Critical Illness Insurance (CII)

• critical illness insurance (CII) pays a lump sum if you are
  • diagnosed with a covered life-threatening medical condition (illness, injury or disease), and
  • survive 30 days
• you can use benefits in any way — even if you are able to work
• excludes pre-existing conditions and those with HIV or AIDS
• top four critical illnesses:
  1. heart attack
  2. cancer
  3. stroke
  4. heart bypass surgery
• definitions and critical illnesses vary by insurer (a contract of adhesion)
• if no critical illness occurs, some contracts will refund your premium
  • upon death
  • upon reaching an age such as 65 or 75

Taxation

Critical illness insurance is relatively new to Canada and the Canadian ITA has no definitions of it. So the taxation is unclear. CRA has not provided much guidance.

The provincial insurance acts define "Accident and Sickness" insurance, which appears to encompass basic Critical Illness Insurance. Adding a rider to return the premium upon death is providing a death benefit. Does that make the entire policy life insurance? What if there is a return of premium upon survival to a particular age? Is that an investment?

Tax Status Of The Premium And The Benefit

Person Is Owner and Beneficiary

The premium would be treated as a personal or living expense (not a medical expense). That means the premium would not be deductible but the benefit would be tax-free. With a Return of Premium option, the taxation is unclear.

Corporation Is Owner and Beneficiary

The premium would be treated as a capital expense (not "incurred for the purpose of gaining or producing income from a business or property"). That means the premium would not be deductible but the benefit would be tax-free. With a Return of Premium option, the taxation is unclear.

The benefit is ineligible for the [[[CDA|Capital Dividend Account]], which means that a tax-free transfer to shareholders isn't possible. The remaining ways to get the money out of the corporation are

1. taxable salary (deductible to the corporation)
2. taxable bonus (deductible to the corporation)
3. taxable dividends (paid from after-tax corporate income)

Corporation Is Owner and Employee Is Beneficiary

If the corporation pays the premiums, the employee is taxed on the amount of the premium, but the critical illness benefit is tax-free. With a Return of Premium option, the taxation is unclear.

References

• What's it like to have a stroke at 35? (heartandstroke.com, Dec 2011)
• Ontario ERs missing 1 in 10 stroke patients (Toronto Star, Jul 2012)
• Can "cancer" be more harmful than the disease? (Globe and Mail, Dec 2011)
• It may seem expensive, but critical illness insurance buys peace of mind (The Globe and Mail, Jun 2011) [read the comments too]
• Why critical illness insurance remains unsuccessful (Riscario Insider blog)
• Critical illness insurance: the basics (Riscario Insider blog)
• insurer microsites (no endorsement implied): Manulife. RBC, Sun Life