Why You Should Consider Critical Illness Insurance Before Term Life Insurance
(Six-minute read time)
Critical illness insurance is a valuable yet often overlooked type of coverage. This type of insurance provides financial protection if you're diagnosed with a serious illness, offering peace of mind and support during challenging times.
In this article, we will explain what critical illness insurance is, compare critical illness insurance to life insurance and disability insurance, highlight reasons why critical illness insurance is important, present a real-life scenario, and answer some frequently asked questions to help you better understand this crucial form of insurance.
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What is Critical Illness Insurance?
When you purchase a critical illness insurance policy, you will receive a tax-free lump sum if you’re diagnosed with an illness or a covered condition. You have the flexibility to use these funds however you see fit, such as health care treatments, household expenses, transportation, or replenishing your savings.
To learn more, visit: Understanding Critical Illness Insurance in Ontario
What Is the Difference Between Critical Illness Insurance and Disability Insurance?
Critical illness insurance is aimed at covering immediate, high-cost expenses associated with a severe illness, while disability insurance ensures you have ongoing income to support your everyday living expenses if you cannot work. Critical illness insurance pays a lump-sum benefit, while disability insurance pays a monthly benefit.
Both types of insurance serve different needs and can be complementary. Having both can provide comprehensive financial protection against a variety of health-related risks.
What Is the Difference Between Critical Illness Insurance and Life Insurance?
Critical illness insurance is designed to provide financial support during your lifetime if you are diagnosed with a serious illness, whereas life insurance provides financial protection for your loved ones after your death. With critical illness insurance, you are the beneficiary and can use the funds as needed. With life insurance, your beneficiaries are the ones who receive the benefit after your passing.
Having both types of insurance ensures that you are covered for critical health events during your life and that your family is taken care of financially after you are gone.
While disability insurance is used for income replacement, it has its limitations:
Proof of Disability: Disability insurance requires you to prove that you are unable to work, which can be a lengthy and complex process.
Occupation Considerations: The ease of claiming disability insurance benefits can depend on your job. Those in dangerous occupations might find it easier to claim, while office workers may face more challenges.
Insufficient Coverage: Disability insurance might not cover all your financial needs, especially if you face high medical costs or need to take extended leave from work.
Every insurer has specific eligibility requirements when it comes to insurance
Book a call to learn more about critical illness insurance. Let us help you pick the best insurance policy for your needs.
Reasons to Get Critical Illness Insurance Before Life Insurance
When it comes to financial planning and protecting your future, the decision between purchasing critical illness insurance and life insurance can be challenging. However, there are compelling reasons to prioritize critical illness insurance before life insurance:
Higher Practical Value: Critical illness insurance might cost slightly more a month compared to term life insurance ($90 compared to $40, for example), but the benefits can be far more practical during your lifetime. If you are diagnosed with a serious illness, critical illness insurance offers a lump-sum payment that can be used to cover medical expenses, supplement lost income, and maintain your lifestyle while you recover.
Easier to Obtain Early On: It's generally easier to qualify for critical illness insurance early in life when you are healthier. As you age, or if you develop a health condition, it becomes more challenging to get approved for critical illness insurance. Additionally, if a family member is diagnosed with a serious illness, it may also impact your eligibility for critical illness insurance due to perceived hereditary risks. Getting critical illness insurance before any health issues arise ensures that you have coverage when you need it most.
Protection Against Unplanned Expenses: A serious illness can lead to significant unplanned expenses that can derail your financial plans. Drawing from your RRSP savings to cover these costs can harm your retirement goals. Critical illness insurance protects your long-term financial plans by providing the necessary funds to manage your illness without compromising your future.
Early Purchase Advantages: Buying critical illness insurance early is a smart financial move. It may seem expensive, but the coverage it provides when you need it most justifies the cost. Early purchase ensures that you are protected before any health issues arise, locking in lower premiums and guaranteeing coverage.
Rising Survival Rates: With advances in medical technology, more people are surviving illnesses like cancer. However, the financial burden of treatment and recovery can be significant. Critical illness insurance provides the necessary funds to manage these costs without depleting your savings.
Cancer treatment patients in 2023 reported an average of 34% of their monthly income on cancer-related costs
One-third of respondents in this survey expressed they experience a high financial burden due to these extra costs (which include expenses for medical equipment, childcare, homecare, and transportation).
The Financial Impact of Not Having Critical Illness Insurance
Imagine you are diagnosed with cancer at the age of 40. Without critical illness insurance, you face the task of creating a solution that can help fund your treatment and cover everyday expenses.
Monthly income of $5,000.
Monthly cancer-related costs: $1,700 (34% of $5,000)
Retirement savings of $200,000 and contributing $200 per month.
Home equity of $150,000
Because you are not able to work during six months of treatment, you’ll need to have $30,000 ($5,000 x 6), as well as an additional $10,200 ($1,700 x 6) to cover cancer-related costs, creating a total of $40,200 of cash needed to cover all your expenses.
Options:
Retirement Savings Depleted: Without a lump-sum payout from critical illness insurance, you may need to dip into your retirement savings to cover medical bills, medications, and other associated costs.
Taking Out Loans: To make ends meet, you might resort to taking out loans. This would add to your debt burden and incurs interest payments, further straining your finances.
Home Equity Loans: Another option could be dipping into your home equity. While this might provide temporary relief, it reduces the value of your home equity and increases the risk of losing your home if you can't keep up with repayments.
Outcome:
You decide to take $50,000 out of your retirement savings to cover your monthly expenses for the next 6 months. Since you depleted your retirement savings to support 6-months of treatment, your retirement fund is significantly diminished. Instead of retirement savings projected to reach $1,300,000 by age 65, it has been reduced to almost half at $670,000. Instead of retiring at 65, you decide to work until 71 years old to reach a retirement savings of $1,000,000.
Conclusion:
Without critical illness insurance, the financial burden of a serious illness can be devastating, leaving you more stressed and set back further from your financial goals, such as a delay in retirement and less money to enjoy during your retirement years.
How would your retirement savings look if you purchased critical illness insurance?
Let’s say at the age of 35, you purchased a Term-20 Critical Illness Insurance policy with a coverage amount of $50,000 with a monthly payment of $27 a month. Because of your budget, you reduce your monthly retirement contribution to only $173 a month.
Soon after you receive the news of your cancer diagnosis at the age of 40, you receive a lump sum of $50,000 from your policy, used to cover your expenses during the 6-months of treatment.
As you reach the age of 65, your retirement income reaches $1,290,000, very close to its original projected amount of $1,300,000.
By having a critical illness insurance policy, you retire comfortably at 65 without having any financial delays due to your critical illness.
Conclusion
Critical illness insurance is often overlooked, but given the financial support it provides in times of need, it's a crucial consideration for anyone planning their financial future. If you're considering insurance, make sure you prioritize critical illness insurance.
To learn more about how critical illness insurance can protect you and your family, book a call with us today. Secure your future and enjoy peace of mind knowing you're covered.
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