Critical Illness Insurance For Wise Patients


There are many people who believe in insurance, and just as many who are vehemently against it. Personally I'm a believer, but I also know that there is no blanket solution for everybody, and it's very easy to be over-insured. As mentioned in my article on How To Choose A Financial Planner, it comes down to the professional (in this case an insurance agent) sitting in front of you and their genuine interest provide the best solution for you, not their pocketbook.

Cancer, heart disease, and stroke are the three big illnesses we suffer from these days. The irony is, due to medical technology we are more likely to live from these three than die! This is good, of course, no doubt about it. But we live…at what cost? Literally?

True Stories of Tragedy

A friend of mine was set to retire. He and his wife had worked long and hard in their careers, were in their late 50s and had just bought a retirement home. However shortly into their newfound retirement, he was diagnosed with cancer. Shockingly, the wait for chemotherapy treatments at his local hospital actually exceeded his life expectancy. So off to the Mayo clinic he went, where thank goodness he received the treatments he needed and recovered fully.

But his recovery came at a cost: his retirement savings, and ultimately his retirement. He and his wife were forced to go back to work, and are projected to have to work well into their 60s and maybe even their 70s to achieve the retirement life they once had at their fingertips.

Another friend of mine was actually much younger: he had a heart attack at the age of 30. Due to the nature of his problem he was in and out of hospitals for over six months, and unable to continue working. Luckily after three months his disability insurance kicked in, but unfortunately the insurance only paid out 60% of his after-tax income from when he was working. This wasn't enough to pay for his new mortgage, and the full range of debts he was well on-track to paying off before the heart attack.

The condo had to be sold through a fire-sale, and the markets had dipped such that he actually was still left owing money after the mortgage was paid off with the proceeds. And the disability insurance still couldn't cover off all his debts as well as his medical expenses. After he recovered fully from his heart attack, his finances still didn't. It will take years upon years for him to get back on track to his previously stable position.

Are you listening (rather, reading) yet?

Okay, let's talk about Critical Illness Insurance (CI).

Scary Facts:

  • 75% of healthy individuals over age 40 will become critically ill.
  • Every 26 seconds, an American will suffer a coronary event.
  • On average, an American suffers a stroke every 45 seconds.
  • Men have a one-in-two lifetime risk of developing some form of cancer. For women, the risk is one in three.
  • For those suffering a critical illness prior to age 65, the probability of surviving is almost twice that of dying.

Sources: 2007 Heart and Stroke Statistical Update, American Heart Association; 2007 Cancer Facts and Figures, American Cancer Society.

The Basics of Critical Illness Insurance

If you are diagnosed with a Critical Illness, and survive for 30 days, you are eligible to receive a cash, tax-free lump sum of money from the insurance company. (The eligibility is upon the insurance company receiving satisfactory doctor's reports detailing the illness.)

The big three illness covered under a standard CI contract are heart disease, stroke, and cancer. Most policies also include a "rider" (additional clause) that provides coverage for an additional 15-20 other illnesses and accidents, including blindness, deafness, Multiple Sclerosis, Parkinson's, Alzheimer's, paralysis, and severe burns to name a few.

Statistically speaking, you have about a 50% chance of getting one of these illnesses in your lifetime. (Just look at your chance of getting cancer: 1 in 2 or 1 in 3 depending on your gender. Now add all the other conditions and it's a scary picture.)

A New Thing For Insurance: Get ALL Your Money Back (Return of Premium)

One of the additional riders you can add to your CI policy that makes it bombproof in my eyes: If you don't make a claim (because you never got sick), you get all your money back!

There are of course conditions to be satisfied such as the number of years you held the policy, and you will pay additional money up front for the rider. But here is a true-life example of how this policy pays:

Joe pays $30/month for $75,000 of coverage, and has since he was 28 years old. At age 75, he will get all his money back if he doesn't make a claim. (There are other ways to structure the Return Of Premium rider, however this is one example.)

Tomorrow, if Joe becomes critically ill, he will receive $75,000, no questions asked, and his contract with the insurance company is over and done with. He won't pay the insurance company any more money, and the insurance won't pay him again either.

If Joe doesn't get sick, he will get all his money back at age 75. Between age 28 and 75, He'll have paid the insurance company $16,900 — a small amount in comparison to the $75,000 that would have been paid out at any time during the 47 years Joe held the policy.

Had Joe invested the $30/month at 6% return instead of getting the CI policy, then at age 75 he would have accumulated $94,426. However, it would have taken over 43 years at 6% to have accumulated the $75,000 that would have been paid out by the insurance company at age 55 or 40 or even 29 if he got ill. So the argument of self-insurance isn't strong in this case.

If Joe dies before age 75, he is out of luck. But if he wanted to, he could have added a Return Of Premium On Death (ROPD) rider that would give his estate all the money back too. Personally I figure that's what life insurance is for. The ROPD is more for the people who out of principal want to ensure they get their money no matter what.

No Two Policies Are The Same

There are dozens of ways to structure your Critical Illness insurance policy that I haven't delved into here. For example, you can change the age at which the Return of Premium kicks in or how it does. You can arrange to go on payment holidays if you become disabled. You can structure level policies where the rates never go up, or take a lower rate right now with the promise of an increase in 10 years.

The list of illnesses covered and the definitions which qualify each illness also differ from policy to policy and insurance company to company. Currently there is a push to regulate the definition of illness, such that it is consistent throughout the industry.

I can't make specific recommendations as to what you need or if you even need coverage at all. This is something to review with an insurance agent who can give you all the details you need.

What I can say is that it seems like a winning proposition to me: Pay a little bit of money now for the promise that if you get ill and need financial assistance it will be there, and if not you get all your money back. Sure, you didn't get to invest the money in the meantime, but that's the small price you paid for the ability to protect your other investments, family, finances, and peace of mind.

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Myscha Theriault's picture

I don't think I've ever heard of this one Nora, and I am an insurance freak. I will definitely check it out.

Another couple of products we carry on ourselves are long term care insurance and hospital income insurance.  

Thanks for the article.


Guest's picture

As an insurance agent for over 23 years (not always in sales) I am both a believer in the product and a hater of the industry. Like all industries, insurance companies need to make a profit in order to keep the lights on and pay their employees. Unfortunately this requires decisions that in turn affect people's lives.

This is a good article and well thought out about this type of insurance. CI insurance can often be added to a health insurance plan which is a good way to obtain it since buying a few small specific plans gets expensive since each has minimum fees attached.

In addition to insurance I am a big believer in taking care of your health. While genetics plays a role, it is a lot smaller role than we want to accept - lifestyle is the big contributor to the maladies we will experience in life, and how quickly our body heals and fights off these illnesses.

Life Coach
Insurance and Debt Elimination

Guest's picture

A couple of things people should look deeply into are the illnesses documents and what binds the insurance policy to follow through with paying out claims.

Most insurance agents would probably gloss over the illnesses and exactly how one is determined. That section is the make or break on something like this. Is it determined by a standard battery of tests? Is it subjectively determined by some claims adjuster? Do they take your doctors word or send you to an independent medical exam for the insurance companies paid doctor to declare you fine? Some illnesses are hard to deny since there are definitive positive or negative tests. Others are more up to the entire body of medical findings and are fodder for a company to deny a claim simply to defend their bottom line.

What binds the insurer to pay your claim? Independently purchased policies are not covered under ERISA. This means you can sue them in court and also sue for damages. Insurance under ERISA takes away many consumer rights.

I would also look at the ratings of the company and statistics of how often they pay out claims. A company should have good record in the insurance industry, few lawsuits and a good record of paying a strong percentage of their claims.

People just assume that there will be a safety net if something bad happens. Many find out there not one the hard way. Employer sponsored disability can delay and deny for years leaving your with nothing. Falling back on social security disability can also take years to process and receive benefits. Having something else to fall back on is a rather good idea.

Nora Dunn's picture

Great observations Lucille, thank you!

I too agree that when it comes to choosing any insurance product, it pays to go with large well-established companies with a good payment history. I don't have any desire to pay a fly-by-night company that might close its doors when I need it the most!

Guest's picture

I work for a company that offers Critical Illness insurance sold direct to consumers. This is a great feature b/c much of the CI sold in the US is through worksite. This is a very popular type of insurance in Canada and the UK, but has been slow to catch on in here in the US.

However, with the changing landscape of healthcare today - high deductible plans, co-pays, prescription costs, out-of-pocket expenses -the need is growing for this type of protection. You may think health insurance and disability will cover everything...but the don't!

The great news is that more and more people are surviving illnesses that were once fatal - but are their finances and savings surviving? Our website is - and I think that says it all. Don't let a serious stand in the way of continuing to do the things that you love in your life!
Here's the link to my company and our CI product

Take care.

Guest's picture

Assurance on critical illness may be a great help considering the cost that may be incurred in medication of such deceases that covers an expensive major treatment. But I agree that more than the financial benefits, what matters most is the guaranteed relief that this scientific methods will bring.