Is
CI Really worth it? Or should I self-insure if I were to
become critically ill?
Let's look at an
example...
Tom is a healthy 40
year old non-smoker. He's married with 2 children, has a house,
a mortgage, and has a career he loves making $80,000 per year as a
self employed consultant. His wife, Teresa (also a 40 year old
non-smoker), works part time with a local business with minimal
income. Tom and Teresa have their financial house in order as
their mortgage will be paid in about 10 years, have about $100,000 in
RRSPs and have put some money away for their children's education.
They both have adequate life insurance coverage and Tom has a very
good Disability Income insurance plan.
They had recently
reviewed their finances and goals with their financial planner, John,
who had suggested that Tom should have a look at a Critical Illness
plan. John had explained and showed Tom where a CI plan could
fill some gaps for their protection and how it could protect them
further from financial losses in the event Tom were to become
critically ill.
Tom thought that his
Disability Plan could cover him for the long run and that if he needed
money, he could use his RRSPs. But, what would be the real cost
to Tom and Teresa if Tom were to suffer a critical illness?
Let's assume Tom
suffers a critical illness at the age of 50 and the cost of the
critical illness, including travel to the best care clinic, treatment,
drugs, and lost income, is $100,000...
-
There are many
instances where Tom's disability plan would not come into play in the
event of a critical illness. For example, a 45 year old
male who suffers a heart attack has an average hospital stay of 7 days
and a recovery of 4 - 6 weeks. A disability plan with a 60 day
waiting period would not have started to pay benefits.
-
Disability insurance
is based on and paid for an inability to work. Even though you
may suffer a critical illness, you may still be able to work or you
may only be off work for a short period of time therefore not allowing
the disability plan to pay.
-
As mentioned
earlier, Tom and Teresa have about $100,000 in their RRSPs split
evenly between them and they contribute approximately $6,000 per year.
By the age of 49 using a rate of return of 7.00%, Tom and Teresa would
have accumulated $260,744.61 in their RRSP portfolio.
-
Assuming Tom suffers a critical
illness at age 50, Tom and Teresa would have to withdraw not
$100,000 but $154,207 from their RRSPs in order to have $100,000 after
tax. This would leave their RRSP balance at the end of 10 years
at $131,209.73.
-
A Critical Illness plan for $100,000
using a Level Premium to age 75 structure and the Return of Premium
option (100% at age 65 of premiums returned) is $1,225 per year.
-
Using this information, let's
analyze 4 situations and what the financial outcome of each situation
is:
| |
RRSP
Account Value at age 65 |
After Tax
Retirement Income starting at age 65 |
If...
Tom has NO coverage
and
DOES
NOT suffer a Critical Illness
|
$948,802.09 |
$62,496.46 |
If...
Tom has NO coverage
and
DOES
suffer a Critical Illness at age 50
|
$523,340.11 |
$37,705.78 |
If...
Tom has coverage
and
DOES
NOT suffer a Critical Illness
|
$865,898.01
+
$30,625.00 (Return
of Premium) |
$59,983.57 |
If...
Tom has coverage
and
DOES
suffer a Critical Illness at age 50
|
$869,514.81 |
$58,365.77 |
|
Based on this analysis, Tom feels it is well worth it to pursue the
Critical Illness plan as the downside of becoming critically ill
without coverage is
much larger than the downside of having the coverage and not becoming
critically ill.
Click here to request a quotation for
Critical Illness coverage. |
|
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