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LICENSE TO ILL
Milan Topolovec - special to The Step Journal, September, 2006
Milan Topolovec looks at the importance of critical illness coverage in Canada
There are a number of life insurance products on the market, but disability and critical illness are the two least-used. After all, most people have life insurance, but how many have proper disability and critical illness insurance? In this article the focus will be on individual income replacement insurance, as well as critical illness coverage.
Canadians can, generally feel that they will be protected if they are stricken by an illness. The feelings seem to be that there are suffi cient other sources of income: government, savings, spousal income or cash obtained from sale of assets.
There are a number of sources of disability coverage that can be accessed: group, personal, association and corporate paid executive plans.
One thing is absolutely certain when it comes to disability protection: you pay for what you get, because insurance companies design programs to refl ect premiums paid. Group long-term disability and association plans are limited and often exhibit reverse discrimination against professional as well as executive clients.
The most comprehensive coverage is obtained through an individual guaranteed renewable plan. These policies can be obtained on an individual or corporate paid basis.
FEATURES OF A GUARANTEED RENEWABLE PLAN
Duration of coverage – You should look at a contract that provides a disability payout until age 65 or possibly lifetime.
Guaranteed plan – Premium and contractual guarantees are a must in any well designed program and guaranteed plans have these features.
Definition of disability – ‘Own occupation’ is the most desirable contract defi nition, because at the time of claim, this is the fi rst clause that will be looked at to determine if the insured satisfi es the defi nition of covered disability. With this clause a corporate tax lawyer will not be forced to work as a court clerk. A typical defi nition would read: ‘The insured is unable to perform the substantial and material duties of his/her job’ and ‘he or she is under the regular care of a physician.’
Should the individual be able to work in another job, disability income and income from the job would be paid for in full.
Waiting period – This is also known as the qualifi cation period and ranges from 30 to 720 days. The insured receives their claim cheque 30 days after their waiting period is satisfi ed. There are contracts that will allow the insured to satisfy waiting period over a 12-month period. The waiting days can be satisfi ed from partial, residual or total disability.
Partial disability – This feature enables the insured to collect income based on the percentage of time he or she is not able to work. For example: Half the monthly benefi t is payable if the insured is able to work half of the hours on their regular job.
Residual disability – This provision will have a direct impact on the percentage of income lost due to a disability. Take an example of an accountant that becomes a diabetic and is able to put in an eighthour day. Through this eight-hour day, the accountant is fatigued and is not able to complete the work that he once did, which reduces his billables. With residual coverage, if they have more than a 20 per cent loss, then there will be a disability payout by the insurer.
Recurrent disability – Most contracts state that if, within 12 months of returning to work, the insured is disabled from the same or related condition, there is no need to satisfy the elimination period again. The monthly payout would be paid out as if it was a continuation of the old claim.
These are some of the major provisions of a contract that one should be certain exist when obtaining disability coverage.
Insurance companies are not well-known for their philanthropy so if you are paying a lower premium, read your contractual obligations. Here is an example of a clause that is present in most of the association plans:
‘Accidental injury has to be independent of all other causes.’
CRITICAL READING
Let’s use an example of an individual having a heart attack while driving and receiving a broken back from losing control of a car that runs into a building. With the stated provision, there is coverage for the heart attack but not the broken back.
The time it takes to read the contractual obligations of the coverage you are insured under could be the best 10 minutes you ever spent.
There are only a small number of disability insurers that we consider to offer exceptional coverage to professionals as well as executive clients. Some of these are Great West Life, Manulife and Canada Life etc.
Disability contracts can be customised to meet your individual needs. Here are some of the areas to look at:
step-rated premiums group offset group top-up return of premium cost of living future income option retirement protector salary continuation plan
Seek the services of a professional insurance adviser that specialises in risk management and has not only sold policies, but assisted clients at the time of claim. Ask the adviser for references of people who have used their services.
It is important to know why critical illness insurance was created. Due to improved medical treatments and medications, people are now living longer than ever before, but are doing so with disabilities.
The unique value of a critical illness policy is that it pays a lump sum benefi t upon the insured being diagnosed with a certain condition and surviving for 30 days.
The maximum amount of coverage that an individual can buy is $2,000,000. Insurers will issue a personal policy that will be a multiple of the insured’s annual income.
Underwriting is more strict than that of a life or disability policy. The applicant’s family history plays an important role when the underwriter is deciding whether to issue a policy standard, rate a policy, exclude a condition or decline outright to offer coverage.
Generally we take applications from two insurers and this enables us to obtain better results for our clients. Our clients have been declined by one insurer while in the same process offered coverage from another.
The challenge exists in the fact that critical illness contracts are not uniform and definitions of critical illness differ from one insurer to the next.
All contracts in Canada have a 90-day moratorium on cancer. The cancer coverage will begin 90 days from when a policy is issued.
Critical illness contracts come in different forms and premiums will refl ect the type of contract you obtain. Here are some of the plans: 10-year term, 20-year term, term to 75 and term to 100. These contracts can be customised to have a return of premium on death if the insured has not had a claim. Further options are those that provide a payout to the insured if they surrender a contract before claim at pre-determined years.
WHY CHOOSE CRITICAL ILLNESS COVER?
You may be wondering where most of the claims are paid out under the Critical Illness contract.
There are a number of good reasons one should obtain critical illness coverage, we will examine some of them.
The Canadian health system is overloaded and, with natural ageing it will only get worse over time. Current waiting period to see a specialist in one Province is 26 weeks, and that is just not acceptable. Critical illness provides you with tax-free cash to obtain treatment anywhere in the world and in some cases within a few days.
Many new medications are not covered by our group or government plans due to costs. Herceptin, the breast cancer drug, cuts the chances of recurrence in half and could cost from $35,000 to $40,000 per year. Critical illness insurance can provide you with necessary funds to be able to afford the type of treatment you want.
Both spouses should have critical illness coverage, because even with one critical illness lives are affected. Think of a situation where one spouse is working inside the home and they get a critical illness. The working spouse’s life is affected and the ability to earn an income may also be negatively impacted.
Corporations can use critical illness to protect their future if a key employee becomes critically ill. We have seen term sheets that have demanded that key people have critical illness coverage for the benefi t of the firm.
A partnership as a shareholder agreement can be funded with a critical illness program. The tax treatment is not the same as the creation of a capital dividend account as is the case with life insurance, but it still has huge merit.
Many professionals and executives are working now beyond age 65, and at times making more income than ever before in their lives. Critical illness insurance protects their fi nancial well-being that would be impacted by an illness.
I believe that critical illness is the best product to come around in my 25 years of being a risk management specialist. The critical illness policy should not replace a well designed disability policy but it should add to the level of protection.
Disability insurance and critical illness insurance are unique products that need to be examined carefully and acquired whenever possible. Both of these products serve different needs and they can be customised to create a security net for each client.
There are many professional advisers that are able to guide you through various disability and critical illness coverages. Work with an independent adviser who is able and does represent a number of insurers.
In Canada, we are able to offer exceptional products with guarantees built in that are not available in other parts of the world.
Milan Topolovec TEP is a STEP member in Ottawa and the president and CEO of of TK Group |
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