Children’s Critical Illness Insurance: Unnecessary or Useful Tool?

Many people feel that paying for insurance when a person or child is young is a waste of money and unnecessary. However, when you dig in to the features of a critical illness (CI) policy for children, the long term value and protection they provide, may change your mind.

To start, here is a brief summary of what critical illness insurance does. CI insurance provides a tax free lump sum benefit if the insured person is diagnosed with one of the covered conditions. There are up to 26 illnesses covered which are listed below.

Acquired brain injury Aortic surgery Aplastic anemia

Bacterial meningitis Blindness Cancer

Coma Coronary artery bypass surgery Deafness

Dementia/Alzheimer’s Heart attack Heart valve repair

Kidney failure Loss of independent existence Loss of limbs

Loss of speech Major organ failure on waiting list Major organ transplant

Motor neuron disease Multiple sclerosis Occupational HIV infection

Paralysis Parkinson’s disease Severe burns

Stroke

For children there are potentially an additional 5 conditions covered, which are more commonly revealed in children, including: cerebral palsy, congenital heart disease, cystic fibrosis, muscular dystrophy and type 1 diabetes mellitus.

There is no debate, this can be an uncomfortable topic to discuss as no one ever wants to think about children getting sick. However, it does not change the fact that sometimes unexpected life events happen. A critical illness policy can help reduce the financial stresses of an already stressful time. The rest of this blog will focus on 3 major benefits of having critical illness policies on children.

I just alluded to it but the first benefit is having financial support in a stressful time. I hope that no one ever has to use these plans, but if they do, the lump sum tax free benefit can be extremely helpful.

Parents generally want to provide their children with the best support they possibly can in all aspects of their life. In the event of a critical illness sometimes there are treatment options that require out of pocket spending or travel. If cash is an issue unfortunately these options can be off the table. It also may mean that parents still need to go to work and are financially unable to take time away to be with their family. A critical illness policy can help alleviate both those potential stresses as the parents can use the funds from the policy however they want, no restrictions.  

Second is the future benefits of having the policy for the child. Once the child is old enough to take on the policy themselves it can be transferred to them directly from the parents/policy owner. This ensures that they don’t need to worry about qualifying for coverage later in life. It also will keep their premiums much lower since the earlier insurance is set up the lower the cost.

Finally there is a great feature only available on children’s critical illness plans called Advanced Return of Premiums on Cancellation (Advanced ROPC). This optional feature allows for the return of the premiums paid. Assuming no claim has been made, 75% of premiums paid will be returned to the owner after 15 years or when the child turns 25, whichever comes second.

Then once the child turns 40 they can elect to cancel the coverage and receive 100% of the remaining premiums paid refunded tax free. They can also elect to keep the coverage and cancel with the same deal any time thereafter.

Here is an example.

Mike and Sarah purchase a critical illness policy for their 2 year old daughter Amy that cost $25 per month and provides $50,000 of insurance. They continue being the owners and paying for the plan until after Amy turns 25. At that point of Amy turning 25, Mike and Sarah receive a cheque tax free for $5,175 (75% of $25/month for 23 years).

They then transfer ownership of the policy to Amy. Amy continues paying $25 per month and at the age of 40 she has the option to cancel and receive $6,225 (remaining 25% of premiums paid by Mike and Sarah and 100% of premiums paid by Amy) refunded tax free.

However, Amy likes having the $50,000 of CI insurance electing not to cancel and to keep the policy until she is 70 when she no longer needs it. Amy would then be refunded $15,225. (Again, remaining 25% of premiums paid by Mike and Sarah and 100% of premiums paid by Amy)

If at anytime during the life of the policy Amy was diagnosed with a covered illness, she, or her parents, would have received the $50,000 insurance amount as a tax free lump sum payment. At the end of the day either the insurance is claimed for $50,000 or Amy, Mike and Sarah receive 100% of premiums paid refunded to them.

To summarize everything children’s critical illness insurance has 3 huge benefits.

1)      If needed, the insurance can provide a family with some financial relief during a difficult time

2)      The child can eventually take over the policy with an extremely low premium commitment and no worry of qualifying for the insurance when older

3)      The Advanced Return of Premium on Cancellation option can ensure that if the insurance is not used 100% of premiums paid are refunded tax free

Note: The example above is just an example and the dollar values do not constitute a real life example. To get quotes for your personal situation consult with a licensed insurance provider of your choice or reach out to MC Wealth Management.