While auto insurance is a legal requirement and home insurance can be a mortgage requirement, personal insurances are not obligatory. Nevertheless, 22 million Canadians have life insurance. However, other forms of personal insurance, while just as important, have less of an uptake. Just over half of Canadians have disability insurance, while only 2 million Canadians have critical illness insurance.
Canadians seem to value disability insurance and critical illness insurance much less than life insurance, yet both of them can be crucial in maintaining your lifestyle and keeping you in your home if you get a debilitating illness or get injured.
Both disability and critical illness are more prevalent than most people realize. A recent survey found that more than one in four Canadians aged 15-plus had at least one disability that affected their daily activities. Similarly, almost a third of men and almost a quarter of women who are healthy at age 35 will suffer from a critical illness before they reach 65.
We take a close look at how disability insurance and critical illness insurance work and explain the differences between the two. We also examine which insurance policies are right for you and how they should fit into your financial plan.
How critical illness insurance works
If you’re diagnosed with a condition covered by your critical illness insurance, you’ll receive a one-time, tax-free lump sum, designed to help you cover the costs related to the illness (including loss of income, medical costs, in-home care, etc.).
Critical illness insurance often includes dozens of potential illnesses, including:
- Brain injury due to trauma
- Aplastic anemia
- Blindness
- Various types of cancer
- Deafness
- Dementia/Alzheimer’s
- Heart attack
- Kidney failure
- Organ transplant
- Multiple sclerosis
- Parkinson’s disease
- Stroke
You can choose how long to have this kind of coverage, or you can have it for your whole life. You’ll typically be paid out after the survival period, the length of which will depend on the type of coverage you’ve bought. You’re paid out whether you continue to work or not.
The amount of the lump sum payment will depend on your insurance provider and how much your coverage cost. Many critical illness insurance policies (including those offered by IG) have optional return of premium riders, which, in many cases, provide a 50-100% return of premium at specified times, as outlined in the insurance contract.
How disability insurance works
If you get ill or have an injury and cannot work, disability insurance will pay you a (usually) tax-free monthly amount designed to replace a considerable portion of your salary. Payments continue until you’re able to go back to work or until your coverage period ends (whichever comes first). There is a mandatory waiting period, after which time you’ll start receiving payments.
Disability insurance can cover a wide range of disabilities that prevent you from working, including:
- Injuries from an accident
- Cancer
- Depression and other mental health issues (such as anxiety)
- Chronic pain (such as back pain, fibromyalgia, arthritis)
- Cardiovascular conditions
- Neurological disorders (like stroke and Parkinson’s)
The cost of disability insurance can vary greatly, depending on a number of factors, and can range between 2-4% of your salary.
Factors that will affect the cost include the coverage amount (how much you’ll receive monthly if you can’t work), the length of time you want to receive benefits, the waiting period, your age, your current state of health and your job (people with dangerous jobs usually pay more).
As with critical illness insurance, many disability insurance policies (including those offered by IG) have optional return of premium riders.
Disability insurance versus critical illness insurance: how they’re different
There is some overlap between critical illness insurance and disability insurance, but they are designed to help people going through different experiences and so can pay out (or not) in different ways.
Critical illness insurance provides a one-off lump sum payment, while disability insurance provides ongoing payments for the duration of your disability (or until the end of the coverage period). There can be instances where someone will receive payments for critical illness but not disability insurance, and vice versa.
For example, if you experience a serious depression that prevents you from working, you won’t receive a payout from critical illness insurance, as it’s not a covered condition, but you would receive a payout from disability insurance. Conversely, you could receive a payout from critical illness insurance if you were diagnosed with cancer, but if the illness doesn’t prevent you from working for a considerable length of time, you wouldn’t receive any payments from disability insurance.
Critical illness insurance coverage can last your whole lifetime, whereas disability insurance ends at age 65. Being unable to work because of a disability is what qualifies you to receive disability insurance payouts, while critical illness insurance requires the diagnosis of a covered serious illness.
Disability insurance is only available to people who work, whereas critical illness insurance is available to everyone.
“Well protected, no matter what might happen”: a case study
Patrick, a single parent and an entrepreneur, had to take time off work to have an operation and recuperate. He was worried about how he and his children would be looked after while he recovered, and what would happen to his business.
Thankfully, Patrick’s IG Advisor, Sebastien, had put together an insurance strategy for Patrick based on his unique needs, so that when Patrick had to take time off to recover, he, his children and his business were all well looked after. Watch Patrick’s story here.
Disability insurance versus critical illness insurance: which is right for you?
As we’ve seen, there are many instances where coverage for disability insurance doesn’t overlap coverage for critical illness insurance, so for many people, taking out coverage on both could be a wise move.
For the self-employed, business owners and anyone who doesn’t receive employer insurance benefits, both disability insurance and critical illness insurance should be a priority. Critical illness insurance provides a lump sum that would help you to hire a replacement for you while you recover, or replace your lost earnings. If you became disabled, disability insurance could replace most of your lost income.
Your IG Advisor can work out which insurance would be suitable for your circumstances and how each would fit into your financial plan. These insurances, along with life insurance, can be essential for ensuring that your financial plan doesn’t go off the rails if the worst should happen.
Contact your IG Advisor to discuss whether disability insurance or critical illness insurance have a place in your financial plan. If you don’t have an IG Advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.
Insurance products and services distributed through I.G. Insurance Services Inc. (in Québec, a Financial Services Firm). Insurance license sponsored by The Canada Life Assurance Company (outside of Québec).
