definition, even if you have had a heart attack, then you are not covered.
My advice: read your policy and just as importantly deal with a broker who is familiar with the definitions and differences amongst different companies’ products.
Myth #2 – If you don’t have a claim, get all your money back. (Return of Premium rider)
That’s catchy and it turns out, this claim is actually true for policyholders. The difficulty lies in whether you are actually going to be able to take advantage of the benefit. Oh yeah, this option isn’t free, it’s a rider or add-on to your policy. If your critical illness policy is a term policy, then the return of premium is actually ‘return of premium at expiry’ benefit. The catch here is you must keep the policy until it expires, typically at age 75. Cancel beforehand and your full premiums will not be returned. Let’s follow a quick example for premiums associated with a male, non-smoker, age 40, $100,000 benefit:
- Age 40-49: $608/year
- Age 50-59: $1643/year
- Age 60-69: $4583/year
- Age 70-75: $12,251/year
If you drop the premium because the $12,000 per year in your retirement years are way outside your budget, you will not ‘get all your money back’.
My advice: if you’re going to purchase a policy that has this “return of premium” option, make sure you know how long you have to keep the policy to get your premiums back, and what the future premiums look like.
Myth #3 – Critical illness buys peace of mind
Be cautious of emotional sales ahead of sound financial decisions. Even the Globe and Mail gets caught up in the feel good benefits of these policies. What are you buying? Peace of mind or insurance? If you’re buying insurance, you’re really transferring risk, so you should have a clear definition of loss. A loss doesn’t mean it will feel good but it should mean for insurance purposes it cripples you financially. Think of it this way: assume you have sufficient life insurance and sufficient disability insurance to cover your income. If you develop a covered condition, why do you need $100,000? Where did you lose $100,000? What’s not already covered by either life insurance or disability insurance?
Well, the answer could be one of two things. First, critical illness insurance can be used as an emergency fund. If you get taken out of work due to contracting a covered condition, the funds can be used to bridge the gap between work and disability benefits kicking in. Second, the benefit can be used to cover additional costs like childcare and other unexpected expenses. These are both reasonable purposes for critical illness insurance however they can both be dismissed by having a suitable emergency fund built up. I expect many young families do not have a large enough emergency fund, so a small amount of critical illness insurance may actually make sense.
My advice: if you’re purchasing critical illness to cover short-term expenses, you may have those very same expenses for other reasons (sadly you suffer a debilitating depression, you slip and fall, or as I did, get into a tobogganing accident (really). I’m OK, but critical illness didn’t cover my accident and it won’t cover everything so consider how this product will work for you.
There are a number of great insurance products on the market, so in closing, do your homework and get professional help with the fine policy print. Some financial myths deserve to be busted or at least not always trusted.
Glenn Cooke is an independent life insurance broker and president of Life Insurance Canada.com Inc. See his website to get online quotes for life insurance, critical illness insurance, and no medical exam life insurance.