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Critical Illness Insurance or Disability Insurance?

We are often asked the difference between these two types of insurance. They are both parts of the ‘living benefit’ category of insurance. What this means is that in both cases the benefit amount is paid out if you remain alive. There are differences though and it is important to understand them to figure out which fits best into your insurance plan.

Disability insurance is a policy type that provides you with income replacement in the event that you are unable to go to work for an extended period of time. This can cover you for either injury or illness. Policies can be structured in a variety of ways. Typically you will need to wait 90-120 days before receiving the income and the payment can range from 2 years, 5 years or up to when you reach age 65. You are eligible to receive up to 66% of your gross income (at the time of application). Given these broad generalizations, if you are unable to complete the tasks associated with your regular job due to a disability you can expect to collect the benefit for as long as the disability lasts or the policy allows. The monthly benefit that you receive is often paid tax-free so the net effect to your income should be minimal.

Critical illness insurance differs from disability insurance in one very key aspect. This is a lump sum payment plan, not an income replacement plan. What this means is that if you suffer from a covered condition and meet the policy requirements you receive a lump sum payment and (in most cases) the coverage terminates. The benefit is also tax-free.

Things to consider when deciding on which coverage is best for you:

Disability insurance will replace monthly income that continues for the length of your disability. On average a disability income claim lasts 3 years, most people don’t have enough saved for an emergency to cover three years of household expenses. And although the critical illness lump sum payment is nice it is difficult to have it replace 3 years worth of income. I personally know clients that have been collecting disability income for years and the difference in their family situation would have been catastrophic if this income hadn’t been available. It would have affected everything from retirement plans to where they lived.

Is a lump sum payment best for you? Critical illness can play a valuable role if you are in a situation where you aren’t making a high enough income for disability coverage. For example, consider a situation where one spouse works mainly in the house taking care of family and household tasks. Although their taxable income isn’t high the contribution to the home is extremely valuable.  In this case critical illness insurance is a perfect solution, you can receive a lump sum benefit payment if an illness occurs that helps offset the costs associated with replacing the household contributions that it may be difficult or impossible to complete.

Both are great plans, just make sure that you get coverage that fits your need.

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