Critical Illness Insurance For Physicians: An Actuarial Perspective

As a physician, you devote your career to caring for others. An acute illness can quickly derail your health and financial stability. That’s why critical illness insurance is so valuable for physicians.

Critical illness insurance provides a lump sum, tax-free, cash payment if you’re diagnosed with a covered critical condition like a cancer, stroke, or heart attack. You can use this money for whatever you need – paying off debts, covering living expenses, or funding treatments.

In this guide, we’ll explain the key benefits of critical illness insurance for physicians and how to choose the right policy for your situation so that if the need arises, you can recover with peace of mind. 

Why Physicians Need Critical Illness Insurance

Experiencing a critical illness can wreak havoc on your finances:

• Lost income. If you’re too ill to work, you may have to stop practicing medicine for an extended period. The income cost could significantly impact your financial security.
  
• Out-of-pocket treatment costs. While provincial health insurance covers hospital treatments, you may still face substantial expenses for drugs, experimental therapies, home care, and more.
  
• Disability. A critical illness may leave you partially or fully disabled. Disability insurance payments often only cover 60-80% of your income. You receive no benefits during the waiting period, which is typically 90 days. 
  
• Early retirement. Your illness might force you to stop working years earlier than you planned. This can derail your retirement savings strategy.

A diagnosis could damage your net worth and financial plans. The payout from a critical illness policy provides a financial safety net so you can focus entirely on your health.

Case Study: How Critical Illness Insurance Helped One Physician

At 31 and perfectly healthy, Dr. Myers (name changed) questioned her parents’ advice that she get critical illness insurance. In the end, she trusted their guidance and got a $250,000 policy.

Nineteen years later, stage 3 breast cancer triggered a full payout. The funds allowed Dr. Myers to focus on getting the treatment she needed without worrying about her finances.

Rather than draining her retirement savings or going into debt, the tax-free insurance benefit gave Dr. Myers the breathing room to recover. After successful treatment, she returned to work part-time and remains cancer-free five years later.

How Much Critical Illness Insurance Do Doctors Need?

How much critical illness coverage do you need as a physician? Here are some guidelines:

• Cover your living expenses. Suppose you couldn’t work due to an illness. How much money would you need to cover your mortgage, groceries, utilities, debt payments, children’s education, and other costs?
  
• Fund your retirement. If the illness forced you to retire early, how much would you need to maintain your standard of living in retirement? Factor in pension payments and existing retirement savings.
  
• Pay off debts. Consider taking out enough coverage to pay off your mortgage, loans, lines of credit, and other liabilities. This gives you financial freedom to recover.
  
• Cover treatment costs. Will supplementary health insurance fully cover experimental drugs and therapies? If not, factor these potential costs into your coverage amount.

As a high-income doctor, you may want between $500,000 to $2,000,000 of critical illness coverage. The specific amount depends on your financial obligations and willingness to self-insure. 

Key Considerations When Choosing Critical Illness Insurance

Critical illness insurance products differ. Here are key considerations when looking for a policy:

Comprehensive coverage

Make sure the insurance plan covers all the critical illnesses that concern you, such as cancer, stroke, heart attack, coronary artery bypass, MS, Parkinson’s, Alzheimer’s, ALS, kidney failure, major organ transplant, and loss of sight/hearing. Policies with fewer covered conditions tend to have lower premiums but provide less protection. Since you can’t tell what critical illness may strike, having more conditions covered gives you more protection.

Early detection benefits 

Critical illness insurance typically requires you to wait 30 days post-diagnosis to receive a benefit (this is called the “survival period”). Some policies, when you are diagnosed with certain cancers, pay out a percentage of the total benefit on the day of diagnosis instead (typically 15%, up to $50,000 total). This cash can be used to cover costs like additional medical tests and experimental treatments. The flexibility ensures you can use the money when you need it most.

In some cases, the early detection benefit does not reduce the total benefit payable. It’s simply extra, cost-free protection. For example, if a $500,000 policy paid an insured doctor $50,000 benefit for the early detection of their intestinal cancer, the doctor might also receive the full $500,000 after surviving 30 days. 

Return of premium

Suppose you stay healthy and don’t file a claim for your policy’s entire term. In that case, some insurers will refund all or a portion of the premiums you paid over the years if you selected the optional return of premium option. This benefit provides extra value for your money.

Guarantees

Ensure the insurer can’t cancel your coverage or increase your premiums.  

Tax-free payout in Canada

Like life insurance and disability insurance for physicians, critical illness payouts are generally tax-free in Canada because your premiums come from after-tax dollars. This tax treatment enhances the value of the lump-sum cash benefit you receive.

Choosing The Right Insurer For Critical Illness Insurance

Here are tips for choosing a strong critical illness insurance company:

• Financial strength. Select an insurer with robust financial health to pay out claims reliably for decades. Independent rating agencies like A.M. Best provide valuable insights. We pre-screen for you.
  
• Industry experience. Look for an insurer specializing in critical illness coverage and having decades of experience. General life insurers are often weaker in this niche.
  
• Superior policy. Compare policy features and prices across insurers. Independent insurance advisors (like us) can provide an impartial comparative analysis.
  
• Trustworthy reputation. Please speak to your medical colleagues about their experiences dealing with insurers on claims. You want an insurer known for smooth claims payments. Again, we pre-screen for you.

How To Get The Best Critical Illness Rates

What can you do as a physician to secure the most affordable critical illness insurance?

• Apply earlier. Premium rates are significantly cheaper in your 20s and 30s than in your 50s and 60s. Getting critical illness coverage earlier starts coverage sooner and locks in lower premiums for either a specific term (10 or 20 years), to a specific age (65 or 75 typically) or for life.
  
• Get healthy. Insurers offer better rates to applicants with a healthy body weight, good cholesterol levels, good blood pressure, who don’t smoke, and stay physically active.
  
• Consider medical association plans. Some medical associations may offer critical illness insurance that looks attractive. Be wary, however, because the coverage may be weaker than a personal plan and contingent on your membership. Premiums may be nonguaranteed, and the insurer may have the option of cancelling your coverage at any time. Also, coverage may be limited to a low amount like $250,000, when personal plans can reach $2,000,000.
  
• Choose shorter coverage terms. You can reduce premiums by selecting a 10 or 20-year policy term rather than lifetime coverage. Re-assess your situation at the end of the term since you may want to continue your coverage.
  
• Watch occupation classification. Insurers may classify physicians as a lower risk than the general population, unlocking discounted rates. But medical specialty, duties, location, and claims experience also impact pricing.
  
• Compare. When getting quotes from multiple insurers, compare identical policy terms, ages, and benefit amounts for accurate apples-to-apples analysis. We do this for you.

Taxes and Critical Illness Insurance

What are the tax implications of critical illness insurance? Here are vital points Canadian physicians should know:

• Premiums are not tax deductible for individual policies. 
  
• Payouts are tax-free to policyholders.
  
• To avoid complications, the own critical illness insurance personally so that payouts go directly to you as the policyholder. If the policy is corporately owned, there is currently no tax-free mechanism to extract the critical illness benefit. It would need to be distributed as taxable dividends, reducing much of the advantage.
  
• Consult a tax professional to understand all implications for your specific situation. We can make an introduction if you would like.

FAQs

How is critical illness insurance different from long-term disability insurance?

Disability insurance helps physicians replace lost income by providing monthly payments if you can’t work due to an illness or injury. Critical illness insurance pays out a lump-sum cash amount to use as you see fit, regardless of your employment status after diagnosis. Think of critical illness as being there to cover large, immediate expenses such as experimental treatments, while disability covers your ongoing lifestyle in the long term. Many doctors carry both forms of protection.

Doesn’t my provincial and private health insurance cover all my healthcare costs?

No. Provincial plans like OHIP in Ontario only cover hospital treatments, not expenses like experimental drugs, home care, travel, or income loss from being unable to work. Private health plans also have limitations. Critical illness insurance helps fund what other plans leave out.

Can I renew my critical illness insurance after the term expires?

Typically, yes. Most critical illness policies with a term of 10 or 20 years can be renewed at guaranteed premiums even if your health changes. This ensures you maintain your coverage. Coverage through an employer or medical association often ends if you leave.

What medical history do insurers review?

Insurers will thoroughly assess your medical records, including pre-existing conditions, past surgeries, family history, smoking status, build, and bloodwork. Be prepared to fully disclose your history, as not doing so can jeopardize future claims.

What mistakes do physicians make about critical illness insurance?

We find that doctors tend to make to make these mistakes about critical illness insurance:

• Thinking they’re healthy and invincible: Doctors face similar health risks as everyone else, and a critical illness can strike anyone, regardless of profession.
  
• Focusing solely on disability insurance: While disability insurance replaces income, critical illness insurance provides a lump sum to help with immediate and ongoing expenses that are not covered by other plans.
  
• Assuming coverage from their medical association is enough: While medical associations may provide some coverage, it may not be comprehensive or sufficient for doctors’ needs.
  
• Waiting to apply: Since premiums increase with age, waiting gets expensive. Getting coverage sooner ensures lower rates and locks in coverage rates before potential health issues arise.
  
• Not understanding the policy details: Failing to thoroughly read and understand the policy’s terms, conditions, and exclusions can lead to unpleasant surprises down the line. This includes understanding the covered critical illnesses, the claim process, waiting periods, and benefit amounts.
  
• Getting inadequate coverage: Choosing a policy with low benefit amounts or limited coverage for specific illnesses might not be enough to manage the financial burdens associated with a critical illness.

In Closing

Critical illness insurance protects physicians against the financial shock of a severe health crisis. However, not all policies are created equal. By understanding key features and finding the right insurer, you can secure coverage tailored to your needs and budget. At Taxevity, we’re here to help. Simply reach out for personalized guidance in choosing a policy and provider. 

Promod Sharma (FSA, FCIA, FEA) and Jeevan Sharma (CFP) YOUR FAMILY TEAM

At Taxevity Insurance, we’re passionate about bringing clarity to complex financial decisions. Let us empower you with personalized strategies to achieve your goals. We focus on life and health insurance solutions to protect your business, your family, and your legacy.