I met Nora Dunn while I was living in Toronto, before she sold her successful financial planning business, along with most of her belongings, to become a full-time traveler and freelance writer. As The Professional Hobo, she has been on the road since 2007. She travels in a financially sustainable manner, specializing in creative travel strategies like getting free accommodation and flying in business class for less than economy prices; all the while earning income with her location-independent career. Today I’d like to share an article Nora wrote last summer for CareOne on Critical Illness Insurance, and how it fits as part of your investment portfolio.
Insurance is rarely something we want to think about, but it’s also something we need the most when it’s too late. Here is a basic overview of critical illness insurance, how it can save your finances (more than other kinds of insurance), and how you can get your money back if you don’t make a claim.
CRITICAL ILLNESS INSURANCE BASICS
Critical Illness pays a lump sum tax-free pile of money if you are diagnosed with an illness (or have an accident) that is on a predetermined list. Depending on the policy you choose, there can be a lengthy list of illnesses, but the main ones (that garner the most claims, and are covered under most policies) are heart attack, stroke, and cancer.
You can use the money however you want, from paying for medical expenses and assistance, to covering off living expenses while taking time off work, and more. Once you make a claim, the money is yours, carte blanche. The money is generally payable 30 days after diagnosis. Depending on the doctors’ reports required, it may take longer.
In addition to heart attack, stroke, and cancer, the following illnesses and injuries may be covered under your critical illness insurance policy:
- Aortic Surgery
- Coronary artery bypass surgery
- Kidney failure
- Loss of limbs
- Loss of speech
- Major organ failure/transplant
- Multiple Sclerosis
- Severe burns
Your Chances of Making a Claim
We have a greater chance of being diagnosed with a heart attack, stroke, or cancer (and surviving), than we do of dying before the age of 75. These three biggies account for 85% of critical illness insurance claims. And surviving them can cost a lot.
CRITICAL ILLNESS VS DISABILITY INSURANCE
Critical Illness insurance pays out a lump sum on the diagnosis of a specific illness or condition. Disability insurance is an income-replacement tool if you’re unable to work for any reason. The two can be complementary.
For example, Bob suffers a heart attack and requires heart surgery. He is back at work three months later. Bob’s disability insurance policy has a waiting period of 90 days and thus doesn’t start paying out until he has been off for more than three months. In this case he’s back at work so is not entitled to disability income, but has amassed medical expenses during the initial emergency care and in scheduling prompt surgery, his wife took an unpaid leave of absence from work to care for Bob, and their living expenses weren’t covered while he was off work. Critical illness can provide the money Bob needs to keep the mortgage paid and pay his extra medical expenses.
When to Get Critical Illness Instead of Disability Insurance
Critical Illness insurance shouldn’t be considered an alternative to Disability Insurance; they address different needs. But there are a few instances when Critical Illness insurance might be a viable alternative to a full disability insurance policy:
- If you can’t get disability insurance (for example if you don’t qualify by virtue of your career).
- If you have a long-term disability insurance plan through work, but which has a long waiting period (as in the above example) or other conditions that might affect payment (since your group disability insurance plan through work might not be very good).
CRITICAL ILLNESS INSURANCE VS AD&D
Accidental Death & Dismemberment (AD&D) is another kind of insurance that pays a lump sum based on a variety of conditions. Here are the main differences:
- AD&D also pays out if you die (but only from certain causes).
- AD&D has a restrictive list of conditions under which it pays out (such as losing your left arm and your right leg).
- AD&D is inexpensive – because it so rarely pays out. Critical illness insurance is considerably more comprehensive.
GETTING YOUR MONEY BACK FROM CRITICAL ILLNESS INSURANCE
Some critical illness insurance policies offer a premium refund rider that costs extra, but also entitles you to some or all of your money back if you don’t make a claim. For example, when I turn 65, my policy will refund everything I’ve paid in premiums if I haven’t made a claim. This makes critical illness insurance even more attractive, since it reduces financial risk, and the income that could be generated if I invested those extra premiums is minimal in comparison to the payout if I make a claim.
Photo credit: “Pandemic” by Erik Hungerbuhler on Flickr