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Disability and critical illness insurance are a vital part of a sound financial plan. One protects you if you become disabled, while the other does if you become critically ill.
But how exactly do they work? And if you had to choose, which one should you prioritize?
In this post, we explore the key differences between disability and critical illness insurance.
- Key takeaways:
- Disability insurance replaces lost income by paying you a monthly income while you're unable to work because of an injury or illness.
- On the other hand, critical illness insurance provides a lump-sum benefit if you are diagnosed with one of the 25 covered illnesses, including cancer, stroke, and heart attack.
- Although there is some overlap, both types of coverage are vital in providing full financial protection.
What Is Disability Insurance?
Long-term disability insurance replaces lost income by paying you a tax-free monthly benefit if you’re unable to work because of an injury or illness. The monthly income starts after a waiting period of 90 or 120 days and continues until you recover. If you have a permanent disability, benefits will stop at age 65.
What does disability insurance cover?
Disability insurance covers disabilities caused by any type of injury or illness, subject to a few exclusions. For example, all disability insurance policies will exclude disabilities suffered during an act of war.
How much does it pay?
The monthly payments you receive are proportional to your income—the higher your income, the larger the benefit payments. For example, if you earned $5,000/month, you can buy up to $3,500/month in benefits. You can’t buy the full amount because the insurance company wants to give you some financial incentive to return to work.
How can you use the benefit payments?
You can use the benefits however you want. Since the monthly benefit replaces lost income, you’ll want to cover costs that your earned income would have covered. Mortgage payments or rent, utility bills, food costs, child care, and other living expenses are some of the things the monthly income can cover.
Why do you need it?
Disabilities can happen to anyone, even if you’re in good health. The average length of a disability that lasts longer than 90 days is almost six years. Can you survive for six years without an income? Probably not.
How much does it cost?
It depends on many factors. Your age, gender, smoking status, and occupation class are the main ones. However, the monthly benefit amount, waiting period, and benefit period also play a role in determining costs. Lastly, you can buy optional riders that improve your disability policy. For example, the partial disability rider lets you collect benefits even if you’re not totally disabled from your injury or illness.
In general, you can budget between 2-3% of your annual income for disability insurance coverage.
What Is Critical Illness Insurance?
Unlike disability insurance which replaces lost wages, critical illness insurance provides financial protection if you become critically ill. It pays a tax-free lump-sum payment if you are diagnosed with one of the 25 medical conditions listed in the policy. For some illnesses, the insurance company will pay you after a survival period of 30 days.
What does critical illness insurance cover?
Some of the life-threatening illnesses covered include heart attack, heart surgery, life-threatening cancer, stroke, kidney failure, and multiple sclerosis. Most critical illness policies also pay limited coverage for less severe types of cancer like Stage A (T1a or T1b) prostate cancer. Always check the contract for a detailed description of a specific condition before buying it.
How much does it pay?
Most people buy between $50,000 to $250,000 of lump-sum coverage, although you can get more or less depending on your own needs.
How can you use the benefits?
You can use the lump sum payment however you wish. Although you survived a serious illness, your health may not be the same as it once was. As a result, you may have to make home modifications and pay for medical expenses not covered by the government. The money from the lump-sum payment can cover costs related to these without affecting your retirement savings.
Why do you need it?
According to the Canadian Cancer Society, two in five Canadians are expected to develop cancer in their lifetime. Other illnesses like stroke and heart attack are prevalent among Canadians as well. Critical illness insurance will give you a cash injection so you can focus on recovery.
How much does it cost?
Unlike disability insurance, your occupation doesn’t affect the premiums. You can get a quote by providing your age, gender, smoking status, and benefit amount. However, your family history and health also play a role in determining the costs. If your health is below average, the insurance company may consider you a higher risk than average. That’s when you will have to pay more for coverage.
Frequently Asked Questions
What is the difference between disability and critical illness insurance in Canada?
The main difference between critical illness and long-term disability insurance coverage is how you can qualify to receive payments from the insurance company.
Whereas the inability to do your job is the qualifying event for disability insurance, diagnosis of a serious illness qualifies you for a claim payout for critical illness insurance.
You can see some of the other key differences in the table below.
Critical illness insurance | Disability insurance | |
|---|---|---|
Pays out if | You are diagnosed with a covered condition and live beyond the survival period | You are unable to work in your job due to an injury or illness
|
Type of payout | One-time lump sum | Monthly benefit |
Who can apply | Anyone up to age 65 | Employed and self-employed people |
Coverage term | Up to age 100 | Up to age 65 |
Taxability | Tax-free | Tax-free |
Does critical illness insurance cover disability?
No. Because the qualifying events for critical illness and disability insurance are different, the former won’t cover the latter. If you became disabled and only had a critical illness policy, you wouldn’t receive any payout.
When would one type of insurance pay a claim but the other won't?
Although there is some overlap between critical illness and disability insurance, not both of them will payout all the time. Often, only the critical illness policy will pay. For example, many people diagnosed with life-threatening cancer may only miss a couple of months of work for treatment. In this situation, they will only receive the critical illness benefit.
Of course, the opposite can also happen. For example, major depression can leave you unable to work. While you’ll receive disability benefits, mental illness is not a covered condition in critical illness policies. As a result, only the disability policy will pay. Sprains, strains, and injuries are some other common causes of disabilities not covered by critical illness insurance.
Do you need critical illness insurance if you already have disability insurance?
Yes. Because they cover different things, both types of insurance are vital to give you the best financial protection.
Critical illness insurance is essential for people who can’t get disability insurance coverage. For example, homemakers, unemployed individuals, children and seniors, and people working high-risk jobs may all have difficulty buying disability insurance. That doesn’t lessen the financial impact of cancer or the diagnosis of another serious illness. A critical illness policy will provide coverage where disability insurance isn’t available.
That said, you should always prioritize disability over critical illness insurance, especially if you are self-employed or don’t have group disability coverage. Since you have the potential to earn millions of dollars in your lifetime, your ability to earn an income is your most valuable asset. Should the unexpected happen, the only way to protect yourself from the financially devastating effects of a permanent disability is with disability insurance.
Do you also need life insurance?
It depends. Both critical illness and disability insurance are living benefits. That means the insurance company pays you benefits while you’re alive. On the other hand, life insurance pays a lump sum benefit to your loved ones. So if you have loved ones who depend on you for financial support, you’ll also need a life insurance policy.
In fact, life insurance is the most vital type of insurance policy to get because of the financial protection it provides to your family. With living benefits, there’s a chance you can recover and resume your role as the breadwinner of the family. However, there’s no coming back from death. So you’ll want life insurance as well to reduce the financial impact of your death.
Life insurance isn’t as crucial if you don’t have dependents. In the end, whether you need life insurance depends on your particular situation.
Have More Questions About Critical Illness Insurance And Disability Insurance?
This post only scratches the surface of disability and critical illness insurance. We have many more posts and resources that dive deeper into each type of coverage. You’ll definitely want to check them out to see which insurance you need, if not both.
When you’re ready, use the forms below to request a free quote for critical illness and disability insurance. Or contact us at info@briansoinsurance.com or 604-928-1628 for a customized solution to your personal situation.
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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.
