Critical illness insurance (CI) is often an overlooked component in personal financial planning, with many Canadians knowing only a little about its true value. Yet, when thoughtfully considered alongside life and disability insurance, CI can play a pivotal role in protecting your income and providing essential support during challenging times.

All too often, when the benefits and advantages of critical illness insurance are not fully understood, it’s the first coverage to be dropped when reviewing insurance options. However, once its importance and potential impact are properly recognized, many people choose to make CI an indispensable part of their protection plan, refusing to go without the peace of mind it may offer.

The Origins of Critical Illness Insurance

Critical illness insurance originated in South Africa during the 1980s, thanks to Dr. Marius Barnard - a member of the pioneering team behind the world’s first human-to-human heart transplant. Dr. Barnard observed that, with advances in modern medicine, more individuals were surviving serious health events. However, he soon realized that many of his patients lacked the financial resources needed to cover the costs associated with optimizing their chances of recovery, such as:

• Alleviating the stress of immediate financial obligations, such as mortgage payments, outstanding debts, and hospital expenses

• Covering additional or alternative medical treatments and therapies not included in government or private health plans

• Modifying the home environment to support new physical needs and enhance comfort during recovery

• Providing funds for everyday living expenses during extended periods away from work, which may not be covered by an employer

• Compensating for reduced working hours or the inability to continue in current profession, helping to make up for lost income

• Ability to take a well-deserved holiday with loved ones to celebrate recovery and renewed health

The Benefits of Critical Illness Insurance

As mentioned, CI can help to offer the policy holder another layer of income protection and peace of mind knowing that finances have some protection at an already difficult time. Some of the benefits of CI may include:

• Receive a tax-free lump sum payout upon diagnosis of a covered “critical” condition. CI typically covers major illnesses such as cancer, heart attack, stroke, kidney failure, and in some cases, up to 26 different conditions.

• As the policyholder, you could receive the payment directly and have complete freedom to use the funds however and whenever you choose.

• Optional features, for an extra premium, may allow for the return of your premiums if you remain healthy and claim-free, letting you use that money for retirement or other goals.

• If you own a business, CI may help safeguard your operations by helping protect against the financial impact of a key employee falling seriously ill.

• CI coverage can help reduce the need to liquidate investments or disrupt your retirement savings should a significant illness strike.

Risk to Investment Planning

You’ve worked hard to accumulate some investments – that’s fantastic! But have you considered what could happen to your hard-earned savings if you’re not protected by critical illness insurance? Let’s look at a scenario: imagine a 45-year-old with substantial long-term savings but no CI coverage. If they have had a successful recovery from cancer but need to access $50,000 to support their return to health, their only option may be to withdraw funds from their RRSP. What implications could this have on their overall investment strategy?

• Withdrawals from your RRSP are permanent - once the funds are removed, you cannot recontribute them, resulting in the loss of valuable contribution room.

• Investment assets may need to be sold at an inopportune time, potentially locking in losses if markets have declined.

• To access $50,000 after taxes, you would need to withdraw approximately $77,000 from your RRSP, assuming a marginal tax rate of 35% - highlighting the significant impact of taxes on your savings.

• The withdrawn amount no longer benefits from tax-sheltered compound growth. For example, leaving $77,000 invested at a 5% pre-tax annual growth rate until age 65 could have increased your RRSP’s value by an additional $204,303.92.

• Such a substantial withdrawal could force you to postpone retirement or accept a reduced retirement income, impacting your long-term financial security.

How Likely Is a Critical Illness in Your Lifetime?

If you’re still on the fence about the importance of purchasing critical illness insurance, here are a few stats to consider:

• For a 35-year-old in good health, 31% of men and 23% of women will suffer a critical illness before age 65. (1)

• 2 in 5 Canadians are expected to be diagnosed with cancer in their lifetime. (2)

• In 2024 in Canada, the average age of a benefit recipient was 52.7 years, with just 33% being to those aged 61 and above. (3)

• Over 1.5 million Canadians are living with cancer or are cancer free for up to 25 years after a cancer diagnosis. (4)

Factoring these stats, just 8% of Canadians have critical illness insurance (5) – this at a time when a healthy young individual could attain coverage to age 65 for a $50,000 tax-free lump sum payout for less than $50 per month (6). While CI benefits are generally received tax-free, tax treatment can vary depending on the policy’s ownership structure, including corporate-owned or shared-ownership arrangements, and current CRA rules. With earlier detection of certain illnesses and better treatment options, doesn’t that just make sense?

Ultimately, protecting yourself and your loved ones from the financial repercussions of a serious illness is about more than peace of mind - it’s about helping to support stability when life throws the unexpected your way. Critical illness insurance offers a safety net that can help preserve your savings, maintain your quality of life, and let you focus on recovery rather than financial worry. As healthcare advances and risks remain, taking proactive steps today may make all the difference for your future security.