To make the right choices, you need to do a bit of planning. There’s no right answer for everyone, and much depends on your priorities and the setbacks you face along the way. Just ask Scott and Erin Parkin of Brantford, Ont. Erin, 33, has been a stay-at-home mom to her two kids, Owen, 10 and Molly, 6, for the past 10 years. Scott, a 39-year-old engineer, has been the sole income earner and since he’s in a high tax bracket, he has always contributed to RRSPs—his own plan plus a spousal RRSP for Erin. Over the years they’ve accumulated $66,800 in Scott’s RRSP and $20,000 in Erin’s.

But those contributions came to an end in 2009. That’s because the Parkins aren’t comfortable with the way their RRSP money is invested. Their entire portfolio is made up of segregated funds with annual fees over 3%, and they don’t know what to do about it. But the bigger reason is that they are trying to stay on track to pay off their $198,000 mortgage in 15 years. “We put the little extra money we have—about $3,600 a year—towards the mortgage,” says Scott.

The couple also say they could probably squeeze an extra $200 a month from their budget to put towards either the RRSP or the mortgage, but they aren’t sure which option is best. These competing priorities are typical for people in their 30s. “It’s a constant battle,” says Scott.

Megan and Matthew Shaw of Thunder Bay, Ont., share the Parkins’ concerns. They too, are trying to raise a family (they have three kids, ages 9, 4 and 2) and pay off their $99,000 mortgage solely on Matthew’s $85,000 salary. (Names have been changed to protect their privacy.) “We have no consumer debt so we’re happy with that,” says Matthew, 35, a police officer for the last six years. “But after expenses we usually have about $5,000 annually to invest, and we don’t know where to put that money—the mortgage or RRSPs?”

What makes the choice more vexing is the fact that the Shaws are at a loss over how to fix the stagnant returns on their $150,000 RRSP nest egg. They feel they need a whole new strategy. “Why are we putting all this money into RRSPs and not getting any returns?” asks Megan, 38. “Our annual fees, which average about 2.8%, are ridiculously high.”

The Shaws feel stuck. Most of their mutual funds have deferred sales charges (DSCs)—a penalty you pay when you sell the fund before a certain number of years. These charges usually go down to zero after seven years, but before then the charges can be steep. “We’re debating whether to bite the bullet, sell the funds and pay the penalty, which could amount to several thousand dollars,” says Matthew. “Or, should we wait and sell them when the deferred sales charges reach zero in a few years? We just don’t know.”

What the experts say

In your 30s—like Scott and Erin Parkin, and Megan and Matthew Shaw—you’ll often feel frustrated at not making much financial progress. The good news is that focusing on paying down a mortgage is an excellent strategy. “It’s the highest-return risk-free investment the average person can make,” says Schlenker, the planner. “Most mortgages allow extra principal payments, up to 10% of the balance, on anniversary dates. Take advantage of that opportunity.”

Still, if saving is a huge motivator for you, it may make just as much sense for you to contribute to an RRSP. “Mortgage vs. RRSP? I get asked that question all the time,” says Lamontagne. “If it’s strictly a financial decision, then typically high-income individuals in the top tax brackets are better to maximize their RRSP room before making additional mortgage payments,” says Lamontagne. “The key is not to spend that refund. If the Parkins contribute the refund back to their RRSPs, or even use it to pay down their mortgage, then they will be compounding their savings.”

Something should also be done with how the couples’ existing RRSPs are invested. The Parkins and the Shaws have their savings tied up in high-fee investments, and the costs of their funds are eroding their returns. “In reality, investors can control only two things that affect the returns on their investment accounts—their own behaviour and the fees they pay,” says Schlenker. “Both the Parkins and the Shaws are paying fees of $3,000 to 4,000 a year, far higher than seems warranted.”

Lamontagne agrees. “If they can lower their costs by even 0.5%, that will leave thousands of dollars more in their accounts by the time retirement rolls around.” The Parkins and Shaws should start shopping around for a fee-based adviser, rather than one who receives commissions from the funds he or she sells. Ideally, their adviser should be using low-cost exchange-traded funds (ETFs) or index mutual funds to build their RRSP portfolios.

In the Shaws’ case, they can begin the transition by transferring at least some of the money out of their mutual funds. You can usually transfer 10% of the balance each year without being hit with the deferred sales charge. A low-fee investment portfolio split 60% equities and 40% fixed income—similar to the MoneySense Couch Potato Portfolio—is a good place to start. (See MoneySense.ca for details.)

Finally, the Shaws need to realize that police officers such as Matthew stand to collect a very generous pension in retirement. That means having a large RRSP would result in that money being taxed heavily when mandatory withdrawals start at age 72. So a better option for the Shaws may be to use extra money to pay down the mortgage and max out their TFSAs before they save more in RRSPs.

For many young people, such as 28-year-old Toronto actor and model Lori Bassarab, their first goal is paying down debt. When Bassarab graduated from the University of Western Ontario and got her first full-time job as a marketing manager, she was focused on paying off more than $10,000 in student loans. “I cut back on concerts, vacationing, food and alcohol consumption until it was entirely paid off,” says Bassarab, who is now debt-free.

Bassarab also made some RRSP contributions in her early 20s. “I was interested in reducing taxes,” says Bassarab. “My parents suggested I do it, and I did.” Right now, she holds a couple of stocks in her RRSP but hasn’t checked up on them or made another contribution for a couple of years. “With my modeling job, entertainment and clothing bills are stupid,” says Bassarab. “Once I pay all my expenses, there’s just nothing left at the end of the year.” Her goal? To eventually use her $15,000 or so in RRSP savings to make a down payment on a small condo. “I wish I managed money better. I worry about saving for retirement, so anything that would help make that easier would be great news.”

Kimberly and Brad DeLenardo, both 28, sympathize with Bassarab. The DeLenardos both work for social service organizations in Kirkland Lake, Ont., but say their financial life has become more complicated since their two young daughters—Adriana, 22 months, and Leyla, two months—were born. And even though the couple earns a respectable $110,000 in total annually, they’re stretched to the limit.

That’s because on top of carrying $20,000 in student debt and a $45,000 mortgage on their home, the couple’s expenses just keep mounting. They include a huge $15,000 annual daycare bill when Kimberly returns to work from maternity leave next fall, a much bigger mortgage when they buy a larger home in a couple of years, as well as the $1,000 a year that they contribute to their kids’ RESPs annually. That leaves only about $2,400 a year for RRSPs. “Neither one of us has a company pension, and we won’t be able to contribute much more than this to our RRSPs for the foreseeable future, so we worry,” says Kimberly.

Right now, Brad has $10,000 in his RRSP while Kimberly has $17,000, mostly in bank mutual funds. “I’ve been too busy to monitor returns or look at the fees we’re paying,” says Kimberly. “It gets pushed aside because life gets in the way. But it’s on our to-do list for this year.”

What the experts say

Don’t worry if you’re not building up a large RRSP during the early years of your career. “Saving for retirement is unlikely to be a top priority in your 20s,” says Norbert Schlenker, president of Libra Investment Management Inc. in Salt Spring Island, B.C. “Instead, do what you can to increase your income, cut your expenses, and start cutting your debt.” Remember that reducing debt and saving for retirement are not competing goals: both work together to shore up long-term financial health.

Start by eliminating student loans and other non-mortgage debt—the interest you pay on these loans is usually higher than the guaranteed interest you can earn on investments. Once you’re in the black, you may want to park some money in a high-interest Tax-Free Savings Account (TFSA) to cover unforeseen emergency expenses, like rent if you lose your job suddenly.

This may mean you don’t even make an RRSP contribution in your 20s, but that’s okay: unused RRSP room is carried forward. This works out well, since you will likely earn more money in your 30s, 40s and 50s, and contributions made during higher-income years mean more tax savings. However, if you’re earning a substantial full-time salary in your 20s—$50,000 or more, say—an RRSP contribution could be a good idea if you’ve paid off all your consumer debt and student loans.

The key is to focus on developing good savings habits. “You can start by paying yourself first,” says Marc Lamontagne, a fee-for-service adviser with Ryan Lamontagne in Ottawa. Both Bassarab and the DeLenardos can do that by setting up an automatic contribution to their RRSPs. “Every time they get paid, they should put a percentage, say 10%, towards their RRSPs before paying any other bills,” says Lamontagne.

The trick to building savings is increasing your contribution amount every time you get a raise, says Lamontagne. “You are probably used to living on your current salary, so there is no loss if you divert every raise—or part of it—to savings.” You can also boost your savings by using any tax refunds to make another contribution to your RRSP. This in turn will generate a larger refund next year.

You may have heard that when you’re young, RRSPs should be invested mostly in stocks. However, you may want to buck conventional wisdom and invest more conservatively. If you plan to use your RRSP for a down payment, or if you think you might tap it for emergency funds, then it should be in cash, GICs or short-term bonds. “Those small RRSPs may be the only emergency savings you have and if, like Lori, you plan to withdraw the funds in the next couple of years, you don’t want to have to delay buying a home or condo if the market is down,” says Lamontagne.

If your RRSP is truly for retirement savings and you don’t plan to touch it until you leave the workforce, then you can invest more aggressively. A good plan is to invest 60% of your RRSP money in equities and the remaining 40% in fixed income (bonds) using low-fee investments such as index mutual funds.

As for the DeLenardos, they’re ahead of the game and shouldn’t worry too much about saving for retirement yet. “You can always catch up later,” says Schlenker. “And given the small size of the existing RRSPs, high fees shouldn’t be a big concern now.”

For the 2011 tax year (which includes the first 60 days of 2012) you can contribute up to 18% of your earned income in 2010, to a maximum of $22,450, plus more if you have unused contribution room from previous years. But even a much smaller RRSP contribution can help.

To maximize the benefits of RRSPs, you need to make the right financial moves at every stage of life—your 20s, 30s, 40s, 50s and 60s. With a section for every age, we’re going to show you how to make the tough decisions needed to stay on course. To help, we’ve asked other Canadians to share their own struggles and successes at each stage of life. So if you feel you haven’t been making the most of RRSPs, read on.

Maximize your RRSP: Your 20s, Getting started
Maximize your RRSP: Your 30s, Learning to juggle

Doucet, now 36, spent five days in a Majorca hospital before being transported by ambulance to Majorca’s airport and flown to Gatwick Airport in London, England. From there he was transported by ambulance to Heathrow airport and then flown home first class to Brantford, Ont. His insurer, RBC, hired a Canadian nurse to accompany him. The total bill: $22,727.50.

Fortunately, Doucet had spent $63 on travel insurance to cover him for the 11 days he was away. “Best purchase I ever made,” he says. “Quite apart from what it would have cost me if I had to pay for it myself, I don’t know how I would have handled the logistics of getting myself home.”

Indeed, when it comes to preparing for holidays, travel health insurance should be at the top of your list. Provincial health insurance plans offer sparse coverage for travellers outside of Canada and that can mean big trouble if you need hospital care. “It’s really not wise to travel outside of Canada without insurance,” says Milan Korcok, a long-time medical writer and Florida-based editor of Travel Insurance News (travelinsurancefile.com). Even if you’re just popping across the border to do some shopping, he points out, you need to be protected. “Health care is more expensive in the U.S. than pretty much anywhere in the world.”

Fortunately, protecting yourself from medical mishaps on the road doesn’t have to cost a fortune. Herewith our tips on how to keep costs down:

Avoid doubling up on coverage

“We don’t bother with travel medical insurance because we’re both covered through work,” says 35-year-old Alysia Isidros of Mississauga, who co-authors the blog Beachjunkies.blogspot.com with her husband Mike Solon, 33. Similarly, premium credit cards frequently include travel medical insurance and trip cancellation insurance. The caveat: study the policy closely to make sure you know what you’re getting, advises Korcok. Insurers often limit how much they’ll pay out for claims and restrict coverage to shorter trips.

Don’t buy from your travel provider

Most travel agents flog travel insurance, but you can often get it cheaper elsewhere. Consider that an all-inclusive travel insurance package for a 52-year-old on a $1,500 one-week trip to Aruba rang in at $145.80 per passenger through a package tour operator, including up to $5 million in medical coverage. By contrast, online insurance provider travelguard.ca offered an all-inclusive package for $92.88, including $10 million in emergency medical coverage.

I learned the hard way that if you don’t know what you’re covered for, your home insurance won’t do you much good. Read on, and I’ll fill you in, so you won’t flush good money down the drain like we did.

What kind should you get?

Home insurance generally comes in three different flavours: basic, broad (also called “standard”), and comprehensive. Basic is cheap, but doesn’t protect your home’s contents, so it’s not typically used by homeowners. Broad only covers you from “named perils” that are specified in the policy, and nothing else. Comprehensive, or “all perils” insurance works the opposite way: It covers you for all conceivable calamities except a list of excluded items—typically earthquakes and floods—along with natural wear and tear, mechanical breakdown, settling, and deterioration. This is the kind most homeowners get, and it’s the kind that Fred de Francesco, an insurance agent with Hugh Wood Canada, strongly recommends.

If you get comprehensive insurance, be sure to run a comb through the exclusion list before you sign: “One company may exclude water damage, while another company includes it,” says de Francesco. Similarly, “some policies may restrict coverage during home renovations, while others have no such clause,” he says. Work from your home? Make sure your policy allows for this scenario. Otherwise, your insurer could decline to cover you when you make a claim.

You can pay extra to add “riders” to your policy to cover items on the exclusion list, and if you live in an earthquake-prone region in B.C., says Lindsay Olson, a vice-president at the Insurance Bureau of Canada, there’s a case to be made for purchasing earthquake insurance separately.

Of concern to a broader range of Canadians, sewer backup “has become a big peril for today’s homes,” says Generations Insurance agent Vicki van Santen. If your base policy doesn’t include it, it’s the one extra you should probably always add.

How much coverage do you need?

Don’t confuse the value of your policy with the market value of your home, which includes the land your home is sitting on. Your policy only needs to provide you with the funds to rebuild your home or repair its structure if it gets damaged.

These days most insurance companies assess the cost of rebuilding your home for you, so you don’t have to worry about how much coverage to get. So-called “guaranteed replacement cost” policies cover the cost of rebuilding your home when it gets damaged, no matter what the amount—even if the insurance company underestimated how expensive it would be. Remember, though, that when you renovate, you have to let your insurance company know, says Olson, as that will affect the replacement cost.

A better deal

When you’re buying home insurance, you’re almost always better off using an independent broker who deals with a number of insurance companies, so he or she can get you the best price possible.

To keep your premiums as low as possible, consider bundling your home and auto insurance policies together. “Using the same insurance company for both could shave up to 15% off your total bill,” says personal finance guru and author Gail Vaz-Oxlade. Other measures that could give you a break on premiums: a monitored burglar or fire alarm, a sprinkler system, and—believe it or not—quitting smoking. “Many fires are caused by careless smokers, and insurance companies recognize that non-smokers have a lower risk of fire loss,” says Olson.

Don’t forget what’s inside

Most comprehensive home insurance policies include contents insurance, which covers the cost of replacing your belongings, up to a set amount. But Margot Bai, a former insurance agent and author of the book Spend Smarter, Save Bigger, says this is one area where you could save money by taking the “named peril” route and only insuring big ticket items.

“If you make a claim every time the dog chews on your dining room leg or you drop wine on your laptop, the company could decide not to renew you,” she says. “You get contents insurance to cover the big stuff.”

It’s not as far fetched as it sounds. Toronto’s Mark Skaff recently enlisted his 2003 Mazda Protégé Sport to vouch for him when he joined a trial Pay-How-You-Drive (PHYD) insurance program. He agreed to let his insurance company monitor how he drives using a small electronic recording device in his car, and in return his provider offered him the opportunity to lower his insurance premiums.

Skaff only uses his car to haul groceries and run errands. For the past two years, he shared the tracker data with his insurer every six months. “I knew I would save something,” he says, but the outcome still surprised him.

Such Pay-As-You-Drive (PAYD) and Pay-How-You-Drive (PHYD) programs are slowly gaining popularity in the U.S., but they’re not widely available here—yet. Both rely on telematics, or remote information exchange, using trackers and a car’s on-board diagnostic system to create a clearer picture of your driving habits. The system lets your insurance company monitor how often you drive, when you drive, and whether you make a habit of screeching to a stop or roaring down the street.

The program Skaff enlisted in—the only one in Canada so far—is currently on hiatus. But once Canadian insurance companies fully commit to such programs, they would make great sense for value-conscious consumers, says Dave Huber, an insurance telematics expert, and president of Kairos Solutions. Both systems are user friendly: drivers can plug the trackers into their on-board diagnostic (OBD) port themselves. And sharing the information is equally easy. Skaff uploaded his data into his home computer, and newer systems do it wirelessly.

Depending on the policy, a PAYD or PHYD program “could save 20% to 40% if the telematics confirms that you don’t travel at night and you are a cautious driver,” says Clem Driscoll, a telematics expert and managing partner at C.J. Driscoll & Associates in Los Angeles. And a few wrong moves won’t cost you. “Companies who offer this are saying, ‘we will not raise your rates based on the info we gather.’ Even if you’re not the safest driver, it won’t hurt you,” he says.

Some worry about the Big Brother aspect of tracking, and it’s a valid concern. Although the programs don’t record where you go, they do record a lot of personal driving information, and participants should ask their insurance company exactly how that data will be used, and who it will be shared with.

As the programs gain ground here, more drivers will soon face the choice Skaff made—but he says he would do it again in a heartbeat. After all, his $1,500 annual insurance bill quickly shrank to $1,200, netting him $300 a year in savings. “Someone with driving habits that are more risky might not be comfortable sharing their information,” says Skaff. “But that’s exactly how low-risk drivers, like me, are able to save money.”

Building your policy

Think of your auto insurance policy as a mix-and-match wardrobe. Aside from a few de rigueur colours like basic black, the build is up to you. Below are the main components you have to choose from:

Third-party liability insurance. This insurance is mandatory, and is considered “your first line of defence if anyone decides to sue you,” says Fairview Insurance Brokers principal Fred de Francesco. You have some say over the amount of coverage you get, but he cautions against skimping in this area. “What happens if you run into a streetcar or bus? Bumping up your coverage from $200,000 to $1 million only hikes up your premiums by about $100, so it’s well worth the cost,” he says.

Accident benefits: Also mandatory, this component covers your medical expenses—everything from ambulance services to chiropractic treatment—if you’re involved in an accident, whether you’re at fault or not. A tip from Allstate Canada’s Saskia Matheson: “Your employee benefits may overlap with this coverage, so find out about your medical and disability coverage. If you have enough, you don’t need to buy extra coverage on your car insurance.”

Collision and Comprehensive: Collision insurance covers damage to your vehicle resulting from an impact with another vehicle or object—including the classic hit-and-run in the grocery-store parking lot. Comprehensive coverage takes care of such nasties as theft and vandalism.

While both collision and comprehensive insurance are optional, Margot Bai, a former insurance agent and author of the book Spend Smarter, Save Bigger, advises against waiving collision and comprehensive coverage, “unless your car is so old that the increase in premiums you’d face when making a claim exceeds the value of the vehicle.” Think $5,000 or less.

In combination, collision and comprehensive will set you back by a few hundred dollars. You would think that the premiums would go down as your car ages, but Toronto consumer advocate and auto insurance expert Lee Romanov says it doesn’t always work out that way. “If your insurer has had problems with your type of vehicle, the rates could go in any direction,” she says.

Waiver of depreciation: This option entitles you to receive the list-price value of your car if it gets totalled or stolen within the first 24 months. Otherwise, “you would have to pay back the difference between the list price and the depreciated cost,” says Nancy Hamilton, a manager at Hugh Wood Canada.

Rental car coverage: If you frequently rent cars, consider this extra coverage, “which only costs $25 to $50 per year and may be more affordable than paying for insurance every time you rent a car,” says Matheson.

If you want to lower your premiums, consider raising the “deductible” on your collision and comprehensive insurance. This is the amount that you have to pay if you make a claim. Personal finance guru and media personality Gail Vaz-Oxlade recommends “raising your deductible from the standard $250 to $500, which could save up to 20% on your premium. Go for a $1,000 deductible and you could save 30% or more.”

Shop ’til you drop

Every insurance company has a different way of assessing risk, says Marlene Landry, manager of consumer and industry relations for the Atlantic region of the Insurance Bureau of Canada. “Some companies will hike up your rate after one accident, others won’t change your rate until you’ve had two.”

That’s why you should consider enlisting an independent insurance broker to shop for you, rather than going directly to one provider. “A single broker may have contracts with five or six insurance companies, and you need to talk to several,” Landry notes.

A further stone to turn: the group insurance packages offered by many professional associations and university alumni societies. “If your association consists of accountants who drive Volvos to work, they might be able to offer you a lower rate than you’d get from an individual policy,” says Automobile Protection Association president George Iny.

The claim game

Say you run into the car ahead of you at an intersection, crunching its rear bumper. Should you involve your insurance company? In fact, “the law requires you to do so,” says Michael Turk, legal counsel for the APA. Otherwise, “you run the risk of voiding your policy.” Turk acknowledges that many people skirt around this bit of law and pay for minor collision damage out-of-pocket (assuming the other party agrees). After all, why make an $800 claim if your premiums will go up by $500 a year for the next six years?

Here’s one reason: “The person you rear-ended could make a personal injury claim against you down the road—perhaps because of chronic back pain they incurred after the collision,” says Turk. If you didn’t go through the insurance company at the time of the accident, “you now have a huge problem. The company could decline to cover you.” You’re on safer ground if you write your neighbour a cheque after rear-ending her parked car, “though it’s still a breach of policy,” says Turk. “Consider yourself warned.”

Paralyzed, with a partially severed spinal cord, it took more than six months of hospitalization and two years of intensive physiotherapy for Freedman to resume her life. She was unable to work and had no one to support her. “Thank goodness I had a good private disability insurance plan,” says Freedman, a certified financial planner and author of Hit by an Iceberg: Coping with Disability in Mid-Career. “Those payments allowed me to concentrate on my rehabilitation and to live my life without worrying about where the money was coming from for daily living expenses. That made a big difference to me and my recovery.”

While many of us understand the importance of life insurance, the truth is that insurance against an accident or disease that prevents you from working is arguably even more important. A typical 30-year-old has a four times greater chance of becoming disabled than he does of dying before age 65. A full one in six Canadians will be disabled for three months or more before the age of 50.

There are two main options: long-term disability (LTD) and critical illness (CI) policies. Both pay you money in case of an illness or disability, but they do it different ways. Disability insurance provides a monthly income if you’re unable to work due to a serious injury or illness, while critical illness insurance pays out a tax-free lump sum payment following the diagnosis of one of several illnesses covered by your policy. So which one is right for you?

Regular pay if you can’t work

If you work for a large company, you likely already have some kind of long-term disability insurance. Typically, such a plan will pay you a set portion of your monthly income if you are unable to work. Payments end when you start working again, reach age 65, or die. Coverage differs greatly from one employer to another, and if you’re self-employed or you work for a smaller company, you may have no coverage at all.

Such disability plans will either cover you for “any occupation” or “own occupation.” The latter is much better, because under this definition, total disability means the inability to work at your regular job. With “any occupation,” total disability means the ability to perform the duties of any job. That means that if you become disabled, but you could perform a less demanding job, you may not get the benefit. Often plans offer “own occupation” coverage for the first two years of the benefit period and then switch to “any occupation” after that.

To figure out whether you have enough coverage, contact your company’s HR department—if there is one—or your office manager. If you have coverage, ask them to walk you through your group benefits. If you find that your company plan covers at least 60% of your pay in the event of an accident or illness that prevents you from working, you likely have enough coverage. If you don’t have kids and your mortgage is paid off, you likely could get by on a policy that pays 40% to 50% or your salary. “Basically, you want enough coverage to meet your living expenses—meaning mortgage payments, taxes, hydro, food and transportation costs,” says Lorne Marr, an independent insurance broker and founder of LSM Insurance Services in Markham, Ont.

When evaluating your plan, keep in mind that many disability plans include a cap on benefits. For instance, your plan may cover 60% of your gross income, but only up to $2,500 a month. That means if you’re earning more than $50,000 a year, you may not have enough coverage. If you made $130,000 annually, you would only get the $2,500 a month maximum, which amounts to only 23% of your pay.

If you earn a high income, you may want to consider a private disability plan to supplement your group benefits. To give you a quick idea of the cost involved, a private “own occupation” disability policy for a 40-year-old male white-collar non-smoker that pays $3,000 a month until age 65 (90-day waiting period) would cost about $140 a month. The same policy for “any occupation” would cost about $75 a month.

When calculating your coverage, keep in mind that payments from private disability insurance are tax-free, while the payout from most corporate plans is taxable.

A single payout if you get sick

A second option is critical illness (CI) insurance. You can buy a critical illness policy through an independent insurance broker and it will pay out a lump-sum benefit if you are diagnosed with one of the illnesses specified in the policy. The benefit is tax-free and receiving this benefit doesn’t affect the amount of disability benefits you may also be receiving. When you collect, there are no requirements as to how the money is spent.

The idea of receiving a lump-sum payment of perhaps hundreds of thousands of dollars to help pay for top-notch medical treatment if you are diagnosed with cancer or another critical illness sounds like a smart idea, but unfortunately critical illness insurance is costly and the situations it covers are limited. Typical premiums for a $200,000 policy for a 40-year-old non-smoker add up to $2,000 a year for a 10-year term. More problematic is the fact that the policies are not standardized and problems often arise when payouts have to be made. For instance, some policies will cover only five illnesses, while more comprehensive ones cover up to 25. Such policies can also have stringent requirements regarding survival periods that have to be met after the disability is sustained before a payout is made. If your illness doesn’t meet the requirements exactly, the policy may not pay out a dime.

For instance, if you have a $100,000 critical illness policy, it may specify that no payment will be made if you have a benign melanoma. The same goes for some of the less serious cancers, such as stage one or stage two prostate cancers. “Read the fine print in the policy carefully,” says Barbara Garbens, a certified financial planner in Toronto. “The list of illnesses it covers will be a lot shorter than the exclusions. So it can be a bit of a mug’s game.”

Which type should you get?

If you don’t already have long-term disability insurance and you’re choosing between the two types of coverage, disability insurance is the clear winner. That’s because it will kick in to help you pay the bills in the event of any illness or accident that prevents you from working, while critical illness insurance only helps if you happen to encounter one of the specific illnesses covered by your plan. As well, collecting critical illness insurance often involves more paperwork and delays.

Stanley Morris’s experience with critical illness insurance clearly shows the difference. Last year at age 59, Morris (not his real name) was diagnosed with a brain tumour. Before his diagnosis, he was an active skier, cyclist and entrepreneur. Six years earlier, while reviewing his benefits, Morris had purchased both private disability insurance coverage as well as a critical illness policy.

When he was diagnosed with the tumour, his disability insurance started paying benefits right away, but because of severe headaches, he was unable to file the critical illness insurance documents quickly. After a couple of months, a close friend stepped in to help him with the paperwork and eventually, his claim was filed. But unfortunately, Morris died before he could collect a penny.

Still, there is one situation where critical illness makes sense, and that’s if you help to support your family, but you can’t get disability insurance because you have no earned income. For instance, a 35-year-old spouse who stays home with three small kids and doesn’t work may be a good candidate for a comprehensive critical illness policy (although even then, only for a brief period of time, say 10 years while the children are young). “A family’s lifestyle would change drastically if the stay-at-home spouse was critically ill,” says Rona Birenbaum, a certified financial planner in Toronto. “Paying people to replace the duties he or she performs is expensive. The coverage may not be perfect but it may helpful in these cases.”