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.

Share This Article

Why might you want to consider critical illness insurance? Consider this: Each year, more than a whopping 247,000 Canadians are diagnosed with cancer. More than 108,000 have a stroke. That means hundreds of thousands of people are experiencing the physical and mental stress of a critical illness at any given time.

Life-altering medical conditions can also have major financial implications, often requiring time off work and payments for childcare, medications, alternative treatments, and even home modifications.

That’s where critical illness insurance comes in. It can provide a benefit, so if you’re ever diagnosed with a serious illness, you don’t have to dip into your RRSPs or take on debt just to keep life on track.

Read on to learn how to choose the best critical illness insurance in Canada that works for you.

Key takeaways

• Critical illness coverage is a type of insurance that pays a benefit if you’re diagnosed with a serious illness or condition, such as life-threatening cancer, a heart attack, or a stroke.
• The benefit is a tax-free lump sum that you can use to fill gaps in your provincial health insurance, modify your home, cover daily expenses, or even continue to pay into your retirement savings.
• This type of insurance has pros, including financial protection, income replacement, and flexibility.
• There are also contract conditions to consider, such as no coverage for pre-existing conditions and potential overlap with other types of insurance you’ve purchased.
• This insurance can be especially beneficial for primary breadwinners, caregivers, self-employed people, and business owners.

What is critical illness insurance, and why do I need it?

Critical illness insurance, sometimes called “critical care insurance” or “critical illness coverage,” is a type of coverage that pays out a tax-free lump sum if you’re diagnosed with a serious medical condition or illness. It’s designed to help Canadians or individuals living in Canada pay for all the additional costs (such as medications, home care, travel, accommodations, and childcare) and loss of income that can occur with certain types of life-threatening cancers, strokes, heart attacks, and more.

How does critical illness insurance work?

Are you interested in critical illness insurance? Here’s how to secure the right plan and, in the event of a serious illness, make a claim.

1. Choose a policy and coverage amount: First, you’ll need to choose the policy and coverage level that work for you. Typically, you can add a rider to another policy, such as life insurance, or buy a stand-alone policy. RBC Insurance, for example, has two stand-alone policies covering a different range of illnesses: Critical Illness Recovery Plan and Critical Illness Insurance Plan (a more basic type of coverage). You’ll then need to determine how much coverage (or the payout size) you want to receive in the event of a critical illness. The more coverage you want, the higher the premiums you’ll have to pay. Working with a licensed insurance advisor can help you get the right level of coverage for your unique situation.

2. Set your premium and pay it: You’ll need to pay a premium each month, quarter, or year (depending on the policy) in exchange for insurance coverage. The premium will depend on factors such as: the policy you choose, the coverage amount you want, your age, your overall health level, and your smoking status. Your premium may be fixed (meaning, it won’t change) or variable, depending on your policy.

3. File a claim: If you’re diagnosed with one of the illnesses covered in your policy, you’ll need to ensure that you meet all of the policy’s criteria for the survival period (number of days you’ve had the illness before the benefit will be paid out) and the severity. There may also be a waiting period after you purchase the insurance when you cannot make any claims. When you submit a claim to your provider, you’ll need medical documentation that proves the diagnosis and you may even require additional medical exams.

4. Receive the payout: If your claim is approved, your insurer will provide you with a lump-sum payout. It will be an amount that has been predetermined by your coverage level and is not tied to the actual cost of your lost wages or treatment. You can use the payout any way you want.

What is not covered by critical illness insurance?

All policies will have exemptions. Typically, critical illness insurance will not cover illness, injury, or death in these situations:

• Self-inflicted injury, attempted suicide, or suicide.
• Intentional use of any drug, intoxicant, narcotic, or poisonous substance.
• Participation in a war or a hostile action (insurrection, civil commotion, etc.).
• Attempt to commit or actual commission of a crime, whether charged or not.
• Operating any land, water, or air conveyance (a.k.a. car, boat, or plane) that requires more than muscular power while under the influence of any drug, intoxicant, narcotic, or poisonous substance. For alcohol, the limit is 80 milligrams of alcohol per 100 millilitres of blood.

It’s best to check with your insurer for specific exclusions, since policies vary.

What are the advantages of critical illness insurance?

• Financial protection: Treatments and time spent resting (not working) can be expensive. By using the lump-sum payout for your daily expenses, you can protect your savings and avoid drawing from your RRSPs and/or going into debt.

• Income replacement: If you’re unable to work during your treatment and recovery, the lump sum can replace lost income. For business owners or those who are self-employed, it can even be used to maintain operations, cover business expenses, or hire help.

• Coverage moves with you: If you have critical illness insurance through your employer and you lose your job or switch employers,you lose that coverage. Purchasing a policy separate from your employer ensures you have critical illness coverage regardless of your employer or employment status.

• Flexibility: Unlike regular health insurance, which usually pays directly to health-care providers, critical illness insurance pays a sum directly to you. You can use the payout however you want: for medication copayments, to take time off work to recover, for therapies not covered by health insurance, or even a vacation for you and your family during recovery.

• Coverage for multiple conditions: Thanks to advancements in modern medicine, you have a high chance of surviving a serious illness. The bad news? Your finances could be hit hard while you recover. Luckily, critical illness insurance covers many conditions that could affect you during your lifetime.

• Peace of mind: In the event that you do experience a critical illness, you won’t need to worry about finances and will be able to focus on your most important task: getting better. Plus, budgeting for annual premiums, which are typically fixed for a term, is a lot less stressful than falling ill and suddenly needing to come up with a huge sum of money without insurance. 

What are the contract conditions to be aware of with critical illness insurance?

• Lack of coverage for pre-existing health conditions: Typically, any illness you’ve already been diagnosed with before applying for insurance is not eligible for coverage. In some cases, you might not be eligible for critical illness insurance at all, or there may be a waiting period before coverage can begin.

• Survival period requirement: Some policies have a “survival period” clause, which means you must survive your illness for a certain number of days before receiving a payout. RBC Insurance’s minimum survival period for most covered conditions is 30 days; although, some covered conditions require a longer period before benefits are payable.

• Limited covered illnesses: Your policy will only cover you for a specified list of illnesses. The longer the list of covered conditions, the more you’ll pay in premiums. You won’t receive a payout if you’re diagnosed with an illness that’s not on the list.
  
  

Who should consider critical illness insurance?

There are certain people who will benefit the most from purchasing critical illness insurance.

• Primary breadwinners: Your family relies on you to cover the big expenses, such as mortgage payments, school fees, credit card bills, and more. Critical illness insurance can give you financial stability even if you aren’t able to work for a period of time due to illness, reducing stress for you and your dependants.

• Self-employed individuals and business owners: A payout from critical illness insurance can provide crucial financial support during a health crisis. It may even help to cover business expenses, hire temporary staff, and keep things running in your absence. 

• Caregivers with dependants: In addition to everything else you do, you’re a caregiver. And if you get sick, you might not be able to provide care to your children, aging parents, or family members with disabilities. Critical illness insurance can help you pay for substitute caregivers and other related costs if you need time off for treatment and rest.

• People with high-stress occupations or lifestyles: Whether you work in a hazardous environment or have a high-stress job, you may be at a greater risk for certain illnesses and conditions. Even if a career change isn’t in the cards, you can help guard against financial strain from future health issues with insurance. (Note: Some occupations are excluded from coverage. Be sure to clarify with your provider.)

How much coverage do I need?

Getting an estimate for how much insurance coverage you need is a great first step if you’re looking to build a safety net for you and your family in case of serious illness. Start by trying out RBC Insurance’s critical illness insurance calculator. It can help you understand how much critical illness insurance you need.

Frequently asked questions

How do I choose the right critical illness insurance policy?

You’ll need to take a look at your unique situation and weigh these factors.

• Covered illnesses: Are you at risk for certain health conditions, and are they covered?
• Coverage amount: What lump-sum payout will be enough to cover your expenses?
• Premium costs: How much can you afford to pay in premiums each year, considering they might increase over time?
• Exclusions and limitations: Do you understand the potential exclusions or conditions that could affect your eligibility for a payout?
• Length of coverage: How long do you need coverage? Do you need to consider adding a rider (if your provider allows) to extend the length of your coverage?
• Insurer reputation: Does the insurer you want to use have a good reputation, financial stability, and a clear and reasonable claims-approval process?

What illnesses are typically covered by critical illness insurance?

Some policies are extensive, while others are limited. Here are some commonly covered illnesses:

• Cancer (life-threatening)
• Heart attack
• Stroke
• Kidney failure
• Major organ transplant
• Multiple sclerosis
• Coronary artery bypass surgery
• Dementia, including Alzheimer’s disease

If the disease or illness is not explicitly listed in your policy, you won’t receive any coverage for it.

How is critical illness insurance different from health insurance?

Critical illness insurance is a type of health insurance, but it’s different from health and dental insurance. Health and dental insurance typically cover medical costs directly related to treatment, such as hospitalization, surgery, medication, rehab, and medical equipment. The insurance payout directly goes to the health-care provider or reimburses the insured for their out-of-pocket expenses.

Critical illness insurance is a cash benefit paid directly to you. You can use it toward medical expenses, to take time off work to recover, to pay your mortgage, or to hire a babysitter to look after your kids when you need a nap. How you use the payout is entirely at your discretion.

How is critical illness insurance different from life insurance?

Life insurance and critical illness insurance are two different things. Critical illness insurance pays out when you’re diagnosed with a serious illness and need financial support. Life insurance only pays out a benefit to your estate or listed beneficiary/beneficiaries if/when you pass away.

Can my premiums increase over time?

They might. Renewable policies adjust the premium based on your age or health status. That said, some policies have fixed premiums (meaning, they don’t increase) for a certain period or even for the policy’s duration.

Is critical illness insurance expensive?

The cost depends on many factors, from the policy you choose and the level of coverage you need to personal information, such as age, assigned sex at birth, health status, and whether or not you smoke. Generally speaking, you’ll pay less for critical illness insurance if you’re young, healthy, and nicotine-free. No one wants to imagine being diagnosed with a serious illness. But if you’re a primary breadwinner, parent, business owner, or someone with responsibilities, it’s the “worst-case- scenario” thinking that’s worth doing. Many Canadians will experience (life-threatening) cancer, a heart attack, a stroke, organ failure, or dementia at some point in their lives. If you’re one of them, will you have a plan? Book an appointment with your RBC Insurance advisor now to discuss your options.

Share This Article