Critical Illness Insurance Return of Premium; Whoops!

I like to compare the return of premium on critical illness insurance to a physics question: When you flush the toilet in Canada, does the water spin clockwise or counter-clockwise?  Don’t know?  Let’s give it a try.

Take a $100 bill and flush it down the toilet.  Watch carefully which way the water circles. By doing so, you will:

1. Learn something new.
2. Have some fun.
3. Waste your money.

Purchasing return of premium on critical illness insurance is the same thing, except without the first two points.

Return of premium rider on a critical illness policy promises to pay you back all your premiums should you not make a claim.  In sales-person’s terminology “Get paid the claim or get all your money back”.  Sounds pretty good.  But……….

There are two types of premium structure in critical illness policies, term or term to 100.  (for more details on these two types, read how much critical illness insurance to buy).

For term insurance, the premiums start out inexpensive but get more expensive as you get older.  For example a 10 year term policy has premiums that are level for 10 years, then increase every 10 years.  Here’s what you may have overlooked though.  With a typical critical illness policy you must keep the policy through to age 75 in order to get the return of your premiums.  Cancel the policy prior to age 75, and you don’t get all of your premiums back.  Why would you cancel before age 75 though?  Because while the initial premiums may seem inexpensive, the renewal premiums can get much higher.  Taking an example of a 40 year old Male Nonsmoker, $100,000 of 10 year term critical illness.  The following are the premiums to age 75 for a large Canadian life insurance company:

• Age 40: $719
• Age 50: $1663
• Age 60: $4067
• Age 70: $7693

Are you prepared to continue paying those escalating premiums to age 75?  If not, you will not receive your return of premiums.  Cancel before age 75 and there’s no money back.  In other words, if you purchase a term critical illness policy with return of premium, be aware of the future costs required to maintain the policy until the return of premium option pays out.

The second premium structure for critical illness insurance is term to 100.  These premiums are level for life, they’re guaranteed never to go up.  Great policies in that they ensure your premiums never change – so when do you get the return of premium option?  While many policies have a graded scale for paying this benefit, a typical policy will pay you back your return of premiums after 15 years.  And once again we have a big ‘but’.  BUT, you have to cancel the policy to get your premiums back.  Remember the sales hype that said “Pay a claim or get all your money back”?  Well, they meant it – if you get all your money back you don’t get the opportunity for a claim because you have to cancel.  So why would you purchase a policy with premiums that are level for life?  Clearly that would be because your intentions are to maintain the policy forever.  Adding a return of premium option that then requires you to cancel the policy after 15 years when the intention is to keep the policy for your lifetime seems contradictory.

Actually, if I was a pessimist, I might be inclined to call this option “the life insurance policy would rather give you some money to cancel your policy before you keep it long enough to make a claim”.  Being an optimist however, I make no such claim.

Be wary of this option.  It’s premise is based on a common insurance sales tactic.  Insurance is an ‘intangible’ to consumers, they don’t feel like they’re getting anything if they don’t make a claim.  Add in a tangible like ‘get all your  money back’ and it makes many consumers feel good.  Feeling good is OK, just make sure that your feelings aren’t leading you to wasting money.  If you purchase return of premium, make sure you know the conditions under which it is paid.