Critical Illness Insurance vs. Disability Insurance: Why You Need Both
In a previous post, we explained why critical illness insurance is now equal in importance to life insurance when it comes to inoculating yourself against the financial hardships that come with any critical illness diagnosis.
A diagnosis of cancer, heart attack, stroke, or any other of the 20 to 25 illnesses a critical illness insurance plan typically covers, means a lump sum payment between $10,000 and $2 million for the insured, depending on the plan they purchase. The lump sum payment has no restriction — you can use the amount for anything you can think of, including your mortgage payments, experimental treatments abroad, expensive drugs, extra income, or just a once-in-a-lifetime vacation.
The only real caveat to getting that lump sum is surviving the waiting period, which is normally 30 days. However, one drawback to critical illness policies is its lump sum nature — once the money is spent, it’s gone. As Ontario-based LSM Insurance brokers explained in the previous post,
“[Critical illness insurance] helps will the gaps between any disability insurance they may have.” But if you only have critical illness insurance, there are no gaps for it to fill. Critical illness can top you up financially, but disability insurance provides the foundation. “Normally, disability insurance — if you have it — will only replace somewhere in the neighbourhood of about 60% of their income and for higher income earners, it may even replace less than that,” they revealed.
So, it’s best that the two insurance plans work in tandem with each other, allowing the critical illness insurance lump sum to cover what disability insurance won’t. Of course, that means the steps needed to obtain disability insurance are just as important as the steps necessary for obtaining critical illness insurance.
Why You Need Disability Insurance
Glennis Deslippe, living benefits specialist at Integral Financial Services Inc. in Surrey, B.C., knows better than anyone why critical illness insurance isn’t enough to keep you financially protected during a serious, potentially disabling, illness. “If you trigger a critical illness payout and it is paid out to you, then that’s it. For example, if you had a policy that was $25,000 and if you claimed at age 25, but you had a permanent disability as a result of your illness, then that’s it — that’s all the money you got.”
Disability insurance protects your income to age 65 and will generally kick in after 90 days of disability.
“If you are a male who is 25 and making $50,000 a year, you can qualify for about $2900 a month in disability insurance and that would cost you — for total disability until age 65 — about $50 a month,” says Deslippe.
Under this policy, you would receive approximately $1.4 million in income over your working life for only $56 a month.
“Generally, disability will replace anywhere from 50 to 70% of your net income,” explains LSM Insurance Team. “The reason they won’t replace 100% is because your income under a disability policy is paid out tax-free. So, 60% tax-free is almost the same as 100% before tax. Although, the higher amount you earn, the less of a percentage they’ll replace. So, someone who is earning to $200,000, they might only replace 35% of their income.”
You must also beware of the waiting period. Just like critical illness, you typically must wait 30 days, 60 days, or 90 days before you receive the benefit amount. “The shorter the waiting period, the higher the premium. Also, the longer the benefit period, the higher the premium.”
What makes your disability insurance effective or not depends on the definitions your disability policy falls under, both in terms of disability and occupation. The three occupational definitions to watch are ‘Any Occupation,’ ‘Regular Occupation,’ and ‘Own Occupation’.
According to LSM, Any Occupation is the worst definition. “What that means is if you can do any type of work, you won’t get paid. Then you’ve got ‘Regular Occupation,’ which means that as long as you can’t do your regular occupation, you will still receive money. The third definition is the gold standard and that’s ‘Own Occupation,’ where if you can’t do your job, but you can do another job, you will still receive your disability benefit and you’ll get the money from the other job.”
People who may want a ‘Own Occupation’ policy are surgeons, because if they hurt their hands, they can’t be a surgeon, but they still could be a general practitioner or some other profession in the medical field. The better the definition, the higher the premium, and the better definitions are only available to jobs that aren’t physical, like computer consultants or business professionals. A landscaper, painter or construction worker won’t be able to see those definitions.
“Disability insurance differs from critical illness in the way that the premiums aren’t just based on your health and your age, it’s also based on your occupation: a 40-year-old landscaper will pay more than a 40-year-old pharmacist because the landscaper has a much higher risk of disability than the pharmacist.”
Before you can pick the rider that will define the occupational conditions that will allow you to collect, you will need to choose the disability conditions that will allow you to collect. Your two options are typically ‘Total Disability’ and ‘Partial Disability.’ ‘Total Disability’ means the policy will only payout if you cannot work at your job at all, while ‘Partial Disability’ means you’ll still get money if you can’t perform the major functions of your occupation, but you can still work part-time or perform less demanding functions at your primary job.
“I always encourage people to put at least partial disability on their policy,” says Deslippe. “So, if you can’t work full-time, but you can work part-time, then you can at least get some payout, but your not going to get the whole thing. This is also very important for business owners because it’s pretty hard to keep a business owner out of the office. At least with partial, he can still come in and sign the cheques. If he stepped into the office on a ‘Total Disability’ plan, then he’s not considered totally disabled and he wouldn’t be able to claim.”
Your age when you purchase the policy also matters because it helps the investment expand through the years.
“You want a ‘Cost of Living Allowance’ on there, too, so that the policy value can grow when you have a disability for the longterm.” Of course, the more riders with more favourable privileges you add to a disability insurance policy, the more the monthly premium goes up.” If you look at our previous example of the fellow making $50,000 a year, if he had a ‘Cost of Living’ and the opportunity to buy more insurance later on and already had a ‘Regular Occupation’ classification until age 65, he’s looking at $70 to $80 a month [instead of the basic $50].”
Take Your Time
As you can probably tell, both critical illness insurance and disability insurance are very complex products that may hold your future and the future of your family in their hands.
As Deslippe says, “You can’t just expect to rush through a meeting or request a quote over the internet and feel that you have a good understanding of this.” She advises sitting down with an individual insurance broker to go over your own financial and family situation. “You need to find the right product and the right fit for you because there are so many different types that that’s where brokers and specialists come in.”
If you absolutely must do it on your own, Deslippe will tell you to look for a policy with very wide definitions and very few exclusions, while making sure it’s from one of the top companies in Canada, like Manulife, Canada Life, Great-West Life, or RBC Insurance.
“You can’t go wrong,” she says, “If something does happen, at the end of the day, this insurance is going to play a huge role in preventing bankruptcy.”