Disability Insurance vs. Critical Illness Insurance
– What’s the difference?
Critical Illness Insurance is not marketed as an alternative or replacement for the more conventional disability insurance plans. This table highlights the major differences in coverage and benefits between the two programs.
|
Category |
Disability |
Critical Illness |
|
Availability |
Health, Occupation, Job & Income |
Health Condition & History |
|
Coverage Period |
Ends at age 65 |
Variable, to 75 and longer |
|
Benefit |
Monthly, paid over a specified period, in some cases for life |
Lump Sum, paid 30 days after diagnosis |
|
Tax payable |
Tax-free if premium paid by individual, taxable if paid by employer |
Tax-free |
|
When benefit paid |
Inability to work, definition of work may vary with policy wording allowing for different levels of coverage |
Diagnosis of any one of several specified conditions such as cancer, stroke, heart attack, etc |
|
Level of Benefit |
Related to income, maximum of 75% at time of claim |
Linked to income, $25K to $2mill regardless of income. |
|
Partial benefits |
Available with some policies |
Some policies pay out partial benefit dependent upon the critical illness acquired |
|
Inflation protection, retirement saving protection, etc. |
Available for extra premium |
Not Available |
|
Child protection rider |
Not Available |
Available |
|
Minimum/maximum benefit |
From nothing to very high, depending on benefit payment period |
All or nothing |
|
Multiple benefit periods |
Available |
None. Policy terminates with claim |
|
Availability of premium refund |
Partially, with extra premium if benefits not triggered |
All paid back if policy expires or death occurs without claim |
|
Claim difficulty |
Sometimes when extent of disability in dispute |
Less likely since disability never an issue in claim, only diagnosis of disease |
|
Elimination period |
Varies: 0, 30, 60, 90, 180, 360, 720 days common, premiums vary with wait period |
Benefit paid after 30 days. If death occurs prior, premiums are refunded |
|
Premium |
Varies with occupational class |
The same for all |
From the above comparison it is clear that one type of policy may be more appropriate than the other depending upon benefit and kind of coverage required.
FOR EXAMPLE, CONSIDER THE FOLLOWING:
|
Disability Insurance |
Critical Illness Insurance |
|
|
Elimination Period |
90 Days |
30 Days |
|
Benefit Amount |
$1500/month |
$100,000 |
|
Waiting Time |
90 days plus 1st month |
30 days |
|
Amount Received After Waiting Time |
$2500/month |
$100,000 |
|
Advantages |
If the disability is lifelong, $2500 would last until age 65 |
$100,000 is paid out tax-free, claimant can do whatever they wish with the money. Policy is terminated |
For example, consider a Disability Insurance policy with a 90 day elimination (waiting) period, with a $1,500 monthly benefit compared to a $100,000 Critical Illness Insurance plan. With the DI policy the waiting time is significantly longer – 4 months (90 days + 1st month) vs. payment received after 30 days under the CI coverage, and $1,500 per month is a far cry from a guaranteed $100,000 lump-sum payout. However if the disability is lifelong and the claimant is in their mid-forties, the total benefit under a DI policy would far exceed $100,000.
These plans overlap in the nature of their coverage and benefits, however taken together they provide for the kind of diversification in personal insurance protection that most of us seek to achieve when it comes to the management of our financial investments.