Critical Illness – A Disappearing Opportunity?
A sobering fact that many Canadians are all too familiar with:
Nearly 1 in 2 Canadians will be diagnosed with cancer in their lifetime.
This very frightening statistic is also something that the majority of Canadians are unprepared for. All too often, we tell ourselves that it won’t happen to us. Or, we assume that our health care system will simply take care of us. Regrettably, most of us do not think of or calculate the additional costs associated with such an event. Time away from work, trips to the specialist, or hospital for treatment (many times not available in our home town), hotels, gas, and medicine not covered under our health care plans can quickly add up to staggering amounts.
Fortunately, we as Canadians have a solution available to us, and it’s better than most of us realize. Not only can we apply for Critical Illness coverage that will pay us a 100% tax-free lump sum if we get diagnosed with life-threatening cancer, but it may also cover up to 25 other covered afflictions such as Heart attack, Stroke, Parkinson’s, Alzheimer’s, etc. Canada also happens to be the only country in the world where it is possible to get 100% of the policy premiums back if there are no claims against the policy (after a minimum of 15 years of paid premiums). In addition to the above, Canadian insurers are also the only ones who offer guaranteed, non-cancellable coverage. This simply means that once you are approved and a policy is in place, your premiums can never change (assuming a permanent policy was purchased). Additionally, the contract and coverage cannot be cancelled or altered (as long as it is paid for). Due to the risk and possibility of a large number of claims, no other country in the world offers this type of guaranteed Critical Illness coverage.
The Critical Illness coverage that Canadians have come to enjoy may be nearing the end of its life span. Two major changes in the industry are putting a great amount of pressure on Critical Illness underwriting risk. The first risk is the Life Insurance Capital Adequacy Test (LICAT). This new guideline requires the insurance industry to keep significantly more capital (money) in reserve. As a result, and quoted by the Office of the Superintendent of Financial Institutions Canada (OSFI),
“… the new framework may require individual institutions to evaluate their overall plan based on the business lines in which they are engaged, the risks they choose to take on and how these are managed.”
Most companies that are required to keep more capital on reserve will feel the effect on the bottom line. They, in turn, will generally pass the added cost on to the consumer and/or change or eliminate certain products.
The second major change is the passing of parliamentary Bill S-201 – “An act to prohibit and prevent genetic discrimination”. On the surface, this appears to most as a very forward-thinking and progressive bill. Unfortunately, even the best intentions have unintended consequences. Before the bill passed, any applicant applying for certain types and amounts of insurance were required to disclose their medical history; including if they had undergone any genetic testing. The insurance company would then assess the client and make a decision based on all of the available information. Under the new law, the insurance companies can no longer ask about an applicant’s genetic test results. As a result, applicants may now actively seek out genetic testing and apply for insurance based on those results while the insurance company will not be legally entitled to the information needed to make a risk-adjusted decision. Additionally, the insurance companies now have to take this additional risk into consideration as their claims and costs will most likely rise as a result. As we all know, when costs for a business rise, they are generally passed onto the consumer.
Due to the increased amount of expected claims and the newly enacted government changes, it is anticipated that the cost of coverage may increase substantially in the coming years and/or we may have to revert to coverage that mirrors what the rest of the world is offering – premiums that can increase as claims increase and/or contracts that can be changed or cancelled.
I am a huge proponent of Critical Illness coverage and Shared Ownership Critical Illness Coverage. It is a no brainer in my opinion. Also, as a business owner, there are some very interesting tax-advantaged strategies that can be created using Critical Illness coverage. I encourage all Canadians, at the very least, to take a long hard look at the Critical Illness options available to them while they still exist.
David LeNeveu, CIM, CEA
Founding Partner – Rockwood Wealth Management
The above is a simplified summary of the described concept. For complete tax rules, financial planning, risks and practices, please consult the appropriate tax, legal, accounting and lending specialists.
Please refer to a complete and individualized policy illustration for client specific details, risks and possible alternate scenarios. Not everyone will medically and/or financially qualify for the above-described concept.