Understanding Critical Illness Insurance
TYPES OF CRITICAL ILLNESS
There’s two ways to differentiate critical illness insurance polices; by duration (length of coverage) and by conditions covered. We’ll look at both separately.
Types of Critical Illness – By Duration
Most companies that offer critical illness have plans that are similar in terms of covered conditions but differ in how you pay premiums over time. Premiums increase over time in ‘steps’ or terms, where the steps are a specified number of years. The four most common durations are:
- Term 10 Critical Illness – premiums increase every 10 years until policy expiry (often at age 65 or 75).
- Term 20 Critical Illness – premiums increase every 20 years until policy expiry.
- Term 75 Critical Illness – premiums are level to age 75, at which point the policy expires.
- Term 100 Critical Illness – premiums are level for life.
You should choose a plan that fits how long you need the coverage for. If you’re 45 and expect to keep the coverage until retirement, then a Term 20 would be the most appropriate policy. It’ll have premiums level for 20 years, then when the premiums increase you simply cancel the policy. This will provide the least expensive coverage over exactly 20 years.
Choosing your duration
So how do you choose your duration? Unfortunately there’s no pat answer. Expenses and costs associated with a critical illness plan do not necessarily go away as we get older (other than loss of income, which wouldn’t happen after retirement). Therefore you should seek coverage at a minimum until retirement age, and perhaps longer.
At retirement, while your need to insure your income drops off (since you’re not earning an active income anymore to insure), you may still have associated costs in the event of a critical illness. Further, the chances of developing a covered condition increase as we get older. Should we get coverage past retirement? As I mentioned, there’s no pat answer. You should look at the incremental cost to go from a Term 10 or Term 20 up to a Term 75 or Term 100, then compare the costs to your preference of having the coverage when you’re older. Make your decision based on balancing the increased costs with your desire for coverage past retirement.
A note on cutting upfront costs with duration (Renewals)
Term 10 and Term 20 premiums have premiums that increase at the end of the term (i.e at the end of 10 or 20 years). Premiums increase, and coverage continues level for the next duration. This continues until policy expiry, which for many policies is at age 74.
When you get quotes, typically you’ll only see the first 10 or 20 years of premiums. The second duration, called the ‘renewal’, aren’t something you may be quoted immediately. But what if you want to take a cheaper term 10 and renew it for the second 10 years (giving you 20 years of coverage) instead of taking a level term 20? What do the premiums at renewal in 10 years look like?
It turns out that the renewals at the end of a term will match closely to what the premiums would be for someone who just purchased a new policy. If you purchase a term 10, premiums increase in year 11, but they would be very close to what someone would pay if they purchased a new policy and passed a medical exam. (Important; this is different than life insurance. With life insurance you should never plan on carrying a term plan past renewal as premiums increase exorbitantly at that point). So you get the premiums as if you bought a new term 10 policy every 10 years, but without actually taking a medical exam.
That means that if you want to decrease initial premiums, it’s a viable strategy to take a shorter term and simply keep renewing it. In this fashion, a term 10 will be cheaper than a term 20 for the first 10 years, then more expensive in the next 10 years. Over the total 20 years we would expect the 10 year term to cost somewhat more than a term 20, but not drastically so.
Therefore you should select a term that closely matches your need, but if you want cheaper upfront premiums at the cost of higher premiums later then a shorter term i.e. term 10 is a viable choice.
Types of Critical Illness – What’s Covered
The second natural division of policies is by covered conditions.
The largest general distinction we can make here is whether the policy provides full coverage or limited coverage.
Limited coverage plans generally cover only three conditions – cancer, heart attack, and stroke.
Full coverage policies will cover all 24 conditions listed in the covered conditions section. In addition, one or two companies (Sun Life and Desjardins to name two) also tack on Acquired Brain Injury and Bacterial Meningitis.
You should always choose a full coverage policy if you are able to qualify. Limited coverage plans are sold based on ease of application, take the time to go through a full application to ensure you’re getting the best coverage.
Whether you want a policy that also has Acquired Brain Injury and Bacterial Meningitis is a matter of preference. There’s no viable way to determine whether you should care if you have coverage for these two conditions, or if so, whether they’re worth the additional cost. Decide if you care, if you do, find a policy from a company that offers these conditions. Otherwise, most other companies’ policies will provide virtually identical coverage.