Why We Haven’t Purchased A Critical Illness Policy

Critical illness insurance is a unique type of insurance that will provide a lump-sum payment in the event of a critical illness. What is unique about critical illness insurance versus other types of insurance is that it is VERY specific about what is covered.

Unlike disability insurance, or life insurance, a critical illness policy has some very specific criteria that need to be met before benefits are paid out. While many people may feel that their illness is critical, a critical illness policy doesn’t actually cover many common illnesses but only specific “critical” illnesses.

The idea behind critical illness is good. It can provide financial support during a difficult period of time. A time that may see a decrease in income or an increase in expenses. It helps provide financial support during an unexpected and potentially life changing period.

But despite the benefits we’ve personally decided not to purchase a critical illness policy. We made this decision for a number of different reasons, which I’ll touch on at the end of the post, but first let’s review what a critical illness policy is and what it covers.

Warning: This is not insurance advice. These are my own opinions about critical illness insurance and shouldn’t be considered insurance advice. If you’re unsure if critical illness insurance may benefit you then you should speak with an independent insurance advisor.

What Is A Critical Illness Policy?

Critical illness insurance provides financial help when the policyholder is diagnosed with a critical illness. The most common forms of critical illness are cancer, heart attack and stroke.

Critical illness insurance is different from life insurance or disability insurance. Critical illness insurance is pretty simple at first glance, it provides a lump-sum payment (after the waiting period) when the policyholder is diagnosed with a critical illness.

The lump-sum amount can be spent freely. So it could be used for medical expenses, but it could also be used for income replacement, mortgage payments, monthly bills, or perhaps a once in a lifetime trip to Disney Land. With critical illness insurance the way you spend the lump-sum doesn’t matter.

There may also be extra expenses a policyholder may wish to cover with a critical illness policy. For example, a family with young children may need to plan for additional child care expenses if faced with a critical illness. Or there may be a desire to seek out additional medical treatment not typically covered by a local hospital. These extra expenses can help inform the size of the policy that is required.

What Illnesses Are Covered?

Most critical illness policies are very similar in both the scope and the definitions they use. Typical policies will cover 25 or 26 critical illnesses. They also have similar definitions for those illnesses as well.

Many insurance companies list the illnesses that they cover with a critical illness policy on their website, but in my opinion, reading them will likely take a medical degree. Take this example from an insurance website in the Cancer section…

Exclusion

No benefit will be payable for the following:

• lesions described as benign, pre malignant, uncertain, borderline, non invasive, carcinoma in situ (Tis), or tumours classified as Ta
• malignant melanoma skin cancer that is less than or equal to 1.0 mm in thickness, unless it is ulcerated or is accompanied by lymph node or distant metastasis
• any non melanoma skin cancer, without lymph node or distant metastasis
• prostate cancer classified as T1a or T1b, without lymph node or distant metastasis
• papillary thyroid cancer or follicular thyroid cancer, or both, that is less than or equal to 2.0 cm in greatest diameter and classified as T1, without lymph node or distant metastasis
• chronic lymphocytic leukemia classified less than Rai stage 1, or
• malignant gastrointestinal stromal tumours (GIST) and malignant carcinoid tumours, classified less than AJCC Stage 2.

This type of medical/legalese makes purchasing a critical illness policy a daunting experience. The coverage you’re purchasing may not actually cover the types of illnesses you think.

Why We Haven’t Purchased A Critical Illness Policy

We’ve decided not to purchase a critical illness policy. There are a few reasons for this decision…

1. We have an adequate 6+ month emergency fund
2. We have access to additional investments inside our TFSA
3. We no longer have a mortgage
4. We’re able to minimize our expenses if necessary

In addition to those more practical reasons there are also some less practical reasons we have decided not to purchase a critical illness policy and one of those reasons is that the criteria for a “critical” illness are not very straight forward.

Call me a skeptic but added complexity can sometimes be used to hide unfavorable terms.

When it comes to a critical illness policy, the types of illnesses that are covered are very specific and filled with medical definitions. To the layperson its unclear what illness is covered and what illness is not.

Even if we were to get cancer, which I would certainly feel is critical, the critical illness policy may not pay out…

From an insurance website:

Cancer is a general term used to describe a wide variety of growths, some less serious than others, including those that are not critical. The less-serious and those not critical are excluded from the list of covered illnesses.

So “critical” is covered by a critical illness policy, but “serious” is not.

As a result of this very specific coverage, this type of insurance provides less value in my opinion, and as a result we decided not to purchase a critical illness policy.

What is your opinion? Is critical illness insurance attractive to you? Do you currently have a critical illness policy?

Personally, we’re not sold.