April 28, 2021
I also cover this subject in a YouTube video. Click here to watch!
Do you think you know everything you need to know about Critical Illness Insurance? Well, by the end of this blog, I’ll give you all the facts so you can make an informed decision before you implement this strategy into your financial plan.
Did you know that Critical Illness insurance was developed by a Medical Doctor in South Africa more than 30 years ago? Think about this: 30 years ago if you were diagnosed with cancer, heart attack, or a stroke, 80% of the time you would die and 20% of the time you would live. Fast forward to today and the numbers have flipped….80% live and only 20% pass away. However, if you haven’t protected yourself and put the necessary “bumper guards” in place, even though you might survive cancer, you could face financial ruin. That is why a doctor by the name of Dr. Marius Barnard invented Critical Illness Insurance.
In Canada, only 5% of Canadians have Critical Illness coverage. But 85% of Canadians worry about getting a Critical Illness, and 58% of Canadians have admitted they would be in financial trouble if they were diagnosed with one.
Most people believe that if they get cancer, their Disability Insurance coverage would kick in. Wrong!
Cancer, heart attack, stroke…these are all Critical Illnesses, not disabilities – and so your disability policy will not kick in. There are at least 25 conditions covered under a Critical Illness policy and if you design the policy correctly, you can also include coverage for “Loss of Independent Existence,” which means if you can’t do two out of the six daily activities of living, then the Critical Illness policy will also cover you. In order to qualify for the payout, you must be diagnosed with a Critical Illness and you must live for at least 31 days after the diagnosis.
When we design CI policies for our clients, we design what I call a “guaranteed policy.” What this means is that you are either going to get a CI and the policy will pay out, or if you do not get a CI, then you can have 100% of your money back. This feature is called the “ROP” (Return of Premium) and Canada is one of the last countries in the world still offering a ROP feature.
If you are an incorporated business owner, there are additional strategies on the table for you. One option is just to purchase the CI policy and have it corporately owned – and if you get a covered Critical Illness, then the benefit would be paid into your corporation and you could dividend the money out to yourself to pay for any medical treatments. This is a very cost-effective approach, because you would be using corporate dollars taxed at the small business rate of 12.5% versus your own personal average tax rate of say, 35% to 40%.
The 2nd option on the table is kind of cool: it is called a “split dollar” CI policy. This means that a portion of the premium is paid for with corporate dollars and a portion of the premium is paid for with personal dollars. However, once you qualify and you have decided to cancel the policy and ask for 100% of your money back, you would get both the corporately paid portion as well as the personal paid portion, 100% tax free. So, this is a great strategy for getting money out of the corporation tax-free and at the same time, protecting you and your family in case you are diagnosed with a CI.
How do you determine how much coverage you need to put into place? For most men who contract a CI, their recovery period is around 12 to 18 months. For most females, the recovery period is around 18 months. So you need to take a look at what your “net” annual paycheque is after taxes and then multiply it by 1.5. For example, if your next annual income is $200,000 per year, you will need at least $300K of Critical Illness insurance coverage.
An estimated 50% of Canadians will develop cancer in their lifetime. That’s one in every two Canadians. Most people know at least two or three people who have been diagnosed with cancer and survived. An estimated 25% of Canadians will experience coronary artery disease, heart attack, or stroke – so the message here is this: get the coverage in place while you can still qualify.
Want to learn more about Critical Illness Insurance? Already decided that you need to get the coverage in place? Contact me at the coordinates below to apply to become my client.
Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.
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