Calculating your critical illness and disability insurance needs
Congratulations! You’re a successful businessperson. You’ve finally achieved that magical HNW designation – that’s “high net worth.” You’re a busy professional, executive, or business owner, and you’re on the go all the time. You don’t have time to take a day off – let alone get sick. And yet, critical illness and short-term disabilities do happen. Obviously, you can’t predict those, but fortunately, you can protect yourself, your family, your home, and your business against the potentially disastrous financial consequences.
Being a business owner myself, I understand how hard you have to work to build a successful business. The thought of losing your business or not being able to meet the next mortgage payment due to disability or illness is pretty scary. Your provincial health plan may cover very basic medical care, doctors, and short hospital stays. Your extended healthcare plan might cover private hospital rooms, prescription drugs, some physiotherapy, and some nursing care, all to specified maximum amounts, depending on the exclusions and limitations of the plan.
Basic medical coverage is…basic
When I started looking into this as a professional financial planner some years ago, I quickly realized that basic provincial medical insurance and extended healthcare plans simply weren’t enough to cover the major expenses arising from a critical illness and/or disability. The financial consequences, I found, could be devastating. These include raising money by a forced sale of your business or professional practice, remortgaging your home, liquidating or borrowing against investment assets, collapsing registered plans like RRSPs or TFSAs prematurely. Remember, you or your family still have to pay taxes, mortgage payments, utility bills, consumer loans, credit cards, and meet monthly household living expenses – whether you’re laid up or not.
That’s why I advise my HNW clients to include critical illness and disability insurance as part of the protection component of their financial plan.
Both of these types of insurance pay what’s called a “living benefit,” meaning that when you make a claim arising from illness or disability, the money is paid to you while you are still alive. In this sense, it is unlike life insurance, which pays out only when you die.
Disability insurance replaces income
Disability insurance is also called income-replacement insurance and provides a monthly benefit if you should become disabled and unable to perform your regular daily tasks. It will ensure that you have a paycheque that enables you to continue on with life while you are recovering from your disability and not worry how you will pay your mortgage and other bills. There’s typically a waiting period, usually three months, before the payments begin.
A rule of thumb is that your disability insurance should cover at least about two thirds of your monthly income.
Lump sum critical illness payment
Critical illness insurance is different from disability insurance, in that it pays out a lump sum if you are found to have a serious illness that is covered by the policy – cancer, stroke, heart attack, and so on. The money may be used as you see fit. There may be a 30-day period after diagnosis before payouts begin. Critical illness payouts are not dependent on your ability to perform employment or job-specific duties.
How much do you need?
So how much critical illness insurance do you need? To arrive at a back-of-the envelope figure, add up six months of your own income (less any disability coverage), three months of your spouse’s income (to cover a leave of absence), six months of monthly mortgage, loan, credit card, property tax payments, as well as any estimated medical recovery expenses. The total is the minimum critical illness coverage you’ll need.
Additional riders (add-ons) may also be added to your policy when you sign up for one of these types of insurance. Speak to a licensed insurance agent about your needs and ask them to walk you through each type of insurance and the costs and benefits associated with each.
© 2014 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited.