What is Critical Illness Insurance, and How Can It Protect My Business?
Critical illness insurance is probably one of Canada’s best-kept secrets. Since Canadian healthcare covers a large portion of the healthcare needs faced by Canadians, most don’t bother to purchase critical illness insurance. However, critical illness insurance should not be overlooked, even in Canada; with critical illness insurance, you can dramatically reduce the financial burden experienced by you and your family should you be diagnosed with a long-term critical illness. In addition, shared ownership of a critical illness insurance policy can provide business owners with an attractive investment opportunity, and a way to ensure the continuity of their business should key employees fall ill.
What is Critical Illness Insurance?
Simply put, critical illness insurance pays you a one-time, tax-free, predetermined lump sum, should you be diagnosed with a covered illness. The pay is generally issued 30 days after the diagnosis. There are no strings attached to this sum, meaning you can use the payment as you see fit.
The sum can be used to modify your home so that it’s easier to live with your illness, or it can pay for various therapies and medications. In addition, you’re able to protect your assets since you don’t need to dip into your earnings to pay for your treatments.
Doesn’t Canada’s Healthcare System Cover My Needs?
Canada’s healthcare system covers primary health care services. Some of what Canada’s healthcare system covers include the prevention and treatment of common diseases and injuries, emergency services, primary mental health care, services related to child development and primary maternity care, and end-of-life care.
However, supplementary healthcare services are generally not fully covered by Canada’s universal healthcare system. This includes dental care, vision care, prescription medications, and ambulance services. Although the provinces themselves do cover some of these supplementary services, the coverage varies by province. For example, while Manitoba will cover ambulance fees, Alberta will not, unless the ride is meant to facilitate an inter-facility transfer.
What is Covered by Critical Illness Insurance?
Critical illness insurance covers a wide variety of common illnesses and diseases, including various cancers, heart attacks, stroke, kidney failure, and paralysis. In Canada, cancer, heart disease, and stroke are the three most common critical illnesses affecting Canadians; in fact, about 1 in 2 Canadians are expected to develop cancer in their lifetime.
To further complicate matters, 63% of Canadians diagnosed with cancer are expected to survive for five or more years after being diagnosed with cancer; that translates to five years of having to spend financial resources on managing your cancer, and the lifestyle changes that come with your diagnosis. With critical illness insurance, the financial burden on yourself and your loved ones is significantly reduced.
Asides from providing you with a financial safety net in the event of a critical illness, having a critical illness insurance strategy in Canada can provide attractive investment benefits to major stakeholders in your business, and it can ensure continuity of the business if a key employee is diagnosed with a critical illness that is covered by the policy. This can be accomplished through a Shared Ownership Strategy.
What is the Shared Ownership Strategy?
When a business participates in the shared ownership strategy, it is protected if a key individual within the business is diagnosed with a covered critical illness. Under this strategy, both the business and the employee hold the critical illness insurance policy. The business pays the insurance premiums and receives the benefits of the policy should the employee fall ill. The employee, on their part, pays the premium for the return of premium benefit (ROP).
Once it’s determined that the critical illness insurance is no longer necessary (for example, the key employee may be on the verge of retirement), the policy can be canceled. The employee can then exercise their return of premium option, receiving all premiums paid by both the business and themselves. With this strategy, key employees within the company can receive a high return on their investment, while the company itself is protected should the key employee fall ill.
How Can I Properly Implement This Strategy?
While this strategy can be both an attractive investment opportunity and an excellent way to protect your business, there are several challenges that you’ll need to consider before implementation.
The first most basic, but important issue to consider is whether or not you have the cash flow within the business to pay for the critical illness policy. The cost of a policy can vary depending on your age, what is being covered, and your medical conditions. On top of that, the premiums on the policy will need to be paid for over a long period of time; all providers will outline different rules and guidelines on the percentage of the premiums that will be returned to you depending on when the policy is canceled. If the policy is canceled too early, the amount returned to you can be lowered dramatically.
A business will also need to put a shared ownership agreement in place. This means drafting a corporate resolution for the board of directors to pass; this allows the corporation to buy the critical illness insurance and to agree on a shared ownership agreement.
The shared ownership agreement will need to outline key issues such as the allocation of premiums and benefits, a termination agreement, and what happens in the event the company goes bankrupt or becomes insolvent. This requires directly working with a lawyer or legal team that will understand the implications of having shared ownership over a critical illness policy. They need to understand how shared ownership will affect the business, and how it will affect key employees.
Next, you will need to understand the potential tax issues that may arise from implementing shared ownership in your Canadian critical illness insurance strategy. The Canada Revenue Agency has yet to determine how returns on premiums are exactly taxed; situations can differ on a case-by-case basis. To get the most value out of a shared ownership strategy, it is best to consult a professional who can provide you with a personalized financial strategy.
Work With Experts to Get the Most Out of Critical Illness Insurance
Having a sound critical illness insurance strategy in Canada is one of the easiest ways to protect your business. Critical illness insurance covers healthcare needs that are not covered by the federal or provincial government; trying to cover these payments on your own, by contrast, can be a huge financial burden on yourself, your family, and your business.
In addition, shared ownership of a critical illness insurance policy can lead to a valuable investment opportunity, but this strategy should be approached with caution. You’ll want to work with professionals who understand the tax implications of this strategy, in order for you to get the maximum value out of your investment. At Global Solutions West, we provide proprietary solutions that are reviewed by Canadian and international tax advisory firms, to make sure that your investments are as tax-efficient as possible. Contact us today to take advantage of our expertise.