We live in a dangerous world, especially these days with the global pandemic. But in terms of the type of insurance you need, do you choose Critical Illness insurance or Disability insurance. What is the difference?
They are not the same. Though both types of insurance are designed to replace income, the most obvious difference between the two is that Critical Illness insurance pays out a lump sum whereas Disability insurance pays out a benefit every month for a set time period, either in months or years (depending on the policy) and you are expected to get back to work. There are Disability insurance policies that can cover profound and permanent disabilities as well.
So which insurance should you get?
If you can afford it and you qualify, get both! Group Benefits do not always cover disability or critical illness, and you can use your own Critical Illness and/or Disability Insurance to supplement your Group Insurance if you have it. Anyone can apply for Critical Illness insurance, even children, however, not everyone is eligible to apply for Disability insurance because it depends on your occupation and income.
Critical Illness Insurance
Insurance companies define a critical illness as one that is severe, high risk to longevity, and where treatment and /or recovery can take many months, if not years. Commonly, the insurance covers diagnoses such as heart attacks, strokes, and cancers, but it could also be a permanent condition which has treatment, but no cure, such as a brain disease like Alzheimer’s or a motor neuron disease like ALS (Amyotrophic Lateral Sclerosis) or infection such as HIV (human immunodeficiency virus) or an injury such as severe burns or spinal cord damage.
Insurance companies will clearly state which illnesses they cover and which they do not, as well as the type and nature of the illness and its severity. Not all esoteric conditions will necessarily be covered. If you are not sure, contact your advisor or the insurance company. Also note, most policies will require a waiting period before a claim can be made. It is often 30 days, but it could be more depending on the policy.
Critical Illness insurance exists because of the reality that such conditions are expensive, take a long time to treat, and that there may not be a cure. A critical illness is likely to be life altering and can render a person unable to work, which causes great financial stress on top of everything else. Bankruptcies are not uncommon, even in Canada where we enjoy public health insurance.
How is Critical Illness Insurance Paid Out?
Critical illness insurance provides a lump sum payment. The money is not taxable and can be used in any way necessary. Most clients use the money to pay bills, medical expenses, or buy equipment such as wheel chairs, or home adaptations, nursing care, or even travel expenses to find better doctors for their condition.
Unlike Disability insurance, Critical Illness insurance does not require any ongoing proof of income loss, nor is it affected by any other income you make.
Disability insurance depends solely on your inability to work and is designed to cover a percentage of your income when you are off work. There is expectation that you will be back at your occupation when you are able. Your disability can be as a result of an illness, injury or other proven medical condition. Qualification to apply depends on your occupation and income.
How is Disability Insurance Paid Out?
Unlike Critical Illness insurance, Disability insurance pays out a monthly benefit instead of a lump sum. Usually it is a percentage of what you earned before becoming disabled. For example, if you worked in a restaurant, the benefit would be calculated based on your wage at that occupation; if you were a highly paid specialist, the calculated benefit could be much higher. Now, the cost of the premiums will be higher as well; nevertheless, a minimum wage earner will not likely qualify for a high payout benefit in the same way as a high earning professional. Small business owners are especially encouraged to apply for Disability insurance because if they are disabled, not only are they not earning an income, but their businesses can suffer too.
Unlike for Critical Illness insurance, a Disability insurance payout requires an ongoing proof of income loss. Benefits can stop when you are back to work and earning again. As well, the monthly benefit payouts for Disability insurance, depending on the policy, can last for two to five years or go up to age 65 or some other term. There is a waiting period as well. With Disability insurance, the waiting period can be 30, 60, 90 or 120 days and the longer the waiting period, the cheaper the cost of premiums.
Making the Choice
When choosing what type of insurance to get, first understand what you do for a living and the type of lifestyle that you and your family have. For example, many Employers offer some kind of Disability insurance with your Employee Benefits package, but often do not offer coverage for Critical Illness and even if they do, the coverage is too small. For self-employed persons, Disability insurance will replace your income if you get disabled and cannot come to work.
As more Canadians try their hand at entrepreneurship, down time from their work due to a broken bone, injury, or illness of some kind will not only stifle their monthly income, but it could devastate their savings. Rent, mortgage and bills still have to be paid. Whichever insurance type you choose make sure you have something in place to give you peace of mind and cover your income so that you can deal with the stresses of life. With adequate insurance you can put the financial stress away.