Over the past few months, we’ve focused our attention of the blog on critical illness insurance. We went into detail about the origins of it, how much it costs, which riders are worth getting, and how underwriting for it differs from life insurance. One question remains: should you buy critical illness insurance?
Measuring the potential cost of a loss
To answer that question, you have to ask yourself why you should buy insurance in the first place. The purpose of all types of insurance, from auto to life to critical illness, is to transfer the potential cost from a loss to an insurance company. The potential financial loss from a car accident or death can be hundreds of thousands of dollars, or even over a million dollars, which is why auto and life insurance are an integral part of an insurance package.
So does critical illness insurance belong in this package? How do you compare the financial loss of death versus suffering a critical illness? Whereas death is final and the income loss experienced by surviving family members is permanent, suffering from a critical illness will most likely not result in a loss to the same degree.
For example, with a less severe case, you may need to spend some time in the hospital, but be back at work after only a couple of months. Income was interrupted for a short duration, but with a sufficient emergency fund, it should not affect your financial goals. With a more serious illness, you may have to take an extended leave of absence, renovate your home to accommodate your new condition, and require weekly visits from a physiotherapist. You can bet that you will have to draw on your savings and alter your retirement goals, even if you make a complete recovery.
With such a wide range of outcomes, how do you determine if critical illness insurance is necessary? A comparison can be made with auto and disability insurance, where the potential loss of a car accident or a disability can range from minor to devastating. If you believe auto and disability insurance are must haves, then you can also include critical illness insurance in that category.
Speaking of disability insurance, you may be wondering about the difference between it and critical illness insurance. While the latter pays out a lump sum amount on diagnosis of a covered illness, the former pays a monthly benefit during the period of total disability. It may seem like there is some overlap, but there are many instances where disability insurance would pay and critical illness wouldn’t, and vice versa.
Factors that will affect your decision
There are other factors you have to consider when deciding whether or not to buy critical illness insurance. Besides the financial impact, the steps to recovery can take an enormous emotional and physical toll on you and your family. The lump sum benefit from a critical illness insurance payout can afford you and your spouse to take time off work to fully recover emotionally and physically.
Your budget is also another factor that will weigh into your decision. Having a larger budget may allow you to purchase a more expensive term-to-75 or term-to-100 policy, while tighter cash flows will limit you to term-10 or term-20 policies.
One reason people purchase insurance is because they know somebody in real life who are survivors of major health events. Although they made a full recovery, they can see that the episode had a substantial impact on their finances. Having seen this firsthand will often influence an individual’s decision to purchase critical illness insurance.
You may also want to look at your chances of developing a critical illness. Here are some stats you may find interesting:
- 38% of Canadian women and 44% of Canadian men will develop cancer during their lifetimes (1)
- It is estimated that there are over 70,000 heart attacks in Canada each year. That’s one heart attack every seven minutes (2)
- Every 10 minutes, one person in Canada has a stroke (3)
You may place a different level of importance on all of these factors, but ultimately, they will all influence your decision to buy critical illness insurance. Remember that insurance is a long term commitment, so be prepared to do some homework and do your due diligence so that you arrive at the right decision for you and your family.
Even if you do decide to buy critical illness insurance, remember that you have to be qualified by an insurance company. Underwriting is different from life insurance, and the decline rate is higher for critical illness insurance. The next step you should take is to complete a preliminary underwriting assessment, which will let you know the probable underwriting decision, without having to undergo any blood tests or medical exams.
1. 2006, Canadian Cancer Society, www.cancer.ca
2. 2001, Heart and Stroke Foundation
3. 2004 Annual Report, Heart and Stroke Foundation of Canada