The old joke is that insurance is something that you think you have until you have to claim it!
Insurance is also a reflection of one’s personal attitude towards risk. Some people are insured to the hilt and others buy none. For most, the comfortable answer probably lies somewhere in between. In the past, conventional financial planning dictated that you cover risk of loss of income from two eventualities: death and disability.
The first case is obviously definitive; the second is not. There are so many catches to qualifying as “disabled”. Cadillac policies, which cost more, give you a strong trump card in dealing with the insurance companies. If you can no longer work at what you used to do: they pay! Sedan policies are cheaper, but they may yield surprises and grief when you come to claim. The insurer may have other plans for what you are still able to carry out as a vocation, given your disability. These other income-earning possibilities provide an “out” for the insurer not to pay up!
The “elimination” period defines how long you must be disabled before the insurer pays. Again, the shorter the elimination period, the higher the premiums. Common elimination periods extend from 30 to 180 days. In reality, even a relatively short period of interrupted earnings can cause havoc on family finances.
So, in a deft move, insurance companies have found a solution to the problem they created! Critical illness insurance is a relatively new product which is a sort of hybrid of life and disability insurance.
It is similar to life insurance in that the payout is a single lump sum 30 days after diagnosis, not an ongoing monthly payment like disability insurance. It is similar to disability in that the payout occurs without the drastic measure of dying. It is similar to both of them in that the payments are tax-free and there are no catches as to how the money is spent. This sort of policy may be valuable to cover a spouse who has withdrawn from the full-time work-force to raise children. It would be impossible for such an individual to get disability coverage. Yet, a medical set-back could have a significant impact on the family finances.
Such a policy also could allow the healthy spouse to take a leave from work to be with the ill spouse. A “family” policy can be purchased whereby the policy-holder’s spouse would receive 50% of the coverage if disability occurred. Similarly, a 10% payout would occur if a child became disabled.
Policies vary across insurers, but typically the most common health setbacks are covered. For instance, one policy that we reviewed covered:
- Heart attack
- Multiple sclerosis
- Kidney failure
- Organ transplant
- Coronary artery bypass surgery
Policies can be purchased in amounts from $50,000 to $500,000.
A sample rate quote for a 40 year old male, non-smoker, with a $100,000 policy would cost approximately $600 annually. Policies and premiums are renewable on a ten year term basis.You must pass a qualifying medical when the policy first is taken out.