Because of the pandemic, everyone’s health is top of mind. I have been talking to many people about protecting their families from a loss of income due to sickness using critical illness insurance. Call me biased but I think everyone should have a critical illness policy either personally or if you are lucky you have some through work. The sad reality is if you do not know someone directly who has had cancer, someone close to you does and sometime in your lifetime you will likely become critically ill (hopefully at age 99).
The sole purpose of a Critical Illness policy is to protect one from the loss of income that comes with a lifechanging diagnosis. If you get very sick, you need to focus on recovery, not your bills piling up.
One popular feature of a Critical Illness policy is return of premium. It is presented as method of forced savings. If you get sick you get paid; if you remain healthy you get your money back when you do not need the policy anymore. You can have your cake and eat it too, right?
Personally, I do not like betting against myself and even less so against my health. I see three big disadvantages with Return of Premium: the price, the opportunity cost of not putting your money elsewhere, and the structure reduces your benefit.
1: The insurance acronym for Return of Premium is ROP which could also stand for Really OverPriced. To use myself as an example, I have $50 per month to spend on Critical Illness insurance. I can lock in my rate and coverage to age 100 (high likelihood I will get sick in the next 68 years) and get a benefit of $62,000. Or I can buy some “forced savings”, purchase $31,000 of benefit, and I can get my money back if I cancel it after the age of 55. Why someone would want to be incentivised to cancel their insurance when they enter their highest risk age bracket is beyond me.
2: Without getting too financial, if you gave me $100 today so that I could give you back $100 in 5 years, you would be losing money. That is what the ROP is promising. There is no investment growth. The funds are not indexed to inflation. You just get your money back if you give up the insurance.
To build on the example in #1, the cost of the ROP is $15.63 per month. At age 55 I would be able to cancel my policy, lose my insurance, and get $7,404.16 in my pocket. If I were to buy $31,000 without ROP and put the monthly $15.63 into something very conservative (3% growth) at age 55 I would have $6,170.11. With uber conservative investing we can still build a large nest egg, but in the second scenario I get to keep my insurance. This is much closer to having my cake and eating it too.
3: My biggest gripe with ROP is you are paying a large portion of your premium to get your money back, but you are not guaranteed you ever will. If you get sick, which is the reason this type of insurance exists, you get paid your benefit amount, but you lose all of your ROP ‘savings’. So, in a way you are reducing your benefit amount ever month.
People buy insurance is for the protection it offers. Money spent on a Return of Premium feature is being used for something other than protection. If you want to protect your income we can help. If you want to build a good savings habit, we can help with that too. What we don’t like doing is building a savings plan that is dependent on your health, that will disappear when you are no longer healthy.
The opinions expressed are those of the author and may not necessarily reflect those of Manulife Securities Incorporated or Manulife Securities Insurance Inc..