Critical Illness Insurance: What is it?

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Critical illness insurance is often overlooked, but it could be an important insurance policy for some people. If you get really sick or are diagnosed with a condition that requires immediate treatment, you might not be able to work for an extended period. A lack of income could put families in financial ruin.

To help you in this situation, there’s critical life insurance. This type of insurance differs from life insurance since you get paid while you’re still alive. The real question is, is critical illness coverage worth it?

What is critical illness insurance?

Critical illness insurance is a type of insurance policy that provides a lump sum benefit if you’re ever diagnosed with a serious illness. Some conditions that would be covered under your critical illness plan include heart attacks, stroke, cancer diagnosis, Parkinson’s disease and even organ transplants.

It’s important to note that while some employees may have critical illness insurance from their employers, it may only cover certain conditions, and the lump-sum cash benefit may not be very much.

Unlike life insurance policies, where your beneficiaries get the funds, critical illness insurance pays you. What you do with the benefit amount is entirely up to you. Most people will use the funds to cover any out-of-pocket costs, such as medical bills, medical equipment, and even retrofitting their homes to deal with the fallout of their health diagnosis. You could even use the funds for your mortgage payments or to purchase supplemental insurance.

How does critical illness insurance work?

Critical illness insurance is pretty straightforward. First, you choose the coverage options, the amount you want, and the term. You then pay monthly premiums for a critical illness insurance policy. 

If you’re ever diagnosed with a critical condition, your insurance company will pay you a lump sum. Generally speaking, your insurance provider will contact your healthcare provider for the details to verify your claim.

Once your claim has been verified, your insurance provider will send you a direct deposit or cheque for the funds you’re entitled to. 

Note that critical illness benefits only apply to what’s outlined in your policy details or benefits package. Trips to the hospital for medical emergencies or regular visits to the doctor would fall under your provincial health insurance plan

Unlike some regular health insurance products, there’s no high deductible with critical illness insurance. Any payments you receive are completely tax-free.

Some policies will allow you to reclaim part or all of your premiums if you never make a claim. If you opt in, your policy will usually end at that time. If you were to pass away before making a claim, some policies will provide your beneficiary with a death benefit.

What does critical illness insurance cover?

The conditions covered under a critical illness insurance policy will differ depending on your policy and insurance provider. Generally speaking, you’ll be fully covered for the following:

  • Cancer
  • Heart attack
  • Aortic surgery
  • Heart valve replacement or repair
  • Stroke
  • Coma
  • Dementia
  • Alzheimer’s Disease
  • Amyotrophic lateral sclerosis (ALS)
  • Parkinson’s Disease
  • Paralysis
  • Multiple sclerosis
  • Occupational HIV infection
  • Blindness
  • Deafness
  • Loss of limbs
  • Kidney failure
  • Major organ transplant

In addition, many conditions are partially covered, so you’ll still get some payment. Is it also worth noting that each individual critical illness pays a separate amount. For example, if you suffer a heart attack and are diagnosed with cancer later, you’d get paid twice.

How much does critical illness insurance cost?

The cost of critical illness insurance will differ depending on various factors such as your age, health, the amount of coverage you want and the insurance provider. The number of illnesses covered in your plan could also affect your monthly costs.

Generally, younger and healthier individuals will have lower premiums compared to those who are older or have pre-existing health conditions.

For reference, a standalone critical illness insurance policy that pays $50,000 is roughly $35 to $45 for healthy individuals on a 10-year term.

Note that many life insurance policies will allow you to purchase critical illness insurance as a rider (add-on). By doing this, your monthly premiums could be lower.

How much critical illness insurance do I need?

Many insurance experts think of critical illness insurance as a lump sum payment that will help you with your day-to-day expenses while you focus on your recovery. You want to ensure you have enough cash available for three to six months worth of expenses. Some expenses could include:

  • Mortgage or rent payments
  • Utility payments
  • Oustanding debt payments
  • Groceries
  • Child care 
  • Living expenses
  • Domestic help

Let’s say your monthly expenses are $5,000. Then you would likely want $15,000 – $30,000 in critical illness insurance.

Basically, you should think of your critical illness insurance as your emergency fund. That said, getting a critical illness insurance policy may not be necessary if you already have an emergency fund saved.

However, some people like having a critical illness insurance policy in place as it can help cover medical costs that their provincial health plan may not cover.

Who should get critical illness insurance?

In reality, not everyone needs critical illness insurance. You should only consider it in the following situations:

  • You have dependents that rely on your income
  • People with limited benefits health insurance
  • Freelancers, entrepreneurs, and self-employed individuals
  • Anyone looking to supplement their insurance
  • Those concerned about future medical issues
  • Individuals that lack an emergency fund

Since critical illness insurance is another form of insurance, it’s ideal for anyone that has dependents. If you were to ever become sick and unable to work, that could be disastrous for you and your dependents. Critical illness insurance gives you a buffer during your recovery.

What’s the difference between critical illness and disability insurance?

Critical illness and disability insurance are two different types of insurance products. Critical illness pays you a lump sum when you’re diagnosed with a critical illness, whereas disability insurance replaces a portion of your lost income.

Most people will argue that disability insurance is more important since it covers you for various reasons, such as mental health or disability. Even though your disability insurance won’t pay your full salary, it could provide enough income where your lifestyle doesn’t change.

Think of it this way, disability insurance covers you from a loss of income, whereas critical illness provides you with a payout meant to help you get back on your feet. Disability insurance will continue to pay you even if you can’t work anymore.

How to get critical illness insurance

Critical illness insurance can be purchased from a licensed insurance agent or broker. These brokers will usually be licensed to sell other insurance products too, so they can advise you on what options you have based on your needs.

Another option is to apply for critical illness insurance online via a company such as PolicyMe. In most cases, you need to answer a few questions about your health and lifestyle to be approved. If PolicyMe needs additional information, they’ll contact you.

Once you have selected your coverage, term, and been approved, your policy will be sent to you. You’ll get a chance to review everything before you commit. Only once you’re ready will you be required to make a payment.

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About Barry Choi

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. You can find him on Twitter:@barrychoi

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