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A serious illness can turn life upside down, bringing not only emotional distress but also significant financial challenges. While we can’t always predict or prevent health issues, we can take proactive steps to safeguard our financial well-being.
One of the most effective ways to do this is through critical illness insurance, which provides a lump-sum payout if you are diagnosed with a covered condition. However, with various coverage options available, determining how much protection you need can be overwhelming.
In this post, we’ll break down the key factors to consider when choosing the right amount of critical illness insurance, helping you make a well-informed decision that best suits your needs.
- Key takeaways:
- Critical illness insurance pays a tax-free lump sum if you are diagnosed with a covered condition, like life-threatening cancer or heart attack.
- To ensure financial relief, it's important to purchase enough coverage to cover medical and living expenses, replace your monthly income, and more.
- Non-income earning partners and children are also good candidates for critical illness insurance, although insurance companies limit how much insurance they can get.
What Is Critical Illness Insurance Coverage?
You’ve worked hard to build a secure financial future, but have you considered how a serious illness could impact your finances? Thanks to medical advancements, more people are surviving critical illnesses than ever before. However, recovery can be long, challenging, and expensive.
Critical illness insurance helps protect your financial stability by shifting the burden of medical and living expenses to an insurance provider. If you’re diagnosed with a covered condition, your policy pays out a tax-free lump sum, giving you the flexibility to cover costs and maintain your financial plan—so you can focus on what matters most: your recovery.
What does critical illness insurance cover?
Unlike disability insurance, which provides monthly payments if you’re unable to work due to injury or illness, critical illness insurance offers a one-time lump sum payout upon diagnosis of a covered condition. Most policies cover 25 to 26 serious illnesses, including life-threatening cancer, heart attack, stroke, multiple sclerosis, and Alzheimer’s disease.
In addition to these major conditions, many critical illness policies also include partial payouts for less severe illnesses, such as coronary angioplasty and early-stage thyroid or breast cancer, providing extra financial support when you need it most.
How Much Critical Illness Insurance Do You Need?
How can you use the lump sum payout? Unlike reimbursement-based insurance, critical illness insurance gives you complete flexibility in how you spend the benefit. There are no restrictions—you can use the funds however you see fit.
For example, you can cover everyday expenses like mortgage payments or use the payout as income replacement, allowing you to take time off work and focus on recovery without financial stress.
What expenses do you need to cover?
To determine the right amount of coverage, you should assess several key expense categories: medical costs, daily living expenses, lost income, home modifications, caregiver fees, and travel expenses. Let’s examine each of these areas in detail.
Medical expenses
While provincial health plans cover essential medical services like hospital stays and surgeries, they don’t cover everything. Expenses such as prescription medications taken at home, physiotherapy, and other paramedical services often fall outside of provincial coverage, leaving patients with significant out-of-pocket costs.
The financial burden can be substantial—in 2019, more than half of all oncology drug sales in Canada came from treatments costing over $7,500 for a 28-day supply. With the rising costs of medical care, a critical illness diagnosis can have a major financial impact.
Estimated medical expenses: $40,000
Living expenses
You’ll want enough coverage to handle your ongoing monthly expenses, which may include:
- Housing costs (mortgage payments or rent)
- Debt payments (credit cards, car loans, or other loans)
- Food and groceries
- Utilities (electricity, heating, water)
- Internet and phone bills
- Transportation and travel expenses
- Childcare costs
If you have long-term disability insurance with a 90- or 120-day waiting period, your critical illness benefit can cover these expenses for the first 3–4 months until your disability insurance kicks in with monthly payments.
It’s important to note that qualifying for critical illness insurance is different from disability insurance. Critical illness insurance provides a lump-sum payout if you’re diagnosed with a covered condition, whereas disability insurance only pays if you’re unable to perform your job duties. This means you may qualify for one but not the other.
Additionally, if you have an emergency fund covering 3–4 months of living expenses, you may be able to adjust the amount of coverage you need in this category.
Estimated living expenses: $15,000
Lost income
This category is closely related to the previous one, as the benefit both replaces lost income and helps cover monthly expenses. However, it’s important to remember that it’s not just your income that could be affected. A serious illness can also impact your family members.
For example, your partner may need to take time off work to care for you. It’s wise to factor in about three months’ worth of income that your spouse may lose during this period.
Estimated amount to replace lost income: $15,000
Home modifications
A serious illness can have a lasting effect on your mobility, making it difficult to move freely around your home. You may need to install wheelchair ramps, lifts, grab bars, or other assistive devices. Additionally, widening doorways and modifying your kitchen or bathroom may be necessary to accommodate new needs.
This is why it’s crucial to set aside a portion of your critical illness payout for home modifications that will help you maintain your independence and mobility within your home.
Estimated amount for home modifications: $10,000
Caregiver expenses
A critical illness diagnosis can also lead to additional costs for caregiver support. If the illness affects your mobility or daily functioning, you may need assistance with everyday tasks like personal care, meal preparation, household chores, and transportation to medical appointments.
Caregiver costs can vary based on the type of care needed and the skill level required. Skilled nursing care, for example, can cost up to $4,000 per month. For a period of three months, you should budget around $10,000 to cover these expenses.
Estimated amount for caregiver expenses: $10,000
Travel expenses
In addition to the medical care provided by your provincial health plan, you may choose to seek treatment at private clinics, explore alternative therapies, or even travel abroad for care, such as to the United States. This practice, known as medical tourism, has become more popular due to factors like:
- Shorter waiting times for treatment
- Lower treatment costs
- Availability of treatments not offered in Canada
Since travel medical insurance typically doesn’t cover the costs of medical tourism, it’s important to plan for these expenses using your critical illness insurance. Flights, accommodations, and multiple visits for follow-up appointments can add up to several thousand dollars.
Estimated amount for travel expenses: $10,000
How much coverage do you actually need?
Once you’ve totaled the estimated expenses for each category, you can sum them up to determine your required coverage amount. Based on the average figures above, this total comes to $100,000.
But does that mean you should opt for $100,000 in critical illness insurance coverage? Not necessarily. A critical illness may not occur for many years, so it’s important to consider inflation and the future costs of your care. With a 3% annual inflation rate, you would need $135,000 if the illness were to occur after 10 years and $182,000 if it happened 20 years from now.
How much critical illness insurance coverage does a stay-at-home partner need?
A stay-at-home partner may not earn an income, but that doesn’t mean the financial burden is any lighter if they are diagnosed with a serious illness. The same expenses mentioned earlier—such as medical costs, living expenses, and caregiving—apply to them as well. As a result, it’s not uncommon for couples to purchase equal coverage amounts for both partners.
When it comes to underwriting for the non-income-earning spouse, there are a few key rules. First, the income-earning spouse should have coverage equal to or greater than the non-income earner, unless the income earner is uninsurable. Second, the maximum coverage for a non-income-generating partner is typically $250,000, although exceptions can apply.
How much critical illness insurance coverage does a child need?
Since children can’t purchase disability insurance, critical illness insurance is one of the few ways to financially protect their health. The coverage amount you choose should allow you to take time off work to care for your child, access the best available medical care, and focus on your child’s recovery without financial stress. As such, you might consider purchasing a similar amount of coverage for your child as you would for yourself.
Insurance companies impose limits on how much coverage a child can receive. For amounts up to $500,000, both parents must have some level of critical illness insurance. If you want to secure more than $500,000 for your child, both parents should have coverage exceeding that amount as well.
Additionally, siblings should have equal coverage unless one is uninsurable. Generally, children can be covered for up to $1,000,000.
Each insurance company has its own rules regarding coverage for non-income-earning spouses and children. It’s best to consult with an insurance advisor to understand the guidelines and ensure you’re getting the coverage you need.
How much critical illness insurance can you get?
The maximum coverage amount available is $3,000,000. However, the actual coverage you qualify for may vary based on factors such as your income and mortgage balance. For example, if you are between 18 and 55 years old, you may be eligible for coverage up to 10 times your earned income, plus the balance on your mortgage.
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While we make every effort to keep our site updated, please be aware that timely information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Brian So Insurance and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser. This post is a brief summary for indicative purposes only. It does not include all terms, conditions, limitations, exclusions, and other provisions of the policies described, some of which may be material to the policy selection. Please refer to the actual policy documents for complete details which can be provided upon request. In case of any discrepancy, the language in the actual policy documents will prevail. A.M. Best financial strength ratings displayed are not a warranty of a company’s financial strength and ability to meet its obligations to policyholders.
