Disability insurance and critical illness insurance share some similarities. It’s easy to think having one of them is enough.
However, it is not really a question of “either-or” — both insurances offer different types of protection against life’s uncertainties with specific benefits.
In this post, we'll review the key differences between critical illness and disability insurance and help you decide which one is right for you.
What is critical illness insurance and what does it cover?
Critical illness insurance pays you a tax-free lump sum of money if you are diagnosed with a covered condition. The payout can help you cover out-of-pocket medical costs, including, but not limited to:
- In-home care
- Health insurance deductibles
- Health insurance co-pays
Having said that, you can use the payout for non-medical expenses as well. This money is yours and you can use it any way you like.
What conditions are covered depends on the type of plan you buy. Basic critical illness insurance benefit plans usually cover three to six common critical illnesses, like stroke, heart attack and cancer. Advanced plans, by contrast, typically provide protection against 25 or 26 illnesses and include many less common conditions such as:
- Cystic fibrosis
- Parkinson’s disease
- Alzheimer’s disease
- Multiple sclerosis
- Severe burns
- Major head traumas
Chronic conditions and pre-existing illnesses, however, are typically not covered.
All critical illness insurance plans include a waiting period — the number of days you must wait following the diagnosis before the benefit is paid out. A typical waiting period is 30 days, but longer survival periods are not unheard of.
Here is an example of how critical illness insurance policy works.
Sarah, a freelance graphic designer, is diagnosed with breast cancer. Thankfully, her critical illness insurance covers it. However, because her plan includes a 30-day waiting period, Sarah will not get her payout until the 31st day after her diagnosis. Once the payment is made, her critical illness insurance policy will terminate. She is only entitled to one critical illness benefit in her lifetime.
What is disability insurance and what does it cover?
Disability insurance is a contract where you pay premiums to an insurance company. In return, the insurer promises to pay you a fixed monthly benefit if you become disabled and can't work.
Disability insurance coverage has only one goal: To replace a portion of your monthly income if you cannot earn a paycheck because of injury or illness. You can use the monthly payout as you see fit. It can help you put food on the table, cover living expenses, and pay for out-of-pocket medical costs.
Disability insurance will cover almost any disease or accident that prevents you from working, including mental illnesses such as anxiety and depression. Here are some examples of an injury or illness that might qualify you for disability benefits:
- You fractured your arm and need to take some time off work to recover
- You have been diagnosed with post-traumatic stress disorder (PTSD) and have been advised to take an extended absence of leave from work
- You have developed multiple sclerosis and are currently unable to perform the main duties of your job
When choosing a disability insurance plan, consider how your policy defines disability, since this will decide when you will receive benefits and when you will not. Broadly speaking, disability insurance plans define disability as either “own occupation” or “any occupation”.
Own-occupation disability insurance protects your ability to work in your chosen profession. It pays benefits if you are too sick or injured to perform the substantial duties of your job, but are fit enough to take up another suitable job to earn monthly income. Any occupation disability insurance only pays if your illness or injury stops you from working in your current job. It also considers if you're unable to work in any other job you're qualified for based on your education, skills, and experience.
Let’s say, Martin, a general surgeon with 15 years of experience, suffers a serious injury to his right hand. His injury prevents him from doing surgery, but he can still work as an administrator in a medical facility or a lecturer in a college. In this scenario, if his policy is 'own occupation,' he will receive disability benefits. But if he has an any-occupation disability coverage, no benefits will be paid. That is because Martin is fit enough to perform the main duties of other jobs for which he is qualified. Whether Martin takes up another job or not is irrelevant. If the insurer thinks he can, it will not pay out.
Apart from the definition of disability, pay attention to these policy-specific details:
- Waiting period - The longer the waiting period, the lower the monthly premium.
- The size of each installment – Generally, disability insurance plans replace anywhere between 60% – 85% of your pre-disability income.
- Payout period – Some policies pay for a fixed number of years, like 5 or 10, while some others issue benefits until you reach a certain age, like 65. The longer the insurer has to pay benefits, the higher the cost.
Here’s an example of how disability insurance works. You have a disability insurance policy which covers 70% of your gross income, up to a maximum of $5,000 a month. The waiting period is 90 days, and the payout period is 15 years. So if you ever become disabled, the benefits will kick in 91 days after the onset of your injury or illness. The maximum benefit amount you can get in a month is $5,000, and your benefits will last until the payout period expires or you resume work, whichever is earlier.
What are the differences between critical illness and disability insurance?
Both critical illness and disability insurance provide benefits while you are still living. But they are not the same insurance, and each provide specific products to best meet your needs. Here is the rundown of the main differences between them.
Critical illness vs. disability insurance
|How is the coverage amount determined?
|Not linked to your gross salary. The coverage amount is determined by the plan you pick.
|Linked to your gross salary. Typically, policies pay 60% to 85% of your pre-disability income.
|How are the benefits paid?
|The insurer pays you a lump sum of money.
|The insurer pays a fixed amount every month until the payout period expires or you recover and resume work, whichever is earlier.
|When are the benefits paid?
|The insurer pays out after you are diagnosed with a covered condition or illness.
|The insurer issues benefits if you develop any illness or suffer any injury that prevents you from working.
|What is the coverage term?
|Coverage can last until you reach age 100.
|Most disability insurance policies do not pay beyond age 65
|How resuming work impact the benefits?
|Returning to work has no impact on the payout.
|If you recover and resume work, you benefit payments will stop.
What determinates the cost of critical illnes insurance and disability insurance?
The cost of critical illness and disability insurance depends on your personal factors (like age, health, etc.) and policy-specific details (term length, coverage amount, etc.).
As we grow older, our risk of developing a critical illness or suffering a disability increases. Therefore, older applicants receive higher quotes than younger applicants.
Insurance companies reward healthy individuals with low premium rates. On the other hand, a high BMI or underlying health conditions can bump up your insurance cost significantly.
People with dangerous jobs, like firefighters, pilots, construction workers, etc., likely pay more for coverage than someone with a safe job, like a graphic designer or an accountant.
The greater the payout, the higher the monthly premium rate, other things being equal.
In the context of insurance, the waiting period is defined as the amount of time that must elapse since the onset of the covered condition before the promised benefits become payable. Your policy’s waiting period is inversely related to its cost. So, the longer the waiting period, the lower the monthly premiums.
A policy that stays in force for 20 years will cost less than a similar plan with a 10-year term.
Should I get both critical illness and disability insurance?
Disability and critical illness policy insurances cover different things, but they work in tandem. Having both of them is desirable — and sometimes even necessary.
While you can buy one or the other, consider both since they pay benefits in different ways. Critical illness policy provides you with immediate cash if you are diagnosed with a covered illness and meet the waiting period. On the other hand, disability insurance coverage, provides you with a monthly income if you cannot work due to injury or illness. Your policy will continue to pay out a guaranteed income until you are fit to return to work or its term expires.
Critical illness insurance covers what disability insurance does not. Unlike disability insurance, critical illnesses policyallows employees who can work part-time to have adequate financial protection.
Additionally, a critical illness insurance helps you meet expenses not covered by your health insurance, like co-pays and deductibles. Critical illness policy can also help you meet other expenses, like travel expenses for medical treatments, mortgage or rent, and even daily living expenses.
In some cases, a person is disabled but can still work reduced hours. But, in this scenario, they will not receive the full disability benefits. Critical illness insurance can fill the gaps left by disability insurance coverage since it pays lump sum benefit regardless of whether the insured works full-time or part-time or cannot work at all.
When would one type of insurance pay a claim but the other won’t?
Depending on your insurance plan and health condition, you might get money from both your disability insurance coverage and critical illness insurance coverage, or just one of them. For instance, if you can't do your job because of severe anxiety, only your disability insurance will give you money. Unlike disability insurance, critical illness insurance generally does not cover mental illnesses.
On the other hand, if you get diagnosed with something like breast cancer but can still do your job, only your critical illness insurance will give you money. This insurance gives you a lump sum benefit when you first get sick, even if you can still work.
Do I also need life insurance?
The quickest way to determine whether you need life insurance protection is to ask yourself this question: Would your death impact someone financially?
If the answer is yes, you probably need life insurance. It pays your dependents a lump-sum benefit, which they can use to stay afloat after you are gone.
There are two types of life insurance policies: term and permanent. Term life insurance is simpler and more affordable and provides coverage only for the duration you need it. If you want life insurance to cover financial needs with an end date (e.g. until your kids become financially independent or pay off the mortgage), consider term life insurance. These policies typically come in 10, 15, 20, or 30-year lengths.
In contrast, permanent life insurance last as long you as live. Alongside lifetime coverage, most permanent life plans include a savings element. Permanent life insurance can be a good fit for people with unique needs, like a parent with a special-needs child. Additionally, those who want to use life insurance as both a financial safety net and an investment tool may find it worth the extra cost.
Which one is right for me?
In an ideal world, you should have both critical illness insurance and disability insurance. But what if you can afford only one of them?
If you earn an income, we recommend you pick disability insurance over critical illness insurance. It protects your most important asset — the ability to earn.
For example, if you are finding it hard to qualify for a disability insurance policy because you do not have a monthly income or are employed in a high-risk job, consider buying critical illness insurance. It can help reduce the financial impact of the diagnosis of a severe illness, like cancer.
While disability and critical illness insurance have some similarities, they are two distinct insurance products with different benefits.
Disability insurance protects your ability to earn a paycheck if you are disabled. Critical illness, on the other hand, helps mitigate the financial impact of a severe illness. Most people can benefit from having both, but in some situations having one or the other may be sufficient.
Not sure how much disability and critical illness coverage you need? Or which one you should prioritize if you have a limited budget? Let Dundas Life help you. Our experts will take the time to understand your financial and personal circumstances and offer advice tailor-made to meet your needs. We will also help you locate the right coverage at the most affordable rate.
Gregory Rozdeba is the CEO of Dundas Life, Canada's leading digital insurance brokerage. He has over 8 years of experience in the life insurance industry. Gregory previously served as Director of Sales at a Toronto-based insurtech firm. He took the company from having no product to raising over $7.6M+ in venture capital to transform the prospect to policy process in Canada. Gregory holds a Bachelor's Degree in Finance & Accounting from Ontario Tech University and a Master of Information Management from FH Joanneum.