Last updated on June 18th, 2020
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Many of us take being in good health for granted, but it’s very important to have an insurance plan in place that protects your greatest asset – yourself.
Without an income you and your family could be in dire straits financially. There are multiple insurance products designed to help you in case you are not able to work due to sickness or injury or suffer a critical illness.
The two products that we are going to be talking about are called critical illness insurance and disability insurance.
While they share some similarities, and both help get you and your family out of a financial tough spot, there are a lot of crucial differences that are tailored to different financial needs.
What is Disability Insurance?
Disability Insurance provides a monthly payment designed to replace some of your income if you are no longer able to work due to sickness or an injury.
The way it’s structured is that it covers 60-70% of your employment income. It is supposed to help you maintain the same living standard and keep up with expenses until you can go back to work.
Your income protection lasts until you are 65 years old and you start receiving payouts 90 days after becoming disabled.
Affordable Premiums: As an example, if you are a male who makes about $51,000 annually, the amount of disability insurance you can qualify for is roughly $3000 a month until age 65. To obtain this coverage you’d pay about $55 a month. This price can vary due to your individual situation. The total payout over the whole term of the policy would be $1.5 million.
Tax-free: Disability insurance payouts are tax free, hence, the rates range from 60-70%, which allows for almost complete income replacement.
Waiting Period: There is usually a waiting period from the moment you become disable to the time you get your first payout. Shorter waiting periods, usually 30 days, come with a higher premium. Lower premiums are available if you opt for a longer waiting period such as 60 or 90 days.
Flexible Payout Eligibility: Please note that Disability Insurance policy includes certain definitions such as “Any Occupation,” “Regular Occupation” and “Own Occupation”. You should select “Own Occupation” if you are a surgeon for example.
In case you are not able to perform surgeries but are still able to perform other jobs you are able to get a full payout nevertheless. Of course the more favorable the conditions the higher the premium you need to pay.
Another definition to be aware of is “Total Disability” vs “Partial Disability:. Partial disability means you will get a full payout if you can’t do essential functions of your job. You are still able to earn income working part time or even your primary job if you do it on a lesser scale.
Choosing a partial disability definition is especially important for business owners as it allows them to still run their business while benefiting from insurance payouts. Had he selected a total disability definition his claim would be denied as he would no longer be considered disabled.
You will probably want to add a “Cost of Living Allowance” rider to protect your income against inflationary pressures. Adding this obviously increases the premium you have to pay.
Learn about Disability Insurance on our website:
What is Critical Illness Insurance?
Critical Illness Insurance, as opposed to Disability Insurance, is issued as a one time lump sum payment when you are diagnosed with one of the covered medical conditions. Usually those conditions include cancer, stroke, heart attack and/or certain surgical procedures including but not limited to coronary artery bypass surgery and aortic surgery.
The amount of payment you are entitled to receive will be equal to the total amount of coverage selected when you submitted your policy application. In terms of the funds you get, you are allowed to use it anyway you want.
Critical Illness insurance coverage works best when you supplement it with a disability insurance plan. Not only Critical Illness insurance policy helps to cover the gaps left by your disability insurance, it adds an additional level of financial security that you will be able to use in case of a major emergency such as cancer or a heart attack among other eligible conditions.
You can choose to use your Critical Illness insurance payout to help cover your costs of treatment and recovery, cover travel expenses for medical or other purposes, costs for purchasing assistance devices or just spend more time with your family and friends while you are recovering!
Tax-free Payout: Similar to Disability Insurance benefits, Critical Illness coverage payout is also tax-free.
Affordable Insurance Premiums: The cost of insurance premiums will primarily depend on your age, gender and whether or not you are considered a “smoker”. If you start your policy early and you are not a tobacco-product user, you premiums could be as low as $10 a month.
Optional Paid Premium Return: Another important feature of certain Critical Illness Insurance plans is the ability to receive all paid premiums back if you select such option at the time of your insurance application. In case you never need to use your insurance, you can receive all the money you’ve paid for the policy over the years back when it expires – at your 75th birthday.
You can learn more about Critical Illness Insurance on our website:
Disability v. Critical Illness Insurance: Summary
Here are a few key points to help you understand both products better:
| Disability insurance | Critical illness insurance |
| If you are unable to work due to injury or sickness, disability insurance will help you maintain your lifestyle by replacing a big part of your lost income. The payouts are based on 60-70% of your previous income. | Critical illnesses are very expensive. With critical illness insurance, you could have the money you need when you need it. Lump sum payout helps you manage expenses and give you time and funds to recover. |
What can you use it for?
| Disability insurance | Critical illness insurance |
| Disability Insurance helps you cover your regular expenses since it serves as an income replacement tool. Use it to pay your regular bills, vacation or anything else. | You are able to use the money to cover your regular expenses, mortgage, rent or utilities, groceries and other bills. There are no limitations on how you use CII payout. |
When will you get the money?
| Disability insurance | Critical illness insurance |
| You start receiving monthly payouts after you have been unable to work for a period of time. Waiting periods range from 30 days to 120 days based on the policy. | After you survive your critical illness for a certain period of time – usually 30 days – you will receive a lump sum equal to the total amount of coverage selected at the time of application. |
Who is eligible?
| Disability insurance | Critical illness insurance |
| Disability insurance replaces your income that you earn while employed. It means only people earning income from employment or self employment are eligible to receive coverage. | Any Canadian resident between 18 and 65 y.o. can apply and obtain a critical illness insurance coverage. It is best to get a policy early to secure your financial stability in case of emergency. |
Why you should have both insurance policies:
It is worth nothing that although insurance products have different payout options and eligibility requirements, both are designed to provide a solid level of budget protection in case of an unfortunate event preventing you from living your life as you are used to. By including both products into your financial plan, you can alleviate the risks of being left without sufficient amount of money when you need it most.
While disability and critical illness may sound like something that will never happen to you, national statistics speak otherwise. According to Statistics Canada, about 1 in 5 Canadians have one or more disabilities, which converts to 22% of the population in 2017. Women are twice as likely to develop a disability across all age-groups, which puts them at an increased risk of being unable to earn enough to maintain a desirable living standard.
On the other hand, cancer and heart ailments are the leading causes of death in Canada across the majority of age groups. While survival rate is fairly high if the condition is detected and treated early, it could put a significant strain on one’s financial well-being, not to mention the amount of stress a person has to endure on the road to recovery.
Consequently, having both Disability Insurance and Critical Illness insurance is important since you can rely on your insurance as a source of funds to use for various expenses, while you are unable to continue working or earning the income you’ve had. You can pay for medical bills not covered under your provincial insurance plan, grocery shopping, traveling expenses, pay off your mortgage or car loan and so on.
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It’s important to understand how your disability and critical illness insurance policies work and be aware of its limitations and advantages.
Find a good advisor and have a nice long chat to make sure your policy properly protects you and fits into your financial plans. You can speak with one of our experienced advisors and we can help you create a personalized insurance and financial portfolio that protects you and helps you prosper!
At Arbetov Insurance we have a team of experienced licensed insurance agents and financial advisors who are ready to guide you every step of the way and create a custom plan just for you. We are available 7 days a week in person, by online chat or over the phone.
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