Critical Illness Insurance Versus Disability Insurance: What Are the Differences?

If you were suddenly faced with a serious injury or illness, would you be able to care for and support yourself and your family? That’s the question we all need to answer when considering critical illness insurance and disability insurance.

Having the right coverage can mean a world of difference. It could be the factor that tips the balance between financial stability and all-consuming worry during an already-stressful time.

But what exactly are the differences between critical illness insurance and disability insurance? Is one better than the other, or are both necessary? This quick primer can help you understand the unique benefits of each type of policy and when one or both will best suit your needs.

Key takeaways

• Critical illness insurance provides a one-time lump-sum benefit if you’re diagnosed with a serious health condition, such as life-threatening cancer, a heart attack, or a stroke.
• Disability insurance helps with monthly income replacement if you can’t work for a period of time due to injury or illness.
• Though critical illness insurance and disability insurance may overlap with coverage in some cases, they tend to provide protection for different illnesses and scenarios. They also have distinct exclusions and waiting periods.
• Depending on your individual situation, one or both types of insurance might provide the best coverage for you and your family.

Understanding critical illness insurance

What is it?

Imagine you’re diagnosed with a serious illness, such as life-threatening cancer or experience a heart attack or a stroke. You may require specialized treatments, time off work, accommodations in your home, or help with self-care. These new needs may place a hefty financial burden on you and your family when you’re trying to recover.

While other health insurance policies may cover some of your medical expenses or help with income replacement, critical illness insurance directly pays out a one-time, tax-free lump sum. It’s designed to alleviate the financial stress associated with severe illness. And you can use the benefit however you want, such as paying for medications or treatments not covered by your other insurance, continuing to contribute to your retirement savings while you’re off work, upgrading your house or vehicle to suit your new needs, paying for childcare, or even taking a vacation to recharge. Critical illness insurance acts as a safety net and gives you flexibility during a challenging time.

Types of illnesses covered

The illnesses protected by your critical illness insurance will depend on the insurer and the plan you purchase. Typically, these conditions are commonly covered:

• Life-threatening cancer
• Heart attack
• Stroke
• Kidney failure
• Major organ transplant
• Coronary artery bypass surgery
• Multiple sclerosis

More comprehensive plans may also provide coverage for conditions such as dementia, including Alzheimer’s disease, Parkinson’s disease, blindness, deafness, and even severe burns, paralysis, and loss of limbs. Before purchasing a policy, make sure you understand which illnesses are covered by the plan and any exclusions or limitations (such as waiting periods or survival periods before you’re eligible to claim your benefit).

Exclusions

Many plans will not pay out a lump sum or refund any premiums if you experience an illness, death, or other loss that results directly or indirectly from one of these situations:

• Self-inflicted injury, attempted suicide, or suicide.
• Intentional use of any drug (not prescribed by a doctor), intoxicant, narcotic, or poisonous substance.
• Participation in a war or a hostile action, insurrection, or civil commotion.
• Attempt to commit or commission a crime, whether you’re charged or not.
• Operation of any land, water, or air conveyance that’s operated by any means other than your own muscle (think cars, motorboats, planes) while you’re under the influence of any drug, intoxicant, narcotic, or poisonous substance, including alcohol. For alcohol, the limit begins when the concentration of alcohol in 100 millilitres of blood exceeds 80 milligrams.

Speak with your insurer to confirm the details of your specific policy.

Understanding disability insurance

What is it?

If an illness or injury keeps you from working, disability insurance will typically pay out a monthly benefit to replace a portion of your lost income (often around 60 per cent to 85 per cent). Whether you experience a short-term disability, such as an injury that requires months of leave, or a long-term disability that means you can’t work for years, disability insurance acts like a consistent paycheque to help you cover your living expenses and medical bills.

Types of disabilities covered

As with critical illness insurance, the types of illnesses and disabilities covered will depend on your insurer and the plan you choose. You may receive protection in the following instances.

• Total disability: When you’re unable to perform the essential duties of your occupation due to an illness or injury.
• Residual disability: When your illness or disability prevents you from performing some of your essential work duties, resulting in a 20 per cent or more loss in earnings. You will eventually recover.
• Partial disability: When you can’t perform any of the essential duties of your regular occupation and you experience a 20 per cent or more loss in earnings. You will eventually be able to go back to work.

Exclusions

Much like critical illness insurance, disability insurance will typically not cover any disability that results, whether directly or indirectly, from these situations:

• An act or accident of war.
• Normal pregnancy or childbirth (except complications).
• Any injury or illness that occurs before your policy comes into effect or while your policy is not in force.

Some plans will also have these exclusions:

• Any self-inflicted injury, whether or not it’s intentional, that occurs while you’re intoxicated.
• Your use of any drug, unless it’s prescribed or directed by your physician.
• Any suicide attempt or other intentionally self-inflicted harm.
• Infections related to AIDS and HIV.
• Any injury that occurs while you are committing or attempting to commit a crime, even if you’re not charged with that crime.
• Subjective conditions, such as fibromyalgia and chronic fatigue syndrome.
• Mental and nervous disorders, such as depression, anxiety, stress, and burnout.

Schedule a chat with your insurer if you’re not clear on the exclusions in your policy (or any policy you’re considering buying).

Key differences between critical illness insurance and disability insurance

Before you can decide whether to purchase critical illness insurance, disability insurance, or both, it’s important to understand how each type of coverage works and the ways each can provide you with financial stability during a health crisis. This chart can help you understand the primary differences between critical illness insurance and disability insurance.

	Critical illness insurance	Disability insurance
Triggering event	You can make a claim if you’re diagnosed with one of the conditions or illnesses listed in your policy.   Your ability (or inability) to work is not a factor.	You can make a claim for benefits if you cannot complete some or all of the tasks required for your job due to injury or illness.   The focus is on the illness or injury hindering your ability to do your job, rather than the specific diagnosis.
Waiting period	You will often need to live beyond the survival period (a.k.a. a set amount of time beyond your diagnosis, usually 30 days) before you are eligible for benefits.	You will have to wait the elimination period (a set number of days after you receive your diagnosis) before you begin getting payments.
Nature of benefits	You’ll receive a one-time lump sum, which, depending on your plan, can range from $10,000 to $3 million.	Designed to replace a portion of your lost income while you cannot work, this benefit is often paid out each month and lasts for as long as you remain disabled or until the end of your benefit period.
Duration of benefits	In most cases, your policy will end once you receive your one-time lump-sum payment. However, some insurance providers have riders that cover a second critical illness and payment.	You will receive ongoing payments for the duration of your disability, from a few months to many years, up to the limit defined in your policy. Some plans will pay for a disability that lasts until retirement age, while others have a benefit period of two, five, or 10 years.
Use of payout	You can use the lump-sum benefit however you want: to pay medical bills, upgrade your home, contribute to your RRSPs, try alternative treatments, or take a vacation to unwind.	These benefits are designed to cover living expenses while you cannot earn your regular income. While you can use the payments however you want, the amount you receive at one time is smaller and best for maintaining financial stability during a period of low or no income.
Who can apply	Anyone	Employed and self-employed people
Age eligibility	Coverage often ends between the ages of 65 and 75 years; although, some providers offer permanent insurance.	Coverage often ends between the ages of 55 and 69 years.
Premiums	Your premiums are based on the number of illnesses covered, the lump-sum payout amount you choose, your age, how long the coverage will be in place, and your overall health status.	Your premiums will depend on the disability types covered, your monthly benefit amount, how long you will be eligible to receive benefits, and your occupation.
Taxability	Tax-free	It’s tax-free income if you paid for it, and it’s taxable income if your employee paid for insurance for you.

How to best choose between critical illness insurance and disability insurance

Whether disability insurance or critical illness insurance will be right for you will depend on several factors, such as your occupation, financial situation, health risks, and more.

• Financial needs and responsibilities: Take a look at your financial obligations, from mortgage payments to support of dependants. Critical illness insurance can help with large immediate expenses. Disability insurance is designed to provide ongoing income.
• Health risks: Critical illnesses are common.Each year, around 247,000 Canadians will be diagnosed with cancer, and 108,000 will experience a stroke. Critical illness insurance could be an invaluable safety net if you’re affected by one of these conditions one day. If you have a job that increases your risk of injury or certain illnesses, then disability insurance may be the option for you.
• Employment situation: Anyone is eligible for critical illness insurance; whereas, you must be employed or self-employed to purchase disability insurance. If you work for a company or organization, make sure you’re familiar with your employee benefits. For example, you may have comprehensive disability coverage, but no critical illness insurance. In that case, you might want to purchase your own critical illness policy.
• Budget: In an ideal world, we’d all have premium disability and critical illness insurance coverage. In the real world, these plans cost money. It’s important to balance your coverage needs with the premiums that you can afford.
• Dependants and family responsibilities: You may have a wide variety of people (children, aging parents, or family members with disabilities) and pets relying on your income. Critical illness insurance can provide flexibility with a larger payout if you’re diagnosed with a serious condition, while disability insurance can help to cover your day-to-day expenses.

Is it better to combine both types of insurance?

Even though both are types of health insurance, critical illness insurance provides different benefits than disability insurance. Critical illness insurance is designed to immediately alleviate financial strain if you’re diagnosed with a serious illness or condition. Disability insurance covers a broad range of illness and injuries that can affect your ability to work and helps with day-to-day expenses. You may want to combine both types of insurance if you’re looking for well-rounded coverage that protects you in many circumstances. Speak with an insurance advisor to help you make the decision that best suits your lifestyle. They can help you balance your current and long-term needs, consider your risks and budget, and help you choose the right policies to protect you and your family in all scenarios.

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