Understanding Critical Illness Insurance
Return of Premium (ROP) Rider
With many policies you have available a return of premium benefit rider. For an additional cost, at a certain point you can cancel your policy and receive a full refund of premiums paid. Or, if I was selling this stuff to you, what I would say is “If you get cancer, you get your $100,000 benefit. If you don’t get cancer, you get all your premiums back!’. It’s a total no-lose proposition. There’s two ROP benefits – at maturity or at death. We’re going to focus on ROP at maturity in this section.
Except…...You should skip the return of premium rider.
The fundamental reason you should pass on paying for this rider is that it’s a complete sales tactic and has nothing to do with insurance. To keep your coverage maximized and your premiums minimized it’s important to stick to basic principles and there’s nothing about the ROP rider that has do with insurance coverage.
The hidden budget killer – renewals
ROP is nowhere near as easy as ‘quit and get all your premiums back’. There are conditions and time frames to get your all of your premiums back. There are partial returns after some years, but most people are expecting ‘all their money back’ given the name of the benefit and the way this is typically marketed. So lets look at a sample case to see where things go wrong.
We’ll take a male age 45 purchasing a term 20 critical illness for $100,000 of coverage. The expectation is that they would keep the insurance for 20 years – to age 65, and then cancel.
Premiums are $1049 for the base plan coverage. The cost of the ROP benefit is an additional $799/year. We’ve almost doubled the cost of the insurance doing this, for a benefit that has nothing to do with insurance.
The tendency would be to think that paying the $1049+$799=1848 would let you cancel in 20 years and you’d get back a cheque for 20X$1848. This is incorrect. If this person cancelled in 20 years, you would only receive back a fraction of the total premiums.
That’s because this is not ‘Return of Premium when you cancel’. The benefit is properly called Return of Premium at Maturity. And the maturity of this sample policy is age 75. In other words you have to keep the policy not to age 65 (20 years) but age 75 (30 years). And recall that this is a term policy, and premiums go up at the end of the term. If you want to get all your money back, you’re going to have to keep this policy and pay those much higher premiums at renewal – years 20-30.
Here’s the premiums, for 20 years and then cancelling, for a base 20 year policy without ROP benefit:
Ages 45-65: $1049.
Now, here’s what the premiums look in order to add ROP at maturity and actually get all your premiums refunded:
Ages 45-64: $1848
Ages 65-74: $8856
I suppose we could run a comparison as to what that rate of return is, but I suggest that it’s irrelevant. The deal breaker here is that to get your ROP benefit, you’re almost doubling your premiums in the first 20 years, and then you’ve got to pay almost $9000/year for the next 10 years. It’s nowhere near as inexpensive as it’s perceived to be on first glance. I suggest you take a pass, and stick to insurance for insurance purposes.
Summary
You should now have enough information to start an informed review of critical illness coverage, and to evaluate any policy that is offered. Here’s the summary:
- Get coverage at least equal to the total of your annual income and your spouse’s annual income.
- Get a full coverage policy.
- Choose a policy length as long as you expect to need the coverage.
- Compare early intervention benefit conditions and coverage amounts.
- Skip the Return of Premiums rider.