GIVING THROUGH CRITICAL ILLNESS INSURANCE...
by Keith Gummow, CFP,
CLU, CH.F.C.
How can you give
when it may be most meaningful?
Mary’s best friend had just survived an episode
with cancer. She was thankful to be alive, but the experience had
drained the educational funds they had set up for their teenaged
children’s university. They had also had to tap into their RRSPs,
which will set their retirement plans back a few years.
So,
when Mary heard about Critical Illness Insurance from her financial
advisor, she was quite interested in the concept. Her advisor had put
three cheques on her desk and said as long as she could qualify and the
premiums were paid to date, one of the cheques would be paid out. The
first cheque was for $100,000, which would be paid out in most cases
within 30 days, if Mary were to suffer one, of twenty-two covered Critical
Illnesses. The second cheque was made out to her estate for a refund of
all premiums paid, if she were to die before the plan expired. The third
cheque was for a 100% refund of her premiums paid, assuming she had made
no claims on the plan. The plan they discussed insured her until age 75.
She had the option to cancel her plan at age 65 (or ten years, whichever
was later) and receive a full refund of her premiums.
Mary
had talked to her financial advisor in the past about her desire to do
something for her local University. Donating a life insurance policy
seemed to be an affordable option, but the uncertainty of the timing of
the payoff had stopped her from proceeding. Her advisor asked, if she
could medically qualify for the Critical Illness Insurance, would she
consider taking out an additional plan with the University as owner and
beneficiary? As above, one of the three cheques would be paid to the
University. If she suffered a covered Critical Illness, the amount she was
insured for would be paid. If she lived to 65 or 75 and made no claim, all
of the premiums paid would be refunded. If she were to die, all premiums
paid would be returned. In each of these situations the University would
receive cash. Mary’s idea was for the University, to set up an endowment
fund with the money to provide a scholarship for students, like her
friend’s children, who may need financial assistance.
This strategy also had an
emotional appeal to Mary. She knew that, if she should suffer a critical
illness, it would be a time when she would be very reflective. Knowing a
gift to the University was being established would be even more meaningful
and comforting.
With
the University as owner and beneficiary, Mary would receive a tax receipt
each year for the premiums paid. Her income was $30,000 a year. Any income
over $7,817 was taxed at 22 %. Unlike an RRSP, which would create a
deduction and save tax at the 22% rate, the donation receipt would create
a tax credit worth 40% (assuming $200 in other donations had been made)
Mary
felt that everyone would benefit. If she suffered a Critical Illness, she
would have the money to seek the best medical care and, or take off enough
time to recover. If she stayed healthy, she had completed a forced savings
plan that could provide funds to enhance her retirement. By taking out a
second plan, she could benefit needy students through the scholarship that
would be set up.
An
Example; Mary is 40
and is a non-smoker,
Amount insured: $100,000
Premiums are paid monthly to
age 65 or 75
Monthly premium:
$94.59
Refund of premiums at
age 65: $26,275 (if no claim made)
Refund of premiums at
age 75: $36,785 (if no claim made)
Tax
credit: $94.59 X 12 = $1,135.08 X 40.16 % = $455.85
Net
cost: $1,135.08 – 455.85 = $679.23
