Critical Illness Insurance – What Do You Know About?

I. What is Critical Illness Insurance?
Recommended Reading
Long Term Care Insurance Consumer Buying Guide.
Annuities: The Shocking Secrets Revealed.

Critical illness insurance is a type of insurance which will pay a lump tax free benefit to the insured if he is diagnosis of one of the critical illnesses covered by the policy. The benefit is intended to help insured persons maintain their quality of life and financial independence after suffering a life-threatening illness.

Be sure to understand that critical illness insurance is not
1. based on the inability to work or the death of the insured.
2. needed to be a specific expense that is incurred to qualify for the benefit.

It is designed to pay a lump sum benefit when a person is diagnosed with a covered condition and subject to a waiting period.
This type of insurance creates a great deal of financial flexibility for insured who suffers a major illness.
Critical illness insurance can fill the gap left by more traditional forms of insurance, such as
1. Life Insurance is designed to provide financial assistance to surviving family members after the death of the insured. Payment of the benefit is made as a lump sum.
2. Disability Insurance is designed to replace income loss that results from a disability arising out of an accident or sickness.
(a) It pays a percentage of the insured's income.
(b) It pays after a waiting period.
(c) It pays for a defined benefit period. Not everyone qualifies for this type of coverage.

3. Medical Insurance is designed to reimburse specific medical expenses incurred by the insured. Medical Insurance usually contains both
(a) Deductibles and
(b) A co-insurance requirement. The effect of these factors is that insured are required to pay part of these expenses.
Now you can see that critical illness insurance is a need for insurance that paid a living benefit to the insured who survived a major illness to off set the lost of income and pay additional expenses.

II. The Coverage of Critical Illness Insurance
As we mentioned in previous article, critical illness insurance is a type of insurance which will pay a lump tax free benefit to the insured if he is diagnosis of one of the critical illnesses covered by the policy. The benefit is intended to help insured persons maintain their quality of life and financial independence after suffering a life-threatening illness.

Critical illness insurance covers over 10 impairments including the following
1. Heart disease,
2.Coronary artery bypass graft.
3. Cancer
4.Renal or kidney failure
5.Multiple sclerosis
6.Major organ transplant
7.Blindness
8.Deafness
9.Alzheimer's disease
10.Paralysis
11.Parkinson's disease
12. Occupational HIV Injury

We will try to discuss the précised definitions of above conditions in the next article, but in this article we will try to focus on the waiting period and policy exception.

a) Waiting period or elimination period
In order to qualify for the benefit, the insured must survive the diagnosis of the illness for 30 days. If the insured dies within 30 days of the diagnosis, the beneficiary is entitled only to a refund of the premiums paid.

b) Exceptions to the waiting period
i) If the insured is diagnosed with cancer within 90 days of the when the policy was issued the claim will be denied. Many insurers will terminate the insurance and refund the premium if cancer is diagnosed within this 90 day period. This reduces the chances of the insurer being selected against by insured who may have reason to suspect the onset of cancer.

c) Pre-conditions are not covered in the policy, unless approved by insurance underwriter and included in the policy coverage’s.

ii) Many insurers also require either
* a 90-day
* a 180-day waiting period after the onset of paralysis before they will make a payment under the Critical Illness policy. Once a policy pays out a critical illness benefit, the policy is terminated.

III. Understand the Definitions of Critical Illness Insurance

As we mentioned in previous article, critical illness insurance is a type of insurance which will pay a lump tax free benefit to the insured if he is diagnosis of one of the critical illnesses covered by the policy. The benefit is intended to help insured persons maintain their quality of life and financial independence after suffering a life-threatening illness. In this article, we will give you the definitions of illness that are covered in the policy.
Precise medical wording is important for an objective claim assessment and consistency in pricing the product. Diagnosis often requires specialized tests interpreted by medical experts and the definitions of covered conditions are technical and exact.
The following interpretations of conditions may vary from the policies and insurance companies

1. Heart Attack
People who suffer a heart attack will sustain damage to the heart muscle. These causes
a) The changes in the electrocardiogram (ECG) and
b) The elevation of cardiac or heart enzymes.
The chance finding of ECG changes suggestive of a previous silent heart attack is not covered.

2. Coronary Artery Disease Requiring Surgery (Coronary Bypass)
The undergoing of heart surgery to correct narrowing or blockage of one or more coronary arteries with bypass grafts. This excludes any non-surgical treatment.

3. Cancer
A malignant tumor characterized by the uncontrolled growth and spread of malignant cells and the invasion of tissue. This includes leukemia and Hodgkin disease. Stage A prostate cancer will be covered only if the diagnosis is made before the policy anniversary nearest to the life insured's age of 75.
No benefit will be payable if
A diagnosis of any type of cancer is made within 90 days of the effective date of coverage or the date of the latest reinstatement; or any symptoms of medical problems commence within 90 days of the effective date of the coverage or the date of the latest reinstatement that initiate any investigations that lead to a diagnosis of any type of cancer.

4. Stroke
It covers all 3mechanisms that cause strokes, including:
a) Thrombosis caused by a blockage by a clot that has built up on the wall of a brain artery;
b) Embolization caused by an embolus (usually a clot) that is swept into a brain artery causing blockage;
c) Hemorrhage - caused by the rupture of a blood vessel in or near the brain's surface. Any incident with symptoms lasting less than 24 hours is referred to as a transient ischemic attack and it does not qualify for coverage under this definition.
5. Kidney Failure
End stage renal disease, due to whatever cause or causes, with the life Insured undergoing regular peritoneal dialysis or hemodialysis or having had renal transplantation.

6. Multiple Sclerosis
Benign, chronic and acute forms of multiple sclerosis are covered under this definition. Multiple Sclerosis is an extremely difficult condition to diagnose and usually takes a number of tests to exclude other possibilities before it is confirmed. Neurological abnormalities in this context must be evidenced by the typical symptoms of demyelization with resultant impairment of the brain stem or spinal cord.

7. Major Organ Transplantation
The actual undergoing as a recipient of a transplant of a heart, lung, pancreas, kidney and bone marrow will be covered under policy/

8. Blindess
Permanent loss of sight in both eyes, as confirmed by an ophthalmologist registered with government. The benefit will be paid regardless the cause, disease or degeneration of the eye ball, the optic nerve or the nerve pathways connecting to the brain or the brain itself.

9. Deafness
Total, permanent and profound loss of hearing in both ears with an auditory threshold of more than 90 decibels and confirmed by an registered otolaryngologist.

10. Alzheimer's Disease
The diagnosis by a doctor (who is either a certified neurologist or a certified psychiatrist) that the Life Insured has Alzheimer's Disease, and supported by evident of a progressive degeneration of the disease. The Life Insured must exhibit the loss of intellectual capacity involving impairment of memory and judgment. The disease progresses to severe loss of memory and death usually within 10 years.

11. Paralysis
It is defined as a complete and permanent loss of use of two or more limbs for a continuous period of days following the precipitating event, during which time there has no sign of improvement.

12. Parkinson's disease

The disease is progressive, degenerative of the central nervous system and characterized by muscular rigidity, tremor and slow movements. This definition only covers idiopathic' Parkinson's Disease. "Idiopathic" means that the disease must have originated from an unknown cause Parkinson's disease originating from taking certain drugs or toxic chemicals, etc. will not be covered.
13. Occupational HIV Injury

The diagnosis of Human Immunodeficiency Virus (HIV) resulting from accidental injury during the course of insured's normal occupation, which exposed the insured to HIV contaminated blood or body fluids. Payment under this covered condition requires satisfaction of all of the following:
1. The accidental injury must be reported to the company within 14 days of its occurrence;
2. An HIV test must be taken within 14 days of the accidental injury and the result must be negative;
3. An HIV test must be taken between90 days and 180 days after the accidental injury and the result must be positive;
4. HIV tests must be performed by facilities approved by the Company;
5. All the accidental injury must have been reported, investigated and documented in accordance with workplace guidelines;
6. The accidental injury must have occurred while the life insured was working in Canada or the United States.

No payment will be made if:
1. The Life Insured has elected not to take any available licensed vaccine offering protection against HIV; or
2. A licensed cure for HIV infection has become available prior to the accidental injury; or
3. HIV infection has occurred as a result of non-accidental injury (including, but not limited to, sexual transmission or intravenous drug use)

IV. Types of Coverage of Critical Illness Insurance

Generally two types of critical illness insurance are available:
1. Basic coverage:
It is Covered a limited number of conditions such as cancer, heart attack and stroke.
2. Comprehensive coverage:
It is covered all of the conditions in the basic coverage, plus additional conditions. The actual number and types of conditions covered can differ between insurers.
Within these two plans, most companies offer 3 types of plans: 10 year renewable, level premium to age 75 and permanent plan.

1. 10 year Renewable Plan:
Rates are guaranteed in the policy but they do increase every 10 years until the policy ends, usually at age 65, 70 or 75. One common use is to provide cash to complete retirement plans should the insured become ill.

2. Level to Age 60, 65 or 70 or to age 75
Premium remain unchanged throughout the policy period. Clearly there is a greater likelihood of a covered illness occurring between age 65 and 75 so the longer-term policies will cost a little more. For levels premium to age 75, the premiums are reasonable in relation to the 10-year renewable plans, and significantly lower than the permanent plans. The premiums payable for lifetime coverage are significantly higher than for plans to age 75.

3. Permanent Plan
These policy covers the life time of the insured as the chances of an insured claim occurring are high, the premium will be higher. Also, some policies terminate coverage at age 100.
In order To qualify as a non-smoker, the insured must have abstained from the use of tobacco products for the 12 months preceding the application. When the insured has purchased a policy at smoker rates and subsequently stops smoking, most insurers will amend the policy to reflect the lower non-smoker rate after having received satisfactory evidence of the good health and insurability of the insured.

V. Option and Rider of Critical Illness Insurance

As we mentioned in previous article, critical illness insurance is a type of insurance which will pay a lump tax free benefit to the insured if he is diagnosis of one of the critical illnesses covered by the policy. The benefit is intended to help insured persons maintain their quality of life and financial independence after suffering a life-threatening illness. In this article, we will discuss the most common options and riders offered with critical illness insurance.
Some insurers may not offer all of these options and the coverage may differ somewhat from those discussed here.

1. Return of premium
Generally, this rider provides for a return of all premiums to the beneficiary when the insured dies.
There is often no additional charge for this rider. However, some insurers may charge a small additional premium.

2. Pay back of premium
This rider provides for a refund of all premiums at the end of the policy if there is no claim.
Many policies offer this option only where there is a level premium to age 65, 70 or 75. Other types of policy may require to pay an additional premium for this rider and it can usually only be purchased at the time of issue of the policy. Some insurers will pay a stipulated rate of interest on the premiums, in addition to the refund of premiums paid.

3. Children Rider
Some insurers offer coverage to children of the insured between the ages of 2 - 17. In some cases, insurers may offer coverage for children of the insured who will be born in the future, with coverage starting at birth.
The rider will pay a lump sum (usually $25,000) on the diagnosis of a critical illness for a child. Generally, there is a single premium charge which insures all children in the family.

VI. Understand Underwriting Requirement of Critical Illness Insurance

Usually, there is a pre-screening questionnaire that will be completed. This questionnaire contains a list of uninsurable medical conditions. The use of the pre-screening questionnaire helps eliminate applications from those who are sure to be rejected.

The application for critical illness insurance is similar to an application for life insurance however, there are more questions about the applicant's family medical history.

In situations where the applicant fails to meet all the underwriting guidelines the company may offer the insured the non-standard rate. In these cases the insurer may:

1. Add a surcharge to the regular rates to reflect the increased risk for that applicant.

2. Issue a policy which contains specific exclusions , such as pre conditions exclusion, certain illnesses or conditions can be excluded

3. Basic Plan coverage only to the applicant
When underwriting a critical illness policy, the insurer will review the following areas:

1. Family History
Hereditary factors have a strong influence on the applicant suffering certain diseases in resulting of disqualification of the applicant if one or more family members has been diagnosed or has died from a covered disease.

2. Personal Health
a) Previous instances of hypertension will be closely reviewed since there is a close relationship between hypertension and the suffering of a critical illness.
b) Height and weight
Underwriters have established guidelines as to which height and weight combination are acceptable for the issuance of the critical illness insurance policies.
c) physician's statement
d) Other reports, such as medical examinations, blood tests, urine test.
e) Occupation, avocations and driving habit because these can have an impact on the incidence of critical illness occurrences.
Ex: a professional driver may be more exposed to accidental dismemberment or paralysis than a person who drives only occasionally.

3. Financial Information
The amount of coverage available under critical illness insurance can be a million dollars or more. Therefore, the insurer must determine what amount of coverage is reasonable. Many insurers will normally allow coverage up to 5-7 times of the applicant's salary.

VII. Taxation of Critical Illness Policies

As we mentioned in previous article, critical illness insurance is a type of insurance which will pay a lump tax free benefit to the insured if he is diagnosis of one of the critical illnesses covered by the policy. The benefit is intended to help insured persons maintain their quality of life and financial independence after suffering a life-threatening illness. In this article, we will discuss the taxation of critical illness insurance.
Critical Illness policy is considered to be an accident and sickness policy.

1. If the policyholder, the insured, the payer of the premium and the beneficiary are all the same person, the premium are not tax deductible and the benefits are tax free.

2. In a key person

If premiums are not deducted as business expenses then the benefit is tax free if the key person insured is designated as the beneficiary. If the business is the beneficiary of the policy then premium is tax deductible and benefit is taxable.

3. Small business owners purchased critical illness insurance on themselves.

When setting up ownership in a private corporation, one significant concern is that there is no mechanism similar to the capital dividend account to permit the benefits to be paid out on a tax-free basis to shareholders. As a result, critical illness benefits payable to a private corporation can only be paid out as either taxable employment income or taxable dividends.

Therefore, it could be significant implications where the critical illness benefit is intended to be used by the shareholders as part of a buy/sell arrangement, or to fund personal expenses arising from the critical illness.

4. Corporation critical illness insurance
Some employers have incorporated Critical Illness coverage into a wage loss replacement plan If the premiums for such coverage are deductible as a business expense to the employer then the benefit are not taxable to the employee because they are not payable on a periodic basis. If the employee suffers a critical illness, benefits will be paid directly to the employee under the critical illness policy.
Some insurers are now offering one policy that includes both critical illness coverage and life insurance. The application is underwritten for both benefits at the time of sale. One premium is paid and it funds all the benefits under the policy and it makes even more complicated to the taxation of the policy.

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