Is Return of Premium worth it for Critical Illness?

First of all, before increasing your Critical Illness coverage, I would make sure your Disability Insurance is adequate.

If you only have Group LTD through your employee benefits, there can be significant gaps that many people don’t realize until claim time. I would encourage anyone to understand exactly what their Group LTD provides:

• How much will it actually pay?
• Is the benefit taxable?
• What is the definition of disability?
• Does the definition change after 2 years?
• Are there offsets or limitations?

Then compare that against a strong individual Disability Insurance policy. Once your income protection is properly addressed, I think Critical Illness can be a great supplement.

As for the recommendation of 12 to 18 months of income, I don’t think there is a universal rule. The amount should really depend on what you’re trying to accomplish with the coverage.

For example, if your Disability Insurance has a 90-day waiting period, CI could help bridge that gap and replace income while you’re waiting for Disability Insurance to begin. That’s about the only time I would personally look at CI primarily as income replacement. Beyond that, I would rather see someone have a well-designed Disability Insurance policy.

Questions to ask…

Then ask yourself what expenses or goals could come up during a serious illness that your regular income or savings may not comfortably handle.

Maybe your spouse wants to take time off work to help with appointments or treatment. Maybe you want the flexibility to travel or create some memories with your family. Maybe there are additional costs associated with cancer, a stroke, or another serious illness.

It could also help pay for counselling, physiotherapy, rehabilitation, home modifications, childcare, etc. Even if you have benefits, many plans have relatively low maximums. Someone requiring weekly physiotherapy, for example, could exhaust their group benefit pretty quickly.

Return of Premium

There are a few different types of Return of Premium depending on the policy, including Return of Premium on Surrender, Expiry or Death.

Personally, I’m not a huge fan of ROP. I think it can sometimes be more of a sales feature than an insurance benefit.

Getting all your premiums back if you never claim sounds attractive, but remember if you actually have a Critical Illness claim, you will receive the CI benefit and the ROP disappears. So I prefer looking at the opportunity cost.

As a simple example, let’s say a 40-year-old male is looking at $100,000 of CI coverage to age 75 with 100% ROP at expiry.

• Without ROP: approximately $100/month
• With ROP: approximately $140/month
• Difference: $40/month

This means that the ROP at age 75 would be approximately $58,800.

If you invested that $40/month yourself for 35 years, you would need roughly a 6.1% annual return to accumulate approximately the same $58,800.

At an 8% return, that $40/month could grow to roughly $92,000.

There is also another important difference.

If you suffered a covered Critical Illness shortly before age 75, you could receive the $100,000 CI benefit, but you wouldn’t also receive the $58,800 ROP.

If you had invested the $40/month yourself instead, you could potentially have both the $100,000 insurance payout and whatever you had accumulated in your investment account.

Where I think ROP can make sense is for someone who likes the forced-savings aspect of it and knows they probably wouldn’t invest the difference themselves.  Additionally, it could make sense for if you’ve already maxed out your RRSP and TFSA and the alternative is investing the difference in a taxable non-registered account. In that situation, you should compare the ROP against the after-tax return you would actually earn on the investment. That can make ROP somewhat more attractive, particularly for someone in a high tax bracket.

Even then, personally, I would generally rather keep the cost of the insurance lower and invest the difference myself.

– Jeff

*Disclaimer: This article is intended for general informational and educational purposes only and does not constitute personalized insurance, financial, legal, or tax advice. Insurance needs, policy features, costs, and suitability vary based on individual circumstances and specific contract provisions. Coverage availability and terms are subject to insurer underwriting and approval. Readers should review their own situation carefully and consult with a licensed insurance advisor before making any insurance decisions or changes to existing coverage.