Here's how to understand the differences between critical illness and disability insurance, and how to decide whether you might need one or a combination of both as part of your plan to protect your income.
Nearly seven in 10 Canadians report that they have current debt – and four in 10 say they don’t know how they would pay their bills if they became critically ill or disabled and couldn’t work.
One option to help keep income flowing if an unexpected sickness or injury happens is through an insurance policy. While critical illness and disability insurance are different products, they serve a similar purpose of protecting your finances should you become unable to work and earn an income.
The lowdown on disability insurance
Disability insurance pays a monthly income, this is called the benefit, that replaces a portion of your regular pay cheque if you suddenly find yourself in a situation where you can’t work because you’re sick or injured. This includes mental illnesses such as anxiety, depression and post-traumatic stress disorder. Here are a few examples of an illness or injury, that might qualify for benefits under a disability insurance policy:
- if you develop a mental illness, such as generalized anxiety disorder;
- if you are injured, such as if you break your leg; or
- if you develop a physical illness, such as multiple sclerosis.
Your specific disability insurance policy will explain the details of your coverage – such as:
- how long you would need to be disabled before monthly payments begin,
- the maximum amount of money you could receive each month, and
- how long the payments might last if you continue to be disabled.
For example, your policy might say that payments would cover 60 percent of your gross salary to a maximum of $4,500 per month; it would start 60 days after you develop a condition that is covered under your policy (that 60 days is referred to as the “waiting period”), and payments will last until you’re age 65, so long as you continue to be disabled and unable to work.
Disability insurance plans will either cover you for your “own occupation” or “any occupation.” If you have “own occupation” coverage, you will continue to receive your monthly benefit if you are unable to return to your regular, pre-disability job. In contrast, if you have “any occupation” coverage and you are unable to return to your regular job but could take a less-demanding job, your benefit payments could stop.
Some Canadians may have disability insurance through work. A workplace policy is more likely to provide “any occupation” coverage, so be sure to ask your HR department what kind of coverage you have, if any.
Canadians can purchase an individual disability policy from an insurance broker or insurance company, and can select coverage that is catered to their own needs, including purchasing a policy with “own occupation” coverage.
The number of Canadians who have disability insurance through work is declining – fewer than half of Canadian employees say they have coverage through work, and out of those employees with no work coverage, more than eight in 10 say they have not purchased their own personal policy.
If you have workplace coverage, and your employer pays the cost of the insurance on your behalf, the income you’d get from the policy is taxable. If you pay the cost of your disability insurance from work yourself, the monthly benefit is not taxable.
If you have a personally owned policy, the monthly income you receive if you become ill or disabled is not taxable.
The lowdown on critical illness insurance
A critical illness policy will pay out a lump sum if you are diagnosed with one of the illnesses covered by the policy – such as cancer, Alzheimer’s disease, a heart attack or a stroke.
Unlike a disability insurance policy, critical illness provides coverage for certain illness but no injuries.
The lump sum benefit from a critical illness policy is not determined by your income prior to diagnosis, and unlike disability insurance, you don’t have to have a job to qualify.
Another difference you may have noticed between disability insurance and critical illness is that you receive one lump sum payment with critical illness, instead of the monthly payments you would receive with disability insurance.
The lump sum payment is tax-free. You receive the payment after a relatively short wait time – called the survival period, this is usually 30 days after your diagnosis – and your claim is approved by the insurance company.
Receiving a critical illness benefit doesn’t affect any disability payments you may also be receiving or are eligible for, and there are no restrictions on how you spend the money. For example, you might decide to use the lump sum payment to help with housekeeping chores you are no longer able to carry out personally, to pay for the cost of child care, or to retrofit your home to better suit your needs.
If you’re interested in critical illness insurance, you will need to carefully review and compare policies and ask lots of questions – as the coverage can vary significantly. For example, some policies may only provide a payout if you are diagnosed with one of five conditions, while others might cover as many as 30 different conditions.
While many Canadians are aware of the importance of life insurance, critical illness and disability insurance can be an equally important part of your financial plan. Critical illness and disability insurance are sometimes referred to as “living benefits” because unlike life insurance, you could receive payments from this policy while you are still alive; so it offers protection to you directly, as opposed to your beneficiary.
Have you put together a plan for how you would pay your bills or manage expenses if you suddenly become ill or injured and can’t work? Consider taking some time to calculate how much you might need should the unexpected happen, to make sure that your income is protected, and to learn what options are out there to help.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.