Critical Illness Insurance vs. Disability Insurance | Understanding the Difference

If everything unfolded the way one intended, then financial planning would be easy! Unfortunately, life is a little less predictable, which is why smart financial management involves saving for planned expenses, as well as ensuring we have the means to support ourselves to cover the expenses we haven’t foreseen. When it comes to insurance, there is a wide array of products available to protect yourself, as well as your loved ones, against life’s unexpected twists and turns.

In this post, we’re exploring the small but mighty niche of insurance designed to provide the necessary financial support should you experience an unexpected illness or injury or are diagnosed with a critical illness. This form of protection is offered through two distinctly different insurance products: critical illness insurance and disability insurance. Unlike life insurance which covers your expenses following your death, you receive the payments from these insurance plans while you’re alive, so they’re referred to as “living benefits”.

We’ll guide you through the key differences between these two insurance options to help you understand which will better meet your financial protection needs!

Let’s start with the basics:  What is Disability Insurance & Critical Illness Insurance?

Disability Insurance functions as a monthly payment to replace a portion of your income in the event of an illness or injury that impacts your ability to work. Disability insurance serves as financial support to cover your regular expenses, providing you with roughly 60-70% of your salary. Your coverage ends once you’re well enough to return to work, once you reach age 65, or in the event of your passing.

Critical Illness Insurance, by contrast, offers the policy holder a one-time tax-free lump-sum payment should you fall ill with any of the conditions outlined within your policy (i.e., cancer, heart attack, stroke). There are no parameters surrounding how you can spend your one-time payment; it is available to be used any way you want, whether to cover travel expenses, or pay for therapeutic devices to aid in your recovery.

While similar on the surface, there are 3 distinct differences that define the usability of each of these insurance options:

Who Can Use It?

Disability insurance is a product offered by employers to their employees. Since it is exclusively available to employed people, the amount of coverage is calculated based on your salary. Note that if you have a critical illness, but are still deemed able to work, you will not be eligible for any financial compensation through your disability insurance to help cover any costs associated with your illness.

In contrast, anyone can choose to protect themselves with critical illness insurance! Whether you’re a stay-at-home parent, a grandparent, contract worker, or self-employed, you can purchase critical illness coverage.

How Can I Use It?

As an income replacement tool, disability insurance is intended to cover costs that would otherwise be covered by your income. This includes bills, your mortgage or rent payments, groceries, childcare, or other regular expenses.

The lump sum offered through critical illness insurance offers the policyholder the flexibility to use the funds on anything you want. Recovering from an illness can not only be extremely taxing upon your finances, but it can wreak havoc upon your mental health and put a great amount of stress upon your loved ones. With the freedom to use your critical illness payment as you wish, you may allocate some of the funds towards helping yourself recover more comfortably, as well as paying for a trip with your family as a way to unwind and recharge, together! It’s your money to use your way.

The best part: if you have existing disability insurance coverage through your employer, your critical illness insurance payout won’t affect the disability payments that you’re eligible for.

When Can I Use it?

When you will receive your disability payments differs between company policies, but generally you have to have been off of work with a covered illness or disability for 30-120 days before monthly payments are administered.

With critical illness insurance coverage, you can expect to receive your one-time payment in full after 30 days following diagnosis of the covered illness.

As part of developing a smart financial management plan for your planned and unplanned life events, take the time to work out how much money your family may need should you endure an illness or injury. If you’re currently employed, we recommend consulting your HR representative to gain a thorough understanding of the level of support offered by any existing disability insurance coverage. If there are any gaps in the level of the protection you’re looking for, explore how critical illness insurance may be able to provide the living benefits to fully support your family during your time of recovery.

As with any insurance product, ensure you compare policies, read the fine print, and ask plenty of questions; the number of conditions covered by various critical illness insurance plans can vary, so know what you’re protected for before signing on the bottom line.