Critical Illness vs Disability Insurance: Which Coverage Do You Need?
If you’re a little stumped on the difference between disability insurance and critical illness insurance, read on...
If you’re a little stumped understanding the difference between critical illness vs disability insurance, don’t feel bad. At first blush, they sort of look like two versions of the same thing. They both provide money when your health takes a turn and you survive, but they do it in different ways.
The difference
Critical illness insurance is very specific. You must be diagnosed with a qualifying medical condition to receive a one-time, tax-free payment. Serenia Life covers 26 adult and 7 childhood illnesses 1.
Disability insurance is more general. You receive ongoing income replacement, typically about 65 per cent of what you earn, if you can’t work because of illness or injury.
To illustrate how these policies differ and overlap, imagine you or a loved one receives a diagnosis of cancer and cannot work. Critical illness insurance can provide a one-time, tax-free payment to be used for any purpose. On the other hand, disability insurance can provide a monthly replacement income due to a workplace injury, for example. This is why many people have both kinds of coverage, on their own or through a group benefits plan at work.
Here’s a more detailed look at both kinds of coverage, how they work together, and what sets them apart.
What is critical illness insurance?
Critical illness insurance is something you pay for monthly, like home or auto insurance. If you’re diagnosed with a qualifying illness, the insurance provider issues a one-time payout that you can use however you wish.
In a country like Canada, it may seem redundant to carry insurance for medical expenses when so many people have coverage through provincial or territorial plans, but it’s not. This kind of coverage was created to help with all the incidental costs not covered by government plans. For example:
- Counselling
- Physiotherapy and massage therapy
- Treatment at a private clinic
- Recovery time at home or on vacation
- Wigs and prosthetics
- In-home caregiving services
- Lawn-care services and home cleaning
- Household modifications to improve accessibility
Thanks to this one-time payout, you can avoid having to cash in your savings or take out a loan to pay for out-of-pocket expenses.
The next step is arranging for income replacement so that you can budget for all of your normal, ongoing expenses. That’s where disability insurance comes into play.
What is disability insurance?
People hear the word “disability” and assume the worst, like some life-altering event. In reality, a disability is anything that legitimately keeps you from working, even for a brief time. For a carpenter, it could be something like a broken wrist. For a sales manager, it could be a mental trauma that impairs their ability to deal with people. Each case is unique, and it’s up to the insurance provider to assess each claim, review medical evidence, and then initiate ongoing replacement income payments.
Typically, disability insurance provides a percentage of your income from the time your claim is approved until you either recover and return to work or you reach the age of retirement. The percentage of income and your choice of a retirement date are agreed to in advance and help to determine the amount of your premiums (i.e., the amount you pay for an insurance policy).
Key differences between critical illness vs disability insurance
Summarizing the difference between critical illness insurance and disability insurance is a good way to show how they complement each other and why having both types of coverage is a good way to cover all the bases.
Critical Illness Insurance | Disability Insurance |
|
|---|---|---|
The payout | You get a lump sum of cash. | You receive monthly payments. |
How to qualify | You must be diagnosed with an illness listed on your policy. | You need medical proof of your inability to work. |
What does it pay for? | Anything you want. You can even save some. It’s up to you. | Consider this replacement income and use it to cover monthly expenses. |
Duration | This is a one-time payout so you need to budget well. | Payments last until you return to work or retire. |
Tax implications | This payout is always tax-free. | If you made the payments, there are no taxes. If your employer covered the cost, it might be taxable. |
Is there a waiting period? | Yes. You don’t get the money right away and you have to survive the illness for a period of time. | Yes. Payments may not start until your claim is approved, which can take some time. |
If you already have critical illness insurance or disability insurance through work, ask your group administrator to explain your coverage and help you estimate waiting times. It’s best to understand how your coverage works before you ever need it.
Can you combine critical illness insurance, disability insurance, and life insurance coverage?
Combining coverage is not just allowed, it’s encouraged. Having all three types of insurance is a great way to shore up your overall financial plan. If anything happens to you, your family may not have to cash in savings, pull money out of your retirement plan, or borrow money to stay afloat financially.
Why combine them?
You may not think that life insurance has a lot in common with disability and critical illness, but there is one thing they all share: Peace of mind while you’re still alive. Here’s why:
- If you get sick, critical illness or disability insurance kicks in to help protect your savings and income.
- Having permanent life insurance, such as whole life, allows you to save less in other parts of your financial plan so that you have more money for things like paying for your children’s education.
- If you die, life insurance means that your family may not have to cash in investments or sell things to maintain their lifestyle, and that’s peace of mind you can enjoy every day.
This is why we say that all three types of coverage provide unique versions of “living benefits” – benefits you can enjoy while you are alive. To learn more, check out our comprehensive guide or listen to this podcast episode, But wait… you don’t get it ‘til you die?
Things to consider when choosing critical illness and disability insurance
Insurance policies can always be modified to fit your needs and your budget so build them to fit your life. Here’s what to think about and the questions you should ask yourself.
1. Is now the right time to buy coverage?
It’s almost always cheaper to get coverage when you’re young and in good health. If you haven’t purchased a policy yet, the next best time is now.
2. Do you have dependents?
If you have children, consider how paying for medical expenses or going without income would affect them. For example, would you have to cut back on things like education savings plans if you couldn’t work because of a critical illness or a disability?
3. How do you make money?
If you lose or change your job, group insurance coverage will expire. Consider owning your own policies so that you don’t have to rely on your employer.
4. What benefits do you already have?
Group benefits plans are fantastic as long as you stay employed. Consider augmenting work benefits with your own policies so that you don’t find yourself having to apply for coverage later in life, when it will likely cost more.
5. What’s your budget?
You can start small and buy more coverage as your income goes up – but keep in mind, the cost will go up too! What matters most is that you’ve secured coverage and it’s enough for now. A licensed advisor can take all the guesswork out of the equation and help you determine exactly how much coverage you need.
6. Could you be over-insured?
If you have coverage through work, and you buy additional protection on your own, you could end up with overlapping coverage. Overspending on insurance means you could be underspending on other goals, like retirement.
7. Can you afford to wait for your money?
Certain critical illnesses have waiting periods, and some of them have a “survival clause,” which means you need to survive typically 30 days from the date of the diagnosis to get the payout. An advisor can help you make a more accurate comparison.
8. Are you buying insurance for now or forever?
Some types of insurance are built to expire. Others, like whole life insurance, are permanent – they cost more but never expire. It’s a bit like renting versus owning.
9. Is there a history of illness in your family?
When an illness runs in your family, it can be an added incentive to explore critical illness coverage. In some cases, your medical history may affect the cost of your policy, and a medical exam may be required.
10. Could you and your spouse survive on one salary?
Couples who rely on two incomes have the choice of insuring both people or just the highest-income earner if there is a significant difference in pay. Ask your advisor if this option makes sense given your financial situation.
11. If you’re raising children solo, do you have a backup plan if you’re temporarily unable to work?
Single parents have expenses that can’t be switched off if they need time off to recover from a critical illness. A one-time insurance payout could help cover expenses and make up for the single income their family depends on.
When is critical illness insurance worth it?
Whether or not you will be struck by one of the illnesses covered by an insurance policy – and the financial fallout – can’t be known ahead of time. Life isn’t like that. But if you don’t have coverage through work or you’re self-employed, the uninsured expenses that come with surviving a critical illness could be financially devastating. That’s why many Canadians and their financial advisors feel that critical illness insurance is worth it when other people rely on you and your income.
Why choose Serenia Life for critical illness insurance?
We recently launched our version of critical illness insurance after carefully considering what our members need and expect from us. We built it with smart features, lots of flexibility, and our trademark dedication to service. While we don’t currently offer disability coverage, we can always advise you on how to integrate it, or any other types of coverage, into a complete family insurance plan.
As a member-based organization whose roots go back nearly 100 years, we encourage kindness by sharing our profits through community outreach, fundraising, and unique member benefits that help Canadians support their families and their communities, including:
- $1,000 post-secondary scholarships
- Up to $600 towards fundraising events and up to $400 to cover volunteering expenses in Canada
- Free digital wills (value: $189), or support for legal wills through a lawyer
- And much more!
View a full list of our member benefits
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Ensuring you can afford the time and care you need to recover from a critical illness can provide you and your family with much-needed resources during a difficult time in life. A Serenia Life advisor can provide a no-obligation quote and easily customize a plan to fit your needs.
