There’s an old saying in the law: “the big print giveth, the small print taketh” and no where is this truer than when buying insurance. Buying insurance is like buying a car now: the base model is attractively priced but you really need to buy quite a number of upgrades to really make it work for you. In insurance lingo, an upgrade is called a rider. Keep this in mind when you obtain an insurance quote- the initial price may not get you what you need.

Last week, someone showed me a quote for critical illness and disability insurance and I was shocked but how little you get in a base policy; the insurance is cheap but how much are you really getting without the appropriate riders? Insurance is more about what you are not getting then getting now a days. If in doubt, ask for an insurance quote with all the bells and whistles on it and get your broker to sit down and explain everything to you. Remember that in some cases, you cannot add riders to your insurance policy after it is issued.

Given the amount of fear and paranoia on the street now, I suspect insurance will be aggressively pitched by the industry to provide piece of mind but do your research carefully before you buy since you are worse off paying for a bad policy than having no policy at all. The issue is that insurance quotes are so full of lingo and finance terms, it really makes your head spin something (when I looked at the quote last week, I scratched my head a lot and had to look up a lot of things). Thus, here’s a quick and dirty on critical illness and disability insurance, the problems with base policies and the common riders to consider.

CRITICAL ILLNESS INSURANCE (”CI”)

WHY DO YOU NEED IT? If you contract a critical illness (see below for what this means), the insurance company will give you a lump sum of money to pay for medical costs/loss of income/expense coverage (usually either $100K, $250K, $500K, $750K etc depending on the amount of coverage you buy). The amount of money given to you will obviously depend on the amount of your policy premium. Payment is usually made within a set period of time after you are diagnosed with a critical illness. CI can be thought of as emergency health care insurance.

WHO IDEALLY NEEDS IT? Those not on health care plans (whether individual or group plans) or the health care plan is quite limited (it does not provide a lot of coverage if you are on medical leave, the coverage is quite short in time, the coverage is quite low monetarily etc.) and those without the support network (monetary or otherwise) to protect themselves in the event of prolonged illness (i.e. those without family to help them through an illness etc.)

WHAT ARE YOU COVERED FOR IN A TYPICAL BASE POLICY? Increasingly, little. Base CI policies cover the following critical illness: heart attack, life-threatening cancer (emphasis on life-threatening. Thus, it does not cover “minor” cancers) and stroke and…that’s it. The list use to be a lot more but the cost of insuring an aging population is resulting in decreasing insurance coverage. If you contract any of these three illness, the insurance policy will pay you a certain lump sum amount upon satisfactory proof until you turn 65 (typically). The insurance company does not care what you do with the money; if you, and let’s hope this all happens to us, have a fast recovery then you can pocket whatever money they gave you after you pay for medical expenses, replacement income, fixed costs etc.

In other words, in most basic policies I have seen, your CI will cover you for little.

WHAT RIDERS MAY BE APPROPRIATE?

• Enhanced Cover: You can add other critical illnesses to coverage such as blindness, coma, MS, Parkinson’s and loss of limp. The suitability of this rider depends on your family history, the environment you live in (are you exposed to a lot of chemicals and toxins?) and your age.
• Return of premium: This comes in various options now: (i) a return of part or your full premium at designated time (5 years, 10 years etc.). A full return of premium means you cancel the policy; (ii) a return of your full premium at the expiry of the insurance policy (typically 65 years old unless you buy another rider to increase coverage); or (iii) return of premium upon death.
• Fixed/Guaranteed premium: You pay the same amount to the policy even if the costs of insuring you are increasing. Typically, the policy is more in the beginning but evens out over the years as inflation catches up.

The biggest weakness of a base CI policy is that you become ill for illnesses other than for heart attack, life-threatening cancer or stroke, you are healthy for the life of the policy (strange to describe this as a weakness) and your premium is never returned (although it is not typically indexed to inflation) or the industry is just poor at risk management and the premiums go up without corresponding additional value. Thus, concentrate on riders that address these concerns or you could be sending your money unwisely.

DISABILITY INSURANCE (”DI”)

WHY DO YOU NEED IT? DI is an insurance against income loss. If you become “disabled” (as defined by the policy but generally meaning you are not able to work and generate income; there are exceptions if the disability is caused by mental breakdown or substance abuse), the policy will pay you a set amount of money monthly (as a replacement to your pay cheque at the time you obtained the policy and NOT when you become disabled) for a period of time as stated on the policy. Most policies are sold as payment until 65 although you can pay less and get less coverage. Coverage stops when you resume working. DI is income replacement insurance.

WHO IDEALLY NEEDS IT? Sole bread winners in families. People who have little to no workers compensation insurance/government provides poor disability benefits/employers have poor disability coverage. Those, for whatever reason, are highly leveraged in their lives (whether through bad financial planning or by circumstances- most entrepreneurs have be highly leveraged to capitalize their business) and would not have sufficient cash around to pay for fixed costs.

WHAT ARE YOU COVERED FOR IN A TYPICAL BASE POLICY? Payment of set payments monthly (determined by your monthly income when you obtained the policy) after the “elimination period” (which is the time between disability and when the cheques comes) until the coverage expires.

WHAT RIDERS MAY BE APPROPRIATE?

• Future Increase Option: A DI policy typically will pay you a set amount of money based on your current income when you obtain the policy. For example, if your take-home monthly salary is $3500/month when you obtain a DI policy, you will not be entitled to more than this amount, even if you are making more later, unless you buy this rider. If you are young, your income is increasing or you are making little, the initial coverage may not be adequate if you become disabled down the road. This rider allows you to up the payments payable to you (with an appropriate increase in premiums of course). Ideally for those who are younger and who’s potential income will increase substantially over time.
• Cost of Living Adjustment: the amount paid to you is indexed to inflation. More ideal for younger policy holders since the effects of inflation are greater than their older counter-parts.
• Non-Cancellable and Guaranteed Renewable: Basically, the insurance company has to pay you the agreed upon rate of coverage even if your income goes down or you change jobs. Ideal for those who may want to “down shift” in their careers/become part-timers/go free-lance.

The biggest weakness of a base DI policy is that it is not indexed to inflation or your income and life-style are significantly better after you obtain the policy. In such a case, if the policy has to kick in, the amount of money received is less than what is required when you first obtained the policy. Thus, if you are young or have large income earning potential, focus on riders that will match your earning power over the years and mitigate against the effects of inflation. Otherwise, you could pay a lot for little protection.

____________________________________________

Insurance is a very complicated financial product. Thus, educate yourself accordingly; just don’t take the first thing given to you or the cheapest insurance quote since the policy could not provide to you adequate coverage. If you have to squeeze the most for limited dollars, keep in mind the limitations of base CI and DI polices and buy the riders that cover up the biggest holes in the policy in the context of your life. Good luck.