Unbreak my heart: The crippling effect of health struggles on your finances

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1 April 10th, 2013 by Ardent Financial Group Unbreak my heart: The crippling effect of health struggles on your finances The critical role of critical illness insurance in protecting your finances during a time of need Toni Braxton has a voice like no other. Distinctive and dramatic, the singer has crooned her way to countless weeks at the top of the music charts. But not even the voice of an angel could save Braxton from the earthly realities of poor health. From a benign lump on her breast, to a diagnosis of heart disease and systemic lupus erythematosus, the

2 singer has experienced more than her fair share of heartbreaking pain. And that was just the beginning. Braxton s health problems have also directly contributed to her very public financial struggles. If the cost of treatment and care were enough to ravage this famous starlet s financial security, imagine what it could do to your family? While many Canadian women have life insurance coverage to protect their families in the case of sudden death, very few take the necessary steps to protect their loved ones if they get sick and continue to live. This is why critical illness insurance is such an important investment and critical to any comprehensive financial plan. Often confused with disability insurance, critical illness insurance is available to a broader audience and is usually paid out as a tax-free lump sum roughly 30 days after the initial diagnosis of a policy-defined illness. Don t gamble with your health or your finances For many people stricken by an unexpected critical illness, the first few months following diagnosis can be emotional, traumatic and financially crippling. From urgent treatments to family turmoil, the impact of a critical illness on day-to-day life is dramatic and expensive. With critical illness insurance, you receive a lump sum cash payment, usually about 30 days after the diagnosis. If you have disability insurance (which you should), this payment will help you close the gap between your pre- and post-illness earnings. Remember, it can often take upwards of four months to claim your disability benefits.

3 That s a long time to wait for financial support, especially if your illness requires time-sensitive treatment. Critical illness insurance payouts can be used to cover anything from out-of-country or non-government covered treatments, to mortgage payments and childcare costs. The additional financial cushion can also help protect your spouse from the stress of suddenly becoming the sole source of income in your family, making it easier for him or her to be there during your treatment. Finally, it s important to note that this type of insurance benefit is tax free under current tax legislation, unlike RRSP withdrawals, another common source of income when an unexpected illness hits. Why RRSP withdrawals aren t the answer Sadly, we are seeing an increasing trend in Canadians who are accessing their RRSP funds to cover costs or replace their income during an illness. Unfortunately, this is often a costly decision as it will trigger a number of heavy tax penalties and damage any longterm savings plans. Early withdrawal of money from your RRSP carries a number of negative consequences, including: You have to start all over with your savings. In doing so, you lose the value of the compounded growth. Consider the tax factor. Withdraw up to $5,000 from your RRSP and you ll be taxed 21 percent in Quebec and 10 percent in all other provinces. Access between $5,001 and $15,000 and you re looking at a 26 percent tax in Quebec and a 20% tax in all other provinces. Anything over $15,000 will be taxed at 31 percent

4 in Quebec and 30 percent in all other provinces. Keep in mind that these are withholding taxes at the time of withdrawal; if you are in the highest tax bracket, you ll end up paying the balance at tax time. You can t put the money back. Once you ve withdrawn the money, it is removed from the contribution room available to you, which means you won t be able to replace it later. Your provincial healthcare coverage isn t enough If you re like most Canadians, you re likely under the impression that your provincial healthcare plan will cover most any critical illness treatment. Unfortunately, there s no guarantee when that treatment will take place. Patients can often wait weeks for chemotherapy treatments in Ontario. In the meantime, you re not working and your partner is probably taking time off work to support you (while the bills keep piling up). If you had critical insurance coverage, you could drive across the border tomorrow and receive the necessary treatment. Which option would you rather have? How to purchase critical illness insurance There are currently two ways to get critical insurance coverage: from your bank or financial institution when you sign your mortgage papers (critical illness mortgage insurance) or from an insurance company. While the first option is normally cheaper, it often offers less coverage and will typically only protect you in the case of heart attack, stroke, or cancer. The value of the policy will also shrink as

5 you pay down your mortgage (even though your premiums stay the same). What s more, when you purchase critical illness insurance from your financial institution, it s the bank that becomes your main beneficiary, not your family. Creditors can be crafty when it comes to honouring insurance policies. Just recently, CBC Marketplace delved deeper into the questionable underwriting practices associated with bank-backed mortgage life insurance policies. According to the report, many creditors ask purposefully vague questions during the application process, a tactic which often causes the client to answer incorrectly, rendering the insurance null and void. Similar loopholes have been reported as part of critical illness claims. Policies from insurance companies, on the other hand, normally list more than 20 different medical conditions, which may include kidney failure, blindness, lupus, and Alzheimer s. Managing the cost While the price of critical illness insurance has risen dramatically in the past five years (some policies have increased in cost by almost 25 percent), there are still ways to manage your premiums. First, look at smaller coverage amounts. Don t worry about the right amount of coverage. The reality is, no matter how much coverage you ve managed to secure it s rarely going to be enough when you re dealing with a critical illness. As such, buy as much as you can afford. Something is always better than nothing. From there, look for coverage that is non-cancellable. This policy type offers a consistent term, however they don t guarantee a set premium

6 at renewal. To really reduce costs, aim for a 10-year term. In some cases, this will help you cut premiums by about 40 percent. Finally, make sure to buy your coverage early. The healthier you are, the cheaper your premiums will be. Prices become prohibitive once someone hits their late 50s, becoming almost twice what they would be for someone in their late 40s. Critical illness insurance should be acquired before you fall ill; pre-existing conditions can often make it difficult to secure coverage. As such, it s important that you review any clauses in your policy that relate to your medical history. The startling statistics Still not convinced that you need critical illness insurance? Consider the following: 70,000 Canadians suffer a heart attack each year; 95% survive their first attack. 1 in 3 Canadians will develop some form of cancer, but 65% will survive at least five years. After age 55, the risk of experiencing a stroke doubles every 10 years and 1 out of 20 Canadians suffers a stroke before age 70; 75% will survive it. Women have a 1 in 9 chance of developing breast cancer, but only a 1 in 27 chance of dying from it. You need critical illness insurance, not because you re going to die, but because like Toni Braxton, you re going to unbreak your heart and live.