Are you looking to buy critical illness insurance? There’s two things you need to consider before making this decision.
First, you must have adequate life insurance and long term disability insurance before purchasing critical illness insurance. Both of those coverages are more important than critical illness insurance and must be emphasized first.
An example may help explain why. Let’s say you have a heart attack – a covered condition for critical illness. It’s going to do one of three things to you:
- Kill you. If that happens, and you have proper life insurance coverage, then the critical illness insurance was incidental anyway (and as an aside, if you have a heart attack and die within 30 days of the diagnosis, critical illness won’t pay out anyway). And a typical life insurance policy would have substantially higher coverage than a typical critical illness policy as well.
- Not kill you, but leave you permanently disabled. However if you have proper long term disability coverage then you should have a new paycheque from the disability coverage. And again the benefits of a new paycheque from disability insurance are likely too far exceed the benefits of a critical illness policy lump sum.
- Not kill you, but leave you temporarily disabled. From a strictly financial perspective, a temporary disability should be covered through your own savings rather than insurance. This may actually be a reason you would consider purchasing critical illness insurance, however within the context of these three points, the first two points above are much more financially important than this last point.
The second consideration is to ensure that you’re not doing this strictly for emotional reasons. I emphasize this because the insurance industry seems to be able to make a lot of sales of this product based around the idea that if you get a heart attack, $100,000 is going to make you feel a lot better. Which is OK as long as you don’t treat it as a financial decision. If you are looking at this as part of your insurance and financial planning, then you need to ensure the reasons you purchase the coverage are in fact for insurance or financial reasons.
- coverage of short term disability, i.e. a covered condition takes you off work for a period of time. You should contrast this with having an emergency fund, and whether you actually want to cover this.
- substitute for long term disability insurance. To be clear, you should never use critical illness as a substitute for long term disability insurance (LTD) unless you don’t qualify for disability insurance. In the instances where you don’t qualify for LTD, consider critical illness as a second-best measure. In the instances where you do qualify for LTD, make sure you purchase that coverage first. Again, an example may help. If you have a heart attack, we would expect the the LTD and the critical illness to pay out. But if you get hit by a bus and are disabled, only the LTD is going to pay out. “Hit by a bus” is not a covered condition in critical illness.
- coverage of medical and drug costs. Consider this one carefully. In Canada, we’re supposed to have these costs covered. I have received differing and conflicting opinions on this. If you have cancer, are there additional costs that you must pay? Or not? Consider things like travel to the hospital, overnight hotel stays for family, time off work for family, drug costs, and others. Do these costs exist? Can they be minimized and not require insurance? Are you comfortable paying insurance premiums to cover this?
- Coverage of ‘additional’ medical and drug costs. By additional, I mean medical and drug costs that may not typically be expected for Canadians. Perhaps you want the option of taking expensive experimental drugs. Or you want to be able to go to the Mayo clinic in the U.S. Again, be careful with this consideration. Insurance requires that we lose something, not create wealth. And additional drug and medical costs like this are not a loss – they’re something we gain. That places this consideration more in the realm of a lottery than true insurance. It’s OK if you want to pay critical illness insurance premiums for this option but be aware that it is more of an emotional decision as it does violate the basic precepts of insurance.
In the end, the basic idea that you want to consider is exactly what you ‘need’ the money for if you develop a covered condition. Do you need that money? Or want the money? The lines are very blurry on this with critical illness, so consider careful and buy for the right reasons. I