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Understanding the difference between Critical Illness and Disability insurance

Critical Illness insurance and Disability insurance may sound similar, but each fill different roles within a holistic financial plan. Statistically speaking, most of us will be directly or indirectly affected by critical illness or disability at some point in our life, so it’s important to understand where they overlap and where they diverge. 

With over 12 years of experience, Robert specializes in wealth preservation, risk management, business wealth integration and retirement planning. He leads the wealth advisory team, ensuring a consistent approach to advice and strategies for all our clients.

We’re often asked to explain the differences between Critical Illness insurance and Disability insurance. Though they sound similar, they’re actually quite different and can create a lot of confusion for clients and advisors. Both may pay benefits while the insured person is alive, and both might pay out if they’re sick — same thing, right? Not quite. While there may be some overlap, the coverages fill very different roles within a holistic financial plan.

Beating the odds
These two types of insurance are important for the very reason we don’t like to think about them. Statistically speaking, each of us will be affected in some way by a disability or critical illness, either personally or within our family or circle of friends, during our lifetime.

According to research from the Canadian Cancer Society, about 121,100 Canadian men would be diagnosed with cancer in 2022, and of those, 45,100 men may die from cancer. Conversely, 112,800 Canadian women would be diagnosed with cancer and 40,000 women may die from cancer.

Further, research from Canada Life reports that up to 40% of Canadians will become disabled for 90 days or more before they reach age 65. These statistics drive home the importance of both Critical Illness and Disability insurance to ensure protection and financial support during difficult times.

Overlapping time periods
The first way to distinguish the difference between these types of insurances is understanding the length of time they may be in effect. Disability insurance is only in place during your working years as its purpose is to provide income replacement should you become disabled, meaning you’re no longer generating employment income. On the other hand, Critical Illness insurance can be in place indefinitely. This coverage might pay benefits while you’re engaged in the workforce, and it can remain in place well after retirement.

Triggering events
The initial cause for benefit payment won’t be the same between these types of insurance. Critical Illness insurance covers about twenty-six different illnesses (see figure 1, exact coverage varies by carrier) and pays a one-time, tax-free benefit to the insured after a ‘survival period’ — usually 30 days from diagnosis.

Figure 1:

Source: https://www.sunnet.sunlife.com/files/advisor/english/PDF/810-3508.pdf

Depending on the insurance provider, some illnesses don’t require a survival period and are eligible for benefit payment at the time of diagnosis. It’s not necessary to be off of work in order to receive payment, although many people will choose to take a leave from work if diagnosed with one of these conditions.

Disability coverage will payout if you become disabled as defined by your insurance company. Having one of the illnesses listed above might become an underlying cause of being disabled, but the illness itself isn’t enough to trigger benefit payments. Typically, your disability benefit payments due to injury or illness would begin when you’re deemed unable to perform the important duties of your occupation, if you’re not engaged in any additional gainful occupation and if you’re receiving the appropriate care from a doctor.

Most insurers also have partial and residual disability benefits, so it’s not required for someone to qualify for total disability in order to receive payment. Like the survival period of Critical Illness coverage, Disability insurance has a ‘waiting period’ before payment commences.

Common waiting periods can vary, and we encourage you to have a discussion with your advisor to help select the appropriate waiting period within your coverage. Many people will coordinate their benefits with their short-term and sometimes long-term disability coverage from their employer.

Benefit payments and uses
Critical Illness and Disability insurance differ in the type of payment that’s received. Critical Illness insurance pays in a single lump sum amount after diagnosis and the appropriate survival period. Generally, the coverage expires after the first benefit payment although there’s at least one carrier that does offer second event coverage of a lesser benefit amount than the first event.

Many people will use the benefit payment to supplement lost income if time is taken off of work for travel to treatment centers nationally or internationally, for additional medication that isn’t covered under provincial or employer health plans, or for general unexpected expenses. The value of your benefit will depend on your household cashflow abilities; common benefit amounts are between one to two times annual salary.

Disability benefit payments are a proportion of employment income and usually top out at about 65% of gross income depending on several variables. Self-employed individuals can also qualify for disability coverage, with their payments being calculated based on their total annual corporate revenue. The design of the benefit payments is to provide regular income for a household. That said, these benefits will only last for a specific length of time and depend on the definitions of the policy. Typically, benefits will last for at least two years and may continue all the way to age sixty-five.

It's important to understand the differences between Critical Illness and Disability insurance. Take time to evaluate your options, have conversations with your insurance advisor, and consider your – and your family’s – evolving needs. If you have questions about how to incorporate these or other insurance options into your financial plan, we can help.

Sources: Canada Life, Canadian Cancer Society


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