Disability Or Critical Illness Insurance: What Are The Differences And Which One Do You Need?

If you have loved ones in your life who depend on you, you’ve probably worried about how you would take care of them if anything were to happen to you. Well, hopefully, it’s at least crossed your mind once or twice. Everyone agrees that life insurance is an important part of protecting your loved ones after you’re gone, but many Canadians forget to protect themselves against living through the unexpected. Getting the right disability and critical illness insurances do just that: they protect you and your dependents from the devastating financial impact of a disastrous injury, and short-term or long-term or life-threatening illness. They help you afford the time to heal.

Now you might say, “I’m young, healthy, have a safe job and live a low-key lifestyle. I’ve saved a bit so I don’t need it!” That couldn’t be further from the truth. You don’t expect the unexpected, and it’s hard to imagine yourself unable to work, plus you can’t predict how long it will take to recover. Just like you insure your car in case you get into an accident, you should insure yourself in case, well, you get into an accident. Or get sick.

The odds of getting sick enough to be off work for a long period of time are more likely than you think. Nearly half of all Canadians will experience an adverse health event that will prevent them from working for at least 3 months or more, and it will probably happen before you turn 65.

On top of that, many Canadians are living paycheque to paycheque and admit they would not be able to cover an unexpected bill of just $200 dollars. Can you relate? Are you ready for 3 months without a paycheque?

You’re probably thinking, “I want some insurance right now!” Where do you start and which insurance do you choose? Start with evaluating your needs, your concerns, and your budget. Also, understanding the difference between disability and critical illness insurance will help determine which one – or maybe both – is right for you.

What Is Disability Insurance?

Disability insurance is called a living benefit because you, the insured, receive the payments while you are alive, instead of your beneficiaries after you die.  It pays a limited, consistent benefit for a fixed amount of time to help alleviate the financial impact of an unforeseen health event that would prevent you from working.

Disability insurance covers pretty much whatever would impact your ability to work, whether it be a physical injury, temporary illness, critical or terminal illness. That could be anything from a broken arm to heart surgery, a stroke, and even anxiety and depression. Most employers offer some form of disability insurance through their benefits program. Since your premiums are deducted from your paycheck and are often supplemented by your employer, coverage is relatively inexpensive. However, smaller companies like start-ups or small businesses likely don’t offer it all. If that’s the case then you can buy your own private disability insurance.

Disability benefits are designed to replace a portion of your income if an injury or illness renders you unable to work. Like your paycheque, you’ll receive consistent payments every month to help cover the cost of living during your time off work. Typically, these payments will continue until you either return to work or your coverage period ends. Your coverage depends entirely on your employment status, how much you make, and you cannot keep it if you get fired or quit.

While the payments are meant to imitate your monthly income and are typically enough to cover your debts and basic necessities, you can use the funds however you like, even on things not related to your ailment or financial responsibilities.

Disability benefits do not cover your total monthly income. Typically, benefits will only cover a portion of your gross income like 60%, or up to 90% for more expensive and robust plans. There are usually caps involved with your coverage as well. This means your disability benefits may cover 60% of your gross income up to a maximum of $3000 a month. That means if you make $75,000 a year and your benefit is capped at $3000 a month, you’re actually only getting 48% of your gross monthly income.

There is also often a waiting period before you can submit your claim and start receiving payments. This is different for every provider but could be anywhere from 30 to 60 days. And as mentioned above, the payments don’t last forever. Naturally, if you recover and return to work the payments will stop because you are no longer disabled and don’t need them. If you are permanently disabled your benefits will expire at some point, usually around age 65.

What Is Critical Illness Insurance?

Critical illness insurance is another option available to cover the costs of a significant health event but unlike disability insurance, you are paid a lump sum rather than a recurring monthly benefit. The payout is for approved life-threatening illnesses from a predefined list, not injuries or accidents. The list of pre-approved illnesses can be pretty small too. Almost all policies cover basic critical illnesses like cancer, heart attack, stroke, kidney failure, multiple sclerosis and Alzheimer’s/dementia, but they can have strict qualification requirements.

Critical Illness is also considered a living benefit since the funds are paid out to you while you are alive instead of to your beneficiaries after you die. And much like life insurance, you are typically paid out in one (or a few) lump-sums that you can spend however you want. That could be treatments and medications not covered by your provincial health plan, homecare, a nanny to help with childcare or even to fund your children’s education accounts.

You can purchase critical illness insurance separate from your employer, and you don’t even have to be employed to get it. This kind of insurance isn’t designed to replace a monthly income from lost wages. It acts more like a life insurance payout. Therefore it has nothing to do with your employment status or gross monthly income. Even if you fully recover and go back to work you still get your benefit payment. However, that makes critical illness premiums much more expensive. And while your disability insurance may only cover you until age 65, most critical illness policies will cover you up to 100 years old.

Critical illness coverage is a good option for anyone regardless of employment status and it’s not just for people with a family history of life-threatening illnesses: you can get critically ill even if you don’t have any predisposition.  Since there is no monthly cap on coverage like there is with disability insurance, you are able to purchase as much as you can afford. The lump sum payouts can be in the hundreds of thousands of dollars, much more than disability insurance would ever pay.

Since critical illness insurance is so narrowly defined and limited in what it covers, there could be caveats that prevent your claim from being paid. Some policies cover all forms of cancer, while others only cover specific kinds. There may be such strict requirements around the types of illnesses that even if your disease is technically covered, but it presents in an atypical way, your claim could still be denied. Plus, there’s always the chance you’re the unlucky winner of an illness not covered at all by your policy.

Like disability insurance, there is a waiting period before receiving your payments called a survival period, usually about 30 days. Basically, if your life-threatening illness doesn’t kill you within 30 days of diagnosis you are eligible for your lump sum payout. Also, your benefit payment won’t interfere with any other benefit payments, like disability insurance, so you can use it in addition to other coverages you have.

Do I Need Critical Illness Insurance If I Already Have Disability Insurance?

The short answer? It’s not a bad idea. Paying for both might seem like insurance overkill, but your income isn’t the only thing affected by an adverse health event. Often the cost of treatment, recovery and equipment can incur such high unexpected expenses you may be forced to spend your retirement savings. What do we mean by that?

Well, if you were diagnosed with cancer, for example, obviously you would require time off work. Your disability insurance would provide consistent monthly payments to cover your living expenses. Some experimental cancer treatments are not covered by universal healthcare. And you may also have to travel to other cities or provinces for those treatments. Even with robust prescription coverage, cancer drugs are expensive and can add up fast. How are you going to pay for those upfront costs outside your normal living expenses? What if you require in-home nursing care? What if the type of cancer you have requires surgery that leaves you with a permanent physical disability that requires special equipment like prosthetics? And what if that disability also requires modifications to your home to make it accessible for you from now on? These kinds of treatments and home renovations can run into the tens of thousands of dollars (or more). You shouldn’t have to sacrifice your future in order for you to heal and have access to the resources you need today.

So now you’re probably wondering if you can have both disability and critical illness insurance. The answer is, absolutely!  Both types of policies work well together and can be used simultaneously to meet all your needs and fill any gaps in coverage. So while your disability insurance replaces a portion of your income while you’re off work, your critical illness insurance would payout your lump sum benefit so you can access the care you need, when you need it. Both can be used effectively together to ensure you’ve covered all your bases should the unexpected happen. Having one does not disqualify you from having the other.

Do I Have Enough Disability Insurance Coverage?

First, you’ll need to find out what kind of disability coverage you currently have if you’re working. If you are self-employed or work for a small business, it is more likely that you don’t have any disability coverage.

Check with your HR department or benefits administrator to find out exactly what you are covered for, for how much and for how long. They should be able to explain your insurance plan to you in great detail. Make a list of the benefits, features and restrictions. The most important questions to ask are:

Cost: How much are you paying for your coverage?
Coverage amount: What is the maximum benefit payment, what percentage of your income is covered and is there a monthly cap?
Duration: How long are you covered for, when and how do benefits payments end?
Claims process: What is the waiting period, do you need to pay a deductible, what kind of paperwork do you need to provide?
Eligibility requirements: How long do you need to be employed to qualify and is there a minimum amount of hours you need to work per week? This is especially important for seasonal, part-time, or gig-economy workers.

With those answers in hand, you should compare your disability benefit payments against your monthly budget. Are you able to pay your mortgage, house insurance, utilities, groceries and other basic needs? What about your debts and other financial commitments like child support or alimony? If you’re coming up short you’ll need to buy supplemental disability insurance. Or perhaps you need to add a critical illness policy.

Which One Is Right For Me?

For most Canadians, disability insurance is cost effective, easily accessible through their employer’s benefits package and covers both illness and injuries. You are far more likely to experience an injury or accident that would interfere with your ability to work. On top of that, depression and anxiety are debilitating illnesses, even if they aren’t critical or fatal. According to the Mental Health Commission of Canada, mental illness accounts for a third of all workplace disability claims, hitting younger workers in their prime the hardest. Disability insurance coverage is an affordable way to protect a portion of your income from a wide array of potential health hardships.

Having said that, you can’t put a price on peace of mind. According to Statistics Canada, stroke is the leading cause of disability in Canada and cancer is the leading cause of death. Suffering a stroke is a physically, emotionally and financially traumatic event that requires expensive treatment for recovery, and in some cases, home modifications and in-home healthcare aids. And with cancer rates on the rise, one in two Canadians will develop cancer in their lifetime. Are these numbers startling? Have you done enough to protect your family from the unexpected?

While for most people disability insurance is enough, it’s ok to want both types of insurance to protect as much of your livelihood as possible. You’ll have peace of mind knowing your family will not be adversely impacted, financially or otherwise. You can get coverage for a partner or significant other that takes care of all the domestic responsibilities like raising children or keeping a home. If either of you suffer a severe health event, the other person is affected too. Having both critical illness and disability insurance can relieve stress not just for yourself, but also for the people who you will depend on for support.

If you’re not sure what you want and what you can afford, you can visit an insurance comparison site like PolicyMe and get more information on both types of insurance. The final decision is yours.