Insurance can be a confusing topic. The concept is easy enough, you pay a premium to transfer the risk of something bad happening to someone else. What makes it confusing is that there are so many types of insurance that many people don’t understand the coverage that they have and what they are covered for. An example in the life and health insurance industry is the difference between life insurance and critical illness insurance. How are they different and where would they be best applied?
Let’s tackle life insurance first because it is more familiar than critical illness insurance. Life insurance at its root is a simple concept. You pay an insurance company a premium and if you die while the policy is in force the death benefit is paid to your beneficiaries. Part of the reason that it’s a straightforward product is that the payout reason is binary. You are either dead or alive, only one option triggers the payout. Whatever the reason that you took out the policy, for example to protect against, mortgage payoff, protect your children and/or spouse, estate taxes, etc., the payoff is trigger by one event. You don’t get the money, your beneficiaries do. You’re dead.
Critical illness insurance is a different product altogether. This insurance covers you against being diagnosed with a predetermined list of illnesses that are deemed ‘critical’ meaning that they could have a negative effect on your life going forwards. Critical illness insurance is in the category of a ‘living benefit’ plan. This means that in order for the benefit to be paid out a couple of things need to happen. The first is that you need to be diagnosed with a condition that is covered by the policy. The second is that you need to survive. For example, most critical illness policies will cover you in the event that you suffer a heart attack. The key to receiving the benefit is surviving the event. Typically if you have a heart attack and survive 30 days the benefit pays to you. This is the opposite of life insurance. With critical illness coverage if you die before meeting the survival period outlined in the policy than the benefit doesn’t pay off.
The biggest difference between life and critical illness insurance is who gets the benefit payment. Life insurance will help your beneficiaries carry on the quality of life that they are used too if you die by providing a lump sum payment. Critical illness insurance will help you adjust to any changes needed in your life after suffering a major health event but not dying. Both are important parts of your insurance plan, understanding the key difference between them will help you figure out how they fit for you.