Understanding Critical Illness Insurance
By Glenn Cooke
Critical Illness insurance seems pretty straightforward – if you get a critical illness, you get paid a flat benefit. Unfortunately when it comes time to claim, consumers often find that they weren’t covered for what they though they were.
There’s also a number of important policy attribures that don’t get discussed that can lead to misunderstandings as to what’s covered and what’s not. In particular there’s a simple sales phrase used to sell critical illness which is “If you get cancer, you get paid a benefit. If you don’t, you get all your premiums back’, something that’s not nearly as ‘true’ as a consumer might initially believe.
In the following pages we’re going to take a more fact-based approach to critical illness insurance in Canada. This will give you a better foundation for your purchase of critical illness insurance.
We’ll do so by breaking the problem down into two steps:
- How Much Critical Illness Insurance
- Best Type of Critical Illness Insurance
Following these two steps, in order, will ensure that we’ve purchased the best insurance coverage available.
It will also help in background understanding if you’ve read our Understanding Life insurance ebook prior to going through this one.
Catastrophic Financial Loss
Critical Illness insurance is often sold based on emotion. The fear is that we get cancer or have a heart attack. The payoff is a cheque. This connection is why critical illness insurance is called ‘cancer insurance’ or ‘the cancer lottery’ in the insurance industry. While using fear to self insurance works like crazy, it can lead to incorrect insurance coverage. Ask yourself, if you get cancer, why do you need $100,000? If you don’t have an immediate answer to this, you likely are leaning too much towards an emotional purchase instead of an insurance purchase.
To avoid this, we’re going to introduce a concept I call Catastrophic Financial Loss. We’re going to use this phrase to ‘test’ our insurance purchases. If we fail this test, it indicates we are not looking at the right thing.
- Catastrophic – if we are using insurance to cover a financial loss, the amount of the loss should be huge enough to be life altering – or catastrophic. By contrast, consumer warranties on electronic items are not really insurance. A $500 phone loss shouldn’t be catastrophic for most of us. A $100,000 loss on the other hand is absolutely a catastrophic loss.
- Financial – for insurance to make sense, a loss must be financial. This is opposed to emotional. Take for example the sales phrase I mentioned above – “If you get cancer, you get paid a benefit. If you don’t, you get all your premiums back”. Getting your premiums back – is that a strictly financial decision? Or more of an emotional one? In most cases, it’s an emotional decision. If that’s your motivation, be cautious and evaluate.
- Loss – Mathematically, lotteries and insurance work the same way. A large group of people pool their money. A random event occurs (your numbers come up, or you get cancer) and the recipient of the event receives a payout from the pool. The difference between a lottery and insurance is in the intent – a lottery increases wealth. Insurance means you suffer a loss and the insurance puts you back to where you were; it preserves wealth. Lets say you’re looking at critical illness insurance to pay for out of country medical costs (a common sales approach). Is that a loss? Turns out that it’s not – if you don’t have the money for out of country medical costs, then critical illness is creating this wealth and this is now a lottery. That doesn’t mean you shouldn’t purchase critical illness, it does mean you should pause and evaluate your assumptions.