Some people say you need both life insurance and critical illness, while others don't. Everyone, it seems, has an opinion.
Each type of insurance has a different purpose.
Read on to know what life insurance and critical illness insurance are and their key differences. This post will help you make an informed decision regarding whether you need life insurance, critical illness insurance, or both.
What is life insurance?
Life insurance pays a death benefit to your beneficiaries if you pass while your policy is in force. The payout can minimize the financial impact of your death on your dependents. Your family can use the payout to take care of everyday living expenses, pay for your funeral, clear any debts you have left behind, and cover future expenses, like college tuition fees.
There are two kinds of life insurance policies: term life and permanent life. Term life plans provide coverage for a pre-determined period, like 10, 20, or 30 years. After this period is up, coverage will terminate, unless you renew the policy.
Permanent life insurance plans do not have an end date. They cover you for as long as you live. Many permanent life policies (like whole life and universal life) also include a savings element, called the cash value. You can access the cash value at any time during your lifetime while your beneficiaries receive the death benefit upon your death.
What is critical illness insurance?
Critical illness pays a lump sum amount to you if you are diagnosed with a covered illness. How you use the payout is entirely up to you. You can use it to cover out-of-pocket medical costs, experimental treatments, childcare, or even daily expenses.
Each policy is different, but most plans cover the following life-threatening illnesses:
- Heart attack
- Multiple sclerosis
- Organ failure
To be eligible for the critical illness benefit, you must:
- Be diagnosed with a covered illness (i.e. a qualified physician or a specialist must make the diagnosis)
- Survive the stipulated waiting period
A waiting period, also known as a qualifying period, is the amount of time you must wait after your critical illness has been diagnosed before the benefits become payable. The typical waiting period is 30 days, but some policies have longer waiting periods.
You can receive the critical illness payout only once. The coverage terminates after a successful claim.
What is the difference between life insurance and critical illness?
Both critical illness and life insurance offer protection against life’s what-ifs, but they are two distinct financial products. Here are the key differences between the two:
Who receives the payout?
Critical illness provides living benefits, i.e. you (the insured) receive the payout during your lifetime. In contrast, life insurance issues the policy benefits to your beneficiary after you are gone.
How the payout is issued?
Critical illness insurance issues a lump sum payment after you develop a covered illness and survive the waiting period. You cannot receive the critical illness payout in installments.
Life insurance proceeds can be paid as a lump sum or in installments, depending on the insurer. If the installment-payout option is available, your beneficiary gets to choose the size of each payment and the payout period. For example, your beneficiary may decide to receive a certain amount every month for the next 10 or 15 years after your death or for as long as he or she lives.
When the benefits are paid?
Critical illness insurance includes a waiting period — usually 30 days but it can be longer in certain cases. To receive the insurance proceeds, you must survive the waiting period. So if your plan comes with a 30-day waiting period, you will get the lump-sum payment only after 30 days have passed since your diagnosis.
Life insurance, by contrast, does not have any waiting period. The provider issues the benefits after your beneficiary files the claim and provides all the necessary documents.
Does life insurance cover critical illnesses?
Some life insurance plans cover critical illnesses by default, while others may allow you to add this coverage to your base policy by paying a flat fee. You should check with your insurer whether your policy includes critical illness coverage. If not, whether you can buy it as an add-on.
When critical illness coverage is included in life insurance, the insured can access a certain percentage of the death benefit — typically not more than 50% — while still alive. However, doing so will reduce the death benefit, usually on a dollar-for-dollar basis.
Can I buy both critical illness and life insurance together?
Yes, you can get critical illness and life insurance together. Many insurance companies let you add critical illness coverage to your life insurance plan, or you can choose to buy it as a separate option. But remember, the critical illness part will only pay you if you get sick with a specific illness that the policy covers.
Do I need critical illness insurance?
The quickest way to find out whether you need critical illness insurance is to ask yourself this question: if you fall seriously ill and cannot work, could you still manage your finances and support your family?
If the answer is no, critical illness might be worth the cost. Having access to this lump sum payment could help you pay out-of-medical costs and other expenses without raiding your life savings.
How much does critical illness insurance cost?
How much you will pay for critical illness insurance coverage depends on many factors, including:
Because the likelihood of suffering a serious illness increases with age, the older you are, the more your premiums will be.
If you are in good health, expect to receive a preferred plus or preferred rate. On the other hand, a higher-than-normal BMI or an underlying illness, like diabetes or high blood pressure, will likely increase the cost of insurance coverage.
Family medical history
Insurance companies also look at your family health history to determine your premium rate. They do so because you may be genetically predisposed to certain diseases which may increase the likelihood of a payout.
Tobacco use is linked to a higher risk of several life-threatening conditions, like heart disease and certain types of cancer. If you smoke, you will pay more for coverage than a non-smoker.
Number of covered conditions
Many critical illnesses plans cover only five or six serious illnesses, while others protect a large number of conditions (as many as 26). The more conditions a policy covers, the higher the premium amount will be.
Is critical illness cheaper than life insurance?
Generally, critical illness costs more than comparable term life insurance but is less expensive than permanent life insurance.
The main difference between life insurance and critical illness is that the latter gives you access to a lump sum amount while still alive while the former pays out after you pass. Depending on your personal situation, you may need either one of them or both.
Not sure about your insurance needs? Let Dundas Life help you. Our advisors will take the time to understand your unique circumstances and help you decide what kind of protection is important for you and your loved ones. We will also help you find the right coverage from Canada's top insurers at an affordable price.