Critical illness insurance is a relatively new type of policy that is often misunderstood. Today we will explain what it is and what it entails.
How Does Critical Illness Insurance Work?
Critical illness is similar to term life insurance, except it is paid when you are diagnosed with a covered illness, not in the event of death. However, some people confuse this type of insurance with disability insurance, which replaces your income if you become disabled.
Sickness insurance, like term life insurance, is paid in a lump sum when you are diagnosed with a predefined illness, such as cancer. You decide how this amount will be spent – some people put in additional medical treatment (especially if there are some types of treatment that are not covered by the provincial health services), others decide to take time off from work to spend with their families or to travel.
As with many insurance products, this type of insurance plan includes a comprehensive insurance quote, application, and underwriting process that the insurer analyzes before you buy a policy; and as with any insurance policy, a critical illness policy comes with both pros and cons.
Let’s take a closer look at the pros and cons of this type of insurance.
Pros of Critical Illness Insurance
There are several positive aspects:
- Funds that can help when needed: If you are diagnosed with a critical illness, the lump sum you will receive will allow you to receive better treatment and, in some cases, hopefully make a full recovery. You can also spend these funds on other needs or projects (like traveling or getting items off your to-do list).
- Protection for your own business: If you are self-employed, you may be required to work part-time after being diagnosed with a critical illness (reduced working hours are common when extensive medical treatment is required). It closes the financial gap created by your reduced working hours in your company. With the funds, you can hire someone to help with your business.
- Stackable protection: Unlike disability insurance, critical illness coverage is “stackable.” Coverage with disability insurance is limited because it depends on your income and you cannot exceed this limit even if you have more than one disability policy. However, you may have several policies with varying coverage amounts for different diseases. For example, if you have two policies for $250,000 and $300,000, you can get paid $550,000 when you make a claim.
Cons of Critical Illness Insurance
- Expensive: This type of insurance policy is not cheap. As an example, a Term 10 insurance policy with $500,000 coverage for a 35-year-old non-smoker with no prerequisites (Term 10 means a policy that covers you for 10 years) costs approximately $180/month (sample price) while the same A 10th Term life insurance policy that covers $1,000,000 per person costs approximately $50.
- Definitions are important: If a diagnosed disease, such as a heart attack, does not meet the policy definition, your compensation may not be paid.
- It does not immediately cover you: The policy usually comes with a waiting period (for example, 90 days) for which you are not covered by insurance.
- Payment: instant If you are diagnosed with a critical illness, there is a “survival time” – (30 days for example). If you die within this period, your compensation will not be paid.
Critical illness insurance provides solid coverage if you are unexpectedly diagnosed with a serious illness, but this coverage comes at a cost. It’s a good idea to work with an insurance broker to get a critical illness insurance quote and apply for a policy. Brokers have access to multiple insurance companies and help you navigate the complex application process, especially if you have medical prerequisites.