Does your plan protect your savings and income?

Critical illness insurance is becoming increasingly popular for Canadians.

Yet despite its rising profile, it’s often confused with disability insurance. The two are quite different.

Let’s look at what each does and does not do.

Disability insurance
Disability insurance protects your most valuable financial asset — the ability to earn income over the long term. This may be more important than life insurance because you are statistically more likely to suffer a debilitating illness or injury than to die early. In fact, disability coverage is arguably your most important insurance need if you are not yet retired.

Your disability benefits are linked to your ability to work and to your level of earnings. While the definition of ability to work varies among plans, the basic idea is that the insurer will support you and your family if illness or injury prevents you from earning income. Benefits kick in after a preset waiting period — normally 30, 60, 90, or 180 days — and continue until you recover or, usually, to age 65.

Normally, payouts replace less than 100% of earnings. That provides an incentive to return to the workforce and recognizes that disability policies are usually structured so the benefits are tax-free.

The self-employed should be very careful when buying coverage or filing a claim. Professional advice is crucial to make sure the coverage reflects the full amount of income they could expect to receive from their business.

Critical illness coverage
Critical illness insurance pays a lump sum 30 days after you are diagnosed with one of the medical conditions stipulated in the policy. The list typically includes heart attack, coronary artery bypass surgery, stroke, life-threatening cancer, and paralysis. It might also include loss of speech, eyesight, or hearing as well as kidney failure, major burns, Parkinson’s disease, and Alzheimer Disease. You receive the lump sum even if you continue working.

Whereas disability benefits are received over time, critical illness benefits come as a tax-free lump sum that can be used in any way you want. For example, you might use the payout to finance renovations that will make your home wheelchair-accessible.

As you can see, disability and critical illness insurance are highly complementary. Along with life insurance, they can provide the complete protection you and your family need. Professional advice is the best way to arrange an insurance package that meets your needs and your budget.