How Does Critical Illness Insurance Work?

Sep 18, 2019 | Critical Illness Insurance

What is critical illness?

  • A critical illness is a life-threatening or life-altering condition that may strike with little or no warning
  • Critical illness insurance is designed to help protect against the financial impact of an unexpected illness by providing a one-time lump sum payment

Why should I worry about critical illness?

We are living longer – Canadian life expectancies are expected to be over age 90 by the end of the 21st century.

Medical advances also mean that conditions or diseases that used to be considered fatal are much more treatable and survivable – think of cancer, stroke, and heart attacks. In many cases, these are much less debilitating than they used to be.

Even if you’re young and healthy, that doesn’t mean you won’t ever need CI coverage. Conditions arising from accidents, such as severe burns, loss of limbs, paralysis, and loss of independent existence are covered in most cases, in addition to what we tend to think of when we hear the term “critical illness”.

How can a critical illness affect me financially?

  • Loss of income or reduction of income
  • Lifestyle changes
  • Loss of independence
  • Increased living expenses
  • Jeopardized retirement
  • Risk to children’s future – education expenses

How can CI coverage help?

CI can provide cash flow to help cover recovery expenses:

  • This cash flow might mean that you can use retirement funds for your retirement rather than having to cash in RRSPs early
  • This can also help your estate remain intact, so you can prepare for your own final expenses or pass on funds to your beneficiaries

What conditions are covered by CI insurance?

Different companies may cover different conditions, and not all conditions are listed here. Below is a list of the most common conditions that are covered:

  • Life-threatening cancer
  • Heart attack or stroke
  • Major organ failure
  • Benign brain tumour
  • Multiple sclerosis
  • Blindness and deafness
  • Parkinson’s disease
  • Dementia including Alzheimer’s disease

But we’re in Canada. Isn’t our health care paid for?

There are so many other expenses that can arise from a critical illness aside from medical treatment and prescriptions. Even then, some treatments aren’t covered by your provincial health plan. Critical illness insurance pays out in a lump sum, and you can spend it in any way you see fit.

Consider the following expenses and how CI coverage could help:

  • Travel costs

    • You may need to travel to another city to receive treatment, incurring costs such as hotels, gas, meals, or even housesitting, childcare, or pet care

  • Living expenses

    • If you or a family member are critically ill, you may not be able to work full time or at all, meaning that you may need help with everyday expenses such as mortgage or rent, car payments, groceries, and other necessities

  • Prolonged illness expenses

    • Critical illnesses can sometimes result in longer-term expenses, such as in-home nursing care, housekeeping services, child care, or home renovations to improve accessibility

  • Change of employment

    • Some people may choose to change jobs, to a profession that has less stress or physical demand, which may result in a decline in earning capacity
    • Other people may transition to part-time work due to its being less demanding

 How is critical illness insurance different from disability coverage?

Disability coverage generally provides a monthly payment for a specific period of time, which is intended to help replace your income if you become unable to work. Critical illness insurance, on the other hand, is a lump-sum payment that you can use at your discretion. While it’s certainly true that critical illness patients may need to replace their income, CI payments are intended to provide a larger sum at one time, whereas DI provides a consistent stream of income over a period of time.

How soon does CI insurance pay out after I am diagnosed with a critical illness?

Critical illness policies generally have a “qualification period” following the placing of the policy, which states that an otherwise covered condition that is first diagnosed within the first 30 days of the policy’s issue date will not be covered. This is to prevent people from applying for insurance because they fear they have one of the covered conditions.

Most policies also have a “waiting period” between the date of diagnosis and the payment of the claim, so that the insurer can have a reasonable expectation that the insured person will survive the condition. Waiting periods are usually 30 days, but can be longer for some conditions.

What if I never make a critical illness claim?

There are different types of critical illness policies. Some are like term life insurance policies which are in force for a specific period of time, such as 10 or 20 years. Others are permanent, meaning that they are in force until the insured person reaches age 100.

Similar to a term life insurance policy, when a critical illness policy expires, the insured person is no longer covered. It’s relatively common for CI policies to have a return of premium rider, which means that, at a specified time (e.g. upon the death of the insured person, upon the expiry of the policy, or upon policy surrender), the company will return some or all of the premiums paid. This means that, if you never make a critical illness claim, you may be eligible to a refund of the premiums you’ve paid into the policy over the years.