Critical Illness Insurance

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1 Advances in lifestyle and medical technology have greatly increased your chances of surviving a critical illness. But can you survive financially? Keep in mind that your regular bills, loans, tuition, rent or mortgage payments and other expenses still need to be paid regardless of your state of health. In addition, after suffering from a critical illness such as a heart attack or stroke, you may require special convalescent care, a wheelchair, and/or modifications to your home or car. Where will you get the money to meet your financial obligations while dealing with your recovery? Most Canadians would have to turn to other family members, dip into hard earned savings/rrsps. But in the event that you are diagnosed with a critical illness, mental and physical recovery should be your main focus, not your finances. While no one likes to think about being stricken by a major disease or injury, the facts remain: one in three Canadians will develop a life-threatening cancer, one in four will contract some form of heart disease, and 75% of stroke victims survive the initial attack. The best time to protect yourself against the devastating financial effects that a critical illness could wreak upon your investment portfolio is while you re still healthy. What is critical illness insurance? There is one way to protect yourself from ruinous financial obligations if diagnosed with alife-threatening illness. Critical illness insurance is a form of term insurance that pays a tax-free lump sum living benefit to an insured who is diagnosed with and survives an illness covered by the policy. Critical illness insurance has only recently become popular in Canada. It was introduced in the early 1990s to fill the gap between life and disability insurance. This unique niche in the insurance market recognizes that with increasing longevity in our population, the probability of becoming seriously ill is greater, as is the chance of surviving. Once you are eligible for a benefit under a critical illness policy, you will receive a lump-sum amount to use as you see fit, whether it be to pay for lifestyle adjustments, medical bills or a vacation. You do not have to be disabled to receive the benefit, which you should receive within 30 days of being diagnosed with a covered critical illness. This is quite a contrast from disability insurance, which pays benefits on a monthly basis, replaces a certain percentage of income and usually imposes a waiting period of up to 180 days before payments commence. In addition, benefits from a critical care policy will not jeopardize any benefits that you are eligible to receive from other disability or health insurance policies. You do not have to be employed in order to purchase critical illness coverage, as you do with disability insurance. This means that you can still insure yourself against critical illness if your employment situation or income varies greatly and/or is otherwise hard to quantify for the purpose of qualifying for disability insurance. In addition, if your income is too low to make it worthwhile paying disability premiums given the percentage of monthly income benefits that disability coverage pays, then critical illness insurance may be a more cost effective method of insuring against a lifethreatening condition.

2 Why purchase critical illness coverage? Suffering from a critical illness during your prime earning years can derail a lifetime financial plan. Protecting yourself from such an economic calamity costs very little and provides you and your loved ones with peace of mind. Once you qualify for critical illness coverage, you are guaranteed to receive coverage by the insurer with no further underwriting requirements until age 65. This means that should your health deteriorate in the coming years, you cannot be denied coverage for an eligible illness that results. For example, if you purchase critical illness coverage now and many years later your cholesterol levels rise, you would still be eligible to renew your critical illness coverage. Then, should you suffer a stroke, you would be eligible to receive benefits. But if you were to wait many years without critical illness coverage until your cholesterol levels rose to unhealthy levels, you would not be eligible to purchase critical illness insurance. The cost of critical illness insurance is very reasonable and involves little sacrifice, given the damage that being diagnosed with a critical illness can have on your finances. Furthermore, many policies have an optional refund of premium rider available, which makes critical illness coverage even more cost-effective. The case study on the last page illustrates the potential effect of paying for a critical illness on your financial plan, and serves to illustrate the importance of critical illness coverage in preserving the wealth you ve worked a lifetime to accumulate. Qualifying for critical illness insurance Critical illness insurance is normally available to anyone between the ages of 21 and 65, except individuals in high-risk occupations such as boxing or wrestling, or those with hereditary diseases or HIV. Insurance companies deal with each individual on a case-by-case basis, and eligibility rules vary with each company. You will probably not have to undergo a medical examination to get coverage, but will need to complete a detailed questionnaire in order to apply. Policies generally terminate at age 65, although some companies provide coverage to higher ages. If you choose to increase your coverage after initially qualifying, the insurer will need to underwrite you again (which will usually involve a medical examination). There is usually an upper limit on the amount of insurance you can purchase. If you have a pre-existing condition, you will not be able to obtain critical illness insurance for that condition. That is, you will be most likely still be able to purchase a policy, but with an exclusion for your pre-existing condition. For example, if you have cancer, you can still purchase a policy that will covers other illnesses, such as heart failure, but excludes coverage for cancer. Premiums for critical illness coverage vary widely and depend on many factors, including your age, gender, lifestyle, pre-existing medical conditions, family medical history and amount of coverage required. Males generally pay higher premiums due to their higher incidence of common illnesses such as heart attacks or strokes.

3 Critical illness coverage and policy features When you are provided with a critical illness insurance quote, you will be given a schedule of premiums payable for each year of your life that you are eligible for coverage. As long as you renew your policy each subsequent year, these premiums are guaranteed to be available to you regardless of your actual state of health. Critical illness covers most of the following diseases or conditions: Heart attack Coronary bypass Stroke Cancer (life-threatening only) Benign brain tumor Multiple sclerosis Paralysis Coma Loss of limbs Occupational HIV Blindness Deafness Loss of speech Kidney failure Major organ transplant (whether transplant takes place or not) Severe burns Alzheimer s disease Parkinson s disease Motor neuron disease (ALS) Late onset insulin-dependent diabetes Rheumatoid arthritis One of the most attractive benefits of critical illness insurance is the refund of premium rider available in most policies. This rider allows you to obtain a refund of some or all of the premiums that you have paid for the insurance, usually after at least ten years of coverage. Thus, if you do not claim any benefits under the policy, your net cost of coverage could end up being negligible over a long period of time. This is the only instance where you could actually end up paying for the insurance only if you need it! Thus, there is a compelling case to protect yourself with critical illness insurance. Some policies also return all premiums to your estate if you die while covered. As your lifestyle needs change, you can usually increase the amount of your coverage with additional underwriting. If the additional coverage is declined, you are still eligible to continue receiving the insurance that was in place.

4 Critical illness insurance can take many forms, and can be combined with a Universal Life policy. Hence, it is important to construct a policy personalized to your individual needs with the professional advice of your Raymond James Estate Planning Advisor. Critical illness insurance checklist Critical illness policies vary greatly in their scope and costs. It is very important to ensure you understand all the details of your policy and what it covers and excludes. For example, there is often confusion between a critical illness insurance policy (which provides a lump sum living benefit) and a regular life insurance policy that pays a living benefit as a portion of the face value of the policy (based on compassionate considerations when the policyholder is diagnosed with a terminal illness). The following is a list of considerations to take into account when looking at a critical illness policy: Know what illnesses you are covered for, paying special attention to any policy exclusions. Make sure you understand exactly what constitutes a critical illness, in particular the definitions of various types of cancers. Ensure that your benefit is paid as a lump-sum payment. Verify the amount of the payment. Check how long you have to wait for your benefit. Verify how long you have to survive before being eligible for your benefit. Understand any limits on coverage after you reach the age of 65. Clearly understand the extra features of your policy, such as: return of premium rider guaranteed insurability clause requirements for increased benefit levels renewal premiums clause pertaining to the repayment of premiums to your estate in the event of your death Critical illness insurance example Would you give away half a million dollars of your life savings if it meant getting the medical treatment that would save your life? Faced with that choice, most people wouldn t hesitate to mortgage the future to survive today. But as the example below illustrates, there is a way to take care of both your life today and your financial security tomorrow. A critical illness policy can be used to secure your RRSP and your future when you face the enormous financial demands that often accompany catastrophic illnesses such as a heart attack, stroke and cancer. Risking the future to survive today that s what you would be doing if you cashed out even a portion of your RRSP to pay for medical treatment that was only available in the U.S. when you needed it the most. Given the parlous state of Canada s healthcare system today, traveling to the U.S. for critical medical treatment is no longer a distant possibility for most Canadians.

5 How medical expenses can deplete your RRSP The numbers speak for themselves: if you were diagnosed with a cancer that threatens your life, you might find that the therapy you require is available right now in the U.S. at a cost of US$50,000. Anxious to get treatment, you opt to obtain the treatment in the U.S., and so you turn to your RRSP savings. The US$50,000 cost of the treatment will cost you at least C$75,000. But assuming a 40% tax rate, you will need to withdraw $125,000 from your RRSP to end up with the cash to pay for the American medical treatment. As if the immediate hit to your RRSP wasn t bad enough, the long-term impact will be even worse. For a 45-year-old routinely making annual RRSP contributions of $10,000 and assuming an annual return of 8%, the long-term effect of that $125,000 withdrawal is not just the loss of this amount itself, it is also the money not earned in retirement savings as the RRSP grows each year without the benefit of that extra capital. By age 65, you would see that the $125,000 withdrawal represents a staggering $582,620 in savings no longer available to support your retirement (see graph below). A critical illness policy can help For less than $70 per month, a 40-year-old male non-smoker could purchase a $75,000 critical illness policy that would pay for the life-saving medical treatment without compromising the future security promised by his RRSP. Given the potential recovery of most of your insurance costs through a return of premium rider, there is a compelling case to protect your savings with a critical illness policy. Securities-related products and services are offered through Raymond James Ltd., member CIPF. Financial planning and insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a member CIPF. This summary is brought to you by Raymond James Financial Planning Ltd.(RJFP) for informational purposes only. It expresses opinions not necessarily those of RJFP. Statistics and factual data and other information are from sources RJFP believes to be reliable but their accuracy cannot be guaranteed. This information is furnished on the basis and understanding that RJFP is to be under no liability whatsoever in respect there of. It is provided as a general source of information and should not be construed as an offer or solicitation for the sale or purchase of any product.