Protect your RRSP with critical illness insurance

Advertising and media attention for registered retirement savings plans (RRSPs) hits a fever pitch during the months of January and February. There’s a strong focus on educating Canadians about the significant benefits of RRSPs, and many reminders about the contribution deadline.

But there’s one very important message that’s often overlooked: how to protect your RRSP in case you’re diagnosed with a critical illness. In fact, the chances of a critical illness affecting you may be greater than you think. According to the Council for Disability Awareness, three out of every 10 people entering the workforce will become disabled before retiring.

Unfortunately, for many Canadians struck by a critical illness, RRSP savings become the source of emergency funds. While this may help in recovery, it could result in irreparable damage to retirement plans.

RRSP withdrawals have tax consequences, and having to sell your investments earlier than anticipated might not allow them to generate the returns that were expected. What’s more, lost income from time off work to recuperate or care for a loved one could prevent RRSP contributions from being made for a significant period of time.

As a result, there may not be as much retirement income as had been expected before the illness was diagnosed. That’s why saving for retirement should be kept apart from planning for emergencies.

To help you do that, you may find it’s prudent to purchase critical illness insurance.

Similar to term insurance, critical illness insurance covers you for a specified period of time. Policies vary, but coverage typically includes cancer, heart attack, stroke, multiple sclerosis, kidney failure, blindness, Parkinson’s disease, Alzheimer’s disease and some other serious ailments.

Should you be diagnosed with a covered critical illness during your coverage period, you receive a one-time, tax-free lump-sum payment. You can use the money any way you see fit. That means it could keep you from having to dip into your RRSP and/or it could allow you to keep contributing to your RRSP while you’re recovering from the illness.

Critical illness insurance plans are offered by life insurance companies and are generally available to people up to age 65 and in good health. You may be able to renew your policy until age 75 or for your lifetime.

Coverage generally ranges up to $1 million, although it may be possible to buy a larger policy. The full benefit is available even if you recover from the illness. But you must usually live for at least 30 days after an illness is diagnosed before benefits are received.

Shop carefully when buying critical illness insurance. Coverage, exclusions, benefits and prices can vary. Also, you shouldn’t look at critical illness insurance on its own. It should be part of an overall insurance plan that includes disability, long-term care and life insurance. By having adequate coverage, you can help ensure that your family’s financial needs will be met in the event of unexpected circumstances.

Your financial advisor can help determine the level of coverage that you need, and recommend a plan to meet your requirements.

Catherine Metzger-Silver is a Financial Advisor with Edward Jones Investments in Kentville. She can be reached [email protected].