I really didn’t understand the difference between these two different types of insurance policies. Luckily I have smart friends who answer my dumb question. What is the difference between Critical Illness Insurance and Disability Insurance?.
Chantal Marr answered my query (she is part of LSM insurance one of my advertisers, and she is also my insurance consultant for this blog as well), and I think I now understand the big difference between these two policies.
What is the Difference ?
Chantal’s answer is concise and easily understood:
Disability Insurance pays out a monthly benefit that is tied to your ability to earn an income. Critical Illness pays out a lump sum benefit but is is not tied to your ability to earn an income. Disability Insurance underwrites your occupation and Critical Illness does not.
Chantal has also written a more detailed description and discussion of these insurance vehicles with: Critical Illness insurance vs. Disability Insurance Why You Need Both.
Both Critical Illness Insurance and Disability Insurance?
I do not agree that you need both insurances, I think Critical Illness insurance strikes me as a bit ghoulish, in that you get a big pay out for getting a critical illness. Do you need a large lump sum payment if you are diagnosed with a critical illness? I am not sure, I would have thought that if you have a good health insurance plan, and you have some kind of disability insurance, that would be nearly enough, but I am sure Insurance folks would argue you need the critical illness to be completely covered (again, I don’t agree with that).
As for the Disability Insurance, read over your policy carefully if you are purchasing one to ensure you understand how “Disabled” is defined, and how you qualify (or don’t qualify) for funds (but you should do that with all Insurance policies). Understanding what Disabled means, is the key to the policy, as what you think of as disabled and what your insurer thinks of as disabled may not be the same thing.
Is There Another Part?
The other part of any Disability Insurance Policy is figure out who is insuring you. I have written previously about Self Insured Disability Insurance that decimated many families during the Nortel fiasco. Make sure that whoever is insuring you, is financially sound.
I agree with not requiring both insurance coverages. It seems excessive, similar to accidental death and dismemberment in addition to life insurance coverage. People often buy into this coverage without understanding the true benefits. I suppose I’m a bit cynical of the whole insurance industry to begin with though.
The purpose of critical illness insurance is to cover expenses related to getting a serious illness eg. Remodelling your house for wheelchair access etc., or going to the US for a second opinion or treatment. It’s not as important as disability insurance (which is for income replacement), but is still with having I think. Also, some critical illness insurance policies return all premiums at age 75 if there has been no claim.
I’ll admit, I know next to nothing when it comes to the many different types of insurance. From the sounds of it, critical illness insurance is typically for those who are at higher risk. I’m willing to bet it becomes more common as we age
The way I see it, disability insurance is “forgotten insuranceâ€.
Everyone gravitates to life insurance first (and for good reasons) but protection from a sudden, unexpected loss of your human capital is equally if not more important. Life insurance is for others. Disability insurance is for you and those that depend on you to earn a living. Disability insurance is critical.
Critical illness insurance, while important to some individuals, is not critical per se.
If you get taken out of the workforce due to contracting a serious illness, the lump-sum payment (from critical illness insurance benefits) could be used to bridge the gap between work and when disability benefit kick-in.
Mark
All very good points, thanks Mark.
Insurance will not cover divorce. Not happening. Never. Lets face it. Insurance companies are there to make money. Insurance companies would like to NOT have to pay out, and with divorce rates as high as 50%, they would be paying out on about 50% of the policies! They would have to be taking in HUGE premiums, and paying out small amounts to make any money. So, you can like the idea, as divorce is financially so devastating, but sorry BCM, this one is NOT going to fly! Marriage is a bonding of two hearts, but divorce is nothing but a financial transaction. Can’t see insurance companies getting into THAT financial transaction. That one belongs to the lawyers!
Agreed, but I bet some enterprising smart Insurance person might find a way for it to pay off (or a way to charge an exhorbitant premium to make it pay). Thought it was an interesting idea, but no, not likely to happen.
I’ve read the article twice, and can’t find any reference to insurance for divorce. Can you clarify? Did I miss something?
Okay, maybe it was in the comments that this divorce insurance was mentioned and the comments show most recent first but I was reading them top down, which is why I was confused.
There is no such thing that I know of as divorce insurance unless you call it getting a Pre-nuptual agreement. BCM and I were somewhat tongue in cheek about it as if it were available it would be EXTREMELY expensive to get, as something like 50% of the marriages fail. Most of them for money reasons.
Insurance companies are there to make money, so they would never go for something like a product where they have to pay 50% of the time, as they would go broke!
I can see their rules being very harsh to be able to get a divorce covered. I joke when I say this but… You can only get your divorce covered if your spouse is caught in his or her 17th affair, only on a Tuesday where there are 5 Tuesdays in the month, between years 17 and 19 of your marriage, with permission of the leader of the free world, permission of the Pope, and the permission of the spouse’s parents. Those permissions have to be delivered within 24 hours by the way…
So yes, there is no such thing as divorce insurance unless you have a pre-nup, and someone breaks the rules.
Disability insurance can be more difficult to understand due to the provisions and qualification for benefits. The difference between terms such as own occupation, regular occupation, partial disability and residual are hard even for trained insurance brokers to understand, let alone consumers. Underwriting is also more scrutinized since the occupation also affects the odds of a disability occurring. Compare that to critical illness, which is a much simpler product, with a lump sum payment for a specific event.
In terms of priority, disability insurance should definitely rank higher, since you can still earn income after suffering a critical illness, but you’ll definitely lose your ability to earn income with a disability.
Bet you make a good point. There can be a lot of ambiguity with Disability Insurance and Critical Illness Insurance. Part of this is there is a significant amount of insurance fraud with this policies. But I think a bigger part is many people don’t fully understand what they are buying. The definitions of disability can be confusing even for many brokers and the same can be said for what qualifies for a Critical Illness definition. If something is unclear make sure you get clarification and get it in writing.
As with all things financial, Chantal, it is important that you get a satisfactory explanation in writing that you can use as reference in case things seem to change.
We’re fortunate that one of us has the ability to get disability insurance through work although we pay the premiums.
I can’t see us wanting to pay the premiums for critical illness. Our family has a history of ignoring the vulgar diseases of the masses and choosing to succumb to ones that are quirky and unusual. So with that kind of luck, we’d find we weren’t covered. Also, Ellen Roseman seems to get a fair number of questions from people who were unhappy with their critical illness AND disability insurances. I think it must be very challenging to choose a reliable policy.
I’d like to see insurance companies offer “keep you financially whole” marriage/common law insurance. I’ve seen more families financially devastated by divorce than by anything else!
I bet that Insurance exists, and if not, it will be soon!