critical illness insurance can save your life

Nicola Walter’s 27-year-old friend was in the prime of her life. She had just got married and headed off on her honeymoon when disaster struck. She discovered she had breast cancer and cut her honeymoon short to come home for treatment.

Now on the mend, Walter’s friend was lucky in one important sense because she had critical illness insurance that provided her with money to cover her daily living and health-care costs.

“That was a pretty big wake-up call for me because you don’t think it can happen to you and then you hear about things like that,” says Walter, a 28-year-old realtor with ReMax Crest Realty (Westside) in Vancouver.

“It definitely affected me.”

Her financial planner had been encouraging her for months to look into insurance for this kind of unforeseen event. Her friend’s experience cinched it for her and she bought insurance a few weeks ago.

“If you don’t have insurance like this, ultimately you’re getting someone else to foot the bill for you because somebody’s going to have to carry you if something goes wrong,” says Walter.

“I couldn’t put my parents or sister or boyfriend in that position.”

Walter is fortunate because she’s young and still has lots of time to save for future health-care costs and her retirement. Insurance is now a long-term piece of her retirement plan. But for a lot of people nearing retirement who suddenly face a health crisis, it may be too late.

A Royal Bank of Canada survey showed one in four Canadians stop working early for health reasons and many of them find themselves tapping into their RRSPs for emergency funds, much to their detriment.

“Tapping into (RRSPs) for any purpose other than retirement is typically dangerous to your overall financial plan,” says Heather Clarke, vice-president of insurance services for Investors Group in Winnipeg.

There are four basic types of insurance to protect against unexpected illness or disability or even death.

Critical illness insurance pays out a lump sum of money in the event you contract one of the listed illnesses, allowing you to pay for health-care costs and daily living expenses. Most products have an option to purchase a “return of premium rider,” meaning you can get premiums back if you never become ill.

“It makes it more attractive to people who think it will never happen to them,” says Clarke.

Disability insurance replaces employment or self-employment income if you become disabled for a period of time and it’s often included with employer-sponsored group benefit programs.

“Often, it’s not nearly enough to accommodate not only their living expenses, but more medical bills above what your daily living expenses are,” says Brett Strano, a financial adviser with Edward Jones in Mississauga, Ont.

He says you should sit down with a financial adviser to determine what level of coverage you have at work and consider additional coverage. The rule of thumb is to have six to nine months of living expenses in emergency funds, such as in the money market or a savings account.

Long-term care insurance is another option that provides a lump-sum payment or income stream if you require long-term care, which may include home care services instead of placement in an institution.

“Our advisers find the gaps with self-employed people because they haven’t considered it or they think they won’t qualify,” says Clarke.

Insurance products are evolving to meet the needs of people by evolving into other products. Disability and critical illness insurance, for example, can morph into long-term care insurance with some plans.

“These products are evolving to meet the needs of people to get the maximum coverage with the minimum premium dollar,” Clarke says.

The whole point is to avoid relying on your RRSP in the event of an emergency, which could derail your retirement plans. A spouse or partner might also have to delay their own retirement to pay for your health costs.

Another savings vehicle could be a tax-free savings account (TFSA), which provides a tax shelter and allows you to withdraw money in the short term or long term without tax penalties.

Lee Anne Davies, head of retirement strategies for RBC in Toronto, says a recent poll found 36 per cent of people with a TFSA are using it for emergency savings.

“TFSAs have so much flexibility in the fact that you’re still tax-sheltering the growth of that money, but you don’t have the tax impact if you withdraw the money,” says Davies. If you don’t put mechanisms in place now to avoid future potential shocks to your retirement plans, you could end up in difficulty — at any age.

“These uncertainties in life can crop up at any point in time,” says Davies.

Calgary Herald
Thu Feb 4 2010
Page: R3
Section: RRSP Guide 1
Byline: Derek Sankey
Source: For Canwest News Service