Is Critical Illness Insurance Taxable?

When you're faced with a critical illness, the last thing you want to worry about is taxes. Unfortunately, though, whether or not your insurance payout is taxable can be a bit of a grey area.

In this blog post, we'll explore what exactly constitutes a critical illness and whether or not your payout is considered taxable income in Canada. Keep reading to get all the answers!

Critical illness vs. Disability insurance

Critical illness insurance and disability insurance provide financial assistance when you are dealing with health issues. Since both critical illness and disability insurance provide payments while you are still alive, they are often referred as “living benefits.” Despite these similarities, they are two vastly different products.  

Critical illness insurance provides financial assistance in the form of a lump-sum payment if you are diagnosed with a covered condition. If you get sick, you get paid. The recipient can use the critical illness insurance payment to cover any expenses they deem appropriate, from out-of-pocket medical bills to debt and monthly bills and more. With the help of this financial assistance, the recipient can focus on their recovery instead of worrying about the financial implications of becoming seriously ill.  

The conditions covered by critical illness insurance vary in different policies. A basic critical illness insurance policy usually includes five or six conditions while others may cover up to 36 critical illnesses, including heart attack, stroke, kidney failure, cancer, Alzheimer’s disease, and multiple sclerosis.  

Disability insurance, on the other hand, offers financial assistance in the form of monthly payments if you are unable to work due to illness or injury. The monthly benefit amount and the payout period for disability insurance vary from one policy to the next. If you become disabled, you will receive disability insurance benefits until you return to work or the payout period expires, whichever is first. The monthly payment is generally capped at 60 to 80% of your pre-disability gross income.  

Is a critical illness insurance payout taxable in Canada?

Critical illness insurance benefits provide a lump-sum benefit if you are diagnosed with a life-altering illness. The critical illness insurance payout is not taxable since the premiums paid are with after-tax dollars. So, if your critical illness insurance policy covers you for up to $100,000, and you are diagnosed with a covered medical condition, you will receive the full amount of $100,000.  

Are critical illness insurance premiums tax deductible?

When you pay the critical illness insurance premiums from your own pocket, they are not deductible from your income. That is because the premiums are personal expenses. Therefore, if you pay $20 every month to keep your critical illness insurance policy in force, $240 a year will be considered as taxable income.  

Many Canadian employers offer critical illness insurance as part of the employee benefits package. When the employer pays the premiums for critical illness insurance, they are deductible to the employer. The premiums will be included in your income as a taxable benefit.  

The critical illness insurance payout, however, is tax-free. If you develop a critical illness, the benefit payment you will receive will not be included in your taxable income.

Are insurance premiums tax deductible in Canada?

As a general rule, the premium dollars spent on a private health service plan, including hospitalization, medical, and dental, are regarded as eligible medical expenses. Generally speaking, if you pay for health insurance yourself, you can deduct the premiums from your taxes. You can claim them as a medical expense as long as all or 90% of the premiums are for eligible medical expenses.  

Is critical illness insurance taxed? How?

In the case of critical illness insurance, the insured receives a direct cash payment. There is no payment for covering healthcare co-payments, deductibles, travel expenditures, income shortfalls, and other such expenses. Therefore, individuals who purchase critical illness insurance coverage cannot receive a tax deduction for the premium dollars. Premium payments are regarded as personal expenses. However, the benefit payment is tax-free. The money you receive from the insurer after you develop a critical illness is not counted as income. Consequently, you will not have to pay any tax on it.  

Is critical illness a taxable benefit?

If a critical illness occurs, the recipient receives the one-time, lump-sum payment tax-free, as it is not counted as income.  

Is my health benefit a taxable benefit in Canada?

Employer benefits in Canada are predominantly taxable. However, health benefits are an exception. As an employee, you can receive them free of tax. You will not incur a tax penalty on health benefits provided they are not paid to you directly.

Are my ACA premiums tax-deductible?

In case the health insurance policy you own only covers medical care, the premiums may be deducted from the taxable income.  

Are my medical insurance premiums tax-deductible?

If you have a medical policy in your name and pay the annual premium out of pocket, this amount will be regarded as tax deductible.  

Are health insurance benefits taxable in Canada?

If you have a private health insurance benefit plan that is paid in full by your employer, you will receive the benefits tax-free. The premiums paid by your employer are classified as a pre-tax business expense. These plans are structured in such a way that benefits are paid tax-free to the employees.  

If you own a personal health insurance policy, then the benefits will also be free of tax, as you pay the premiums from your after-tax income.  

Is critical illness insurance worth it?

Having a serious illness can put you on the back foot financially. You are likely to incur expenses that your health insurance (if you have one) does not cover. If you cannot work due to illness, you may face extreme financial stress. This is where critical illness insurance can come in handy. Critical illness insurance shields you and your family from financial hardship during one of your most vulnerable periods by providing a sizeable payment.  

To find out whether you need this protection, ask yourself:  

• Will I be able to meet all or the most important personal financial obligations if I have to pay medical expenses out of pocket?
• Will I be able to keep my family afloat if I suffer loss of income due to my illness?

If the answer is no, you should strongly consider buying critical illness insurance. It protects you from the financial implications of being seriously ill.  

The bottom line

Critical illness insurance acts a safety net if you are diagnosed with a serious illness. It pays you a lump sum, which you can use however you like. The payout is not taxable since it is not counted as an income. That is, this money is not something that you have earned; instead, it is compensation for the loss of income that you experience as a result of being diagnosed with a serious illness. Therefore, you do not owe any tax on the benefit payment.