If someone asked you what you consider your biggest asset to be, what would you say? For many of us, the first thing that comes to mind is our home. We protect our homes, cars, boats, and cottages with insurance. Yet, we often forget about protecting our most critical asset—our ability to earn an income.
Two of the most common living benefits products that help protect your income-earning ability are critical illness and disability insurance. While these types of coverage are similar in their purpose of protecting your finances if you become unable to work, critical differences exist between the two.
To help you determine which type of plan is right for you, consider each product's similarities and differences.
Disability insurance
Unlike Workplace Safety and Insurance Board (WSIB) claims, which only cover injuries that occur in the workplace, personally owned disability coverage protects from injury and illness, regardless of where the health issue occurs or develops. Claims for stress or mental illness, physical injury, or diagnosed conditions can be made. In many cases, such health issues can affect your ability to earn an income for weeks, months, or even years. Disability coverage enables you to take time off needed to recover.
All disability plans are based on your occupation and current income and will vary in cost depending on the risk associated with your job. Disability insurance quotes can be tailored to suit your needs and budget, depending on the waiting period, benefits period, and the provisions you add to your plan. Even if you have long-term disability (LTD) benefits through your employer's benefits program, you may not be adequately covered. Many LTD plans have relatively low maximum benefit amounts and limited "own occupation" protection periods. It often makes sense to purchase additional disability insurance protection to complement the LTD coverage and maximize your overall protection.
When comparing disability insurance to critical illness coverage, consider the following key facts:
- Disability payments can provide for up to 66% of your income
- If your premiums are paid personally, you will receive your payments as a monthly tax-free income benefit.
- Monthly payments can continue up to age 65 if your disability continues or reoccurs
- Disability insurance plans typically require waiting periods before the benefits commence, ranging from 30 to 120 days
- If you make a claim, your premiums are waived
Protect yourself against unexpected setbacks.
Several policy provision options are available with disability insurance so that you can customize the coverage to your situation, including:
- Own occupation: An own occupation provision allows you to receive disability payments if your disability prevents you from performing your specific occupation, whereas an "any occupation" provision only provides benefits if you are unable to do any job
- Cost of living adjustment (COLA): This provision helps your disability payments keep up with inflation by increasing your payments annually
- Accidental death benefit: This rider provides a payment to the beneficiary named on your policy in the event of an accident causing your death
- Return of premium: A return of premium provision can return part or all premiums paid if no claims are made, and the contract is in force for a specified time
Business owners can also protect their key executives with an income loss protection plan, providing an increased taxable benefit with tax-deductible premiums to the corporation. These income loss plans can be used to top up an existing group plan that may not provide for its executives' income levels. It can replace the group coverage with higher benefits.
Critical illness insurance
Several key differences exist between critical illness and disability insurance. Unlike disability insurance, which provides monthly payments upon a claim, critical illness coverage provides a tax-free lump sum payment if you are diagnosed with one of the listed covered conditions provided in the plan. Disability insurance also protects your job-related income, though your employment, or income, is not a qualifier for obtaining critical illness coverage.
For example, critical illness coverage can fill this gap if you suffer a sudden heart attack and are concerned about losing income if it takes time to recuperate. Upon approval of your claim and providing you survive for 30 days after your diagnosis, you will receive a lump sum benefit for use in any way you wish. There are no restrictions on how the funds are used. Some critical illness payment recipients use the lump sum to cover the cost of seeking immediate or experimental treatments in other countries. In contrast, others may use the benefit so that a partner or supporting family member can take time off work to care for an ill family member.
Critical illness plans can vary in the number of illnesses covered, from four to 24 covered conditions; review the plan carefully before proceeding with coverage.
Commonly included illnesses include:
- Heart attack
- Cancer
- Stroke
- Multiple sclerosis
- Parkinson's disease
- Alzheimer's disease
- Numerous other illnesses
Like life insurance policies, critical illness plan options range from lower-cost term plans to permanent-level cost plans, available to age 100.
Provisions can be added to the policy to tailor it to your unique needs, including:
- Return of premium on death: This provision refunds the premiums paid if death occurs during the policy period
- Surrender: This provision occurs upon cancellation of the policy after a specified period
- Expiry if no claim is ever made: An expiry provision takes effect at the end of the level term period
Critical illness coverage, disability insurance, and life insurance can protect you and your family if illness, injury, or death occurs. Every situation is unique, and it's important to discuss these coverages with an advisor who can analyze your needs and help you fine-tune options to fit your budget. For more information, contact the Cowan Financial Services team at 519-651-6660 or 1-877-899-2194, email: wealthmanagement@cowangroup.ca.
