Some life events, like buying a house, are without a doubt momentous occasions. These kinds of life events, however, do come with a great deal of responsibility. If you have a mortgage, you're committing to paying back that mortgage every single month, no matter what.
But what if you can't work due to illness? That's where insurance comes in, but there are different types.
For example, life insurance is designed to protect your assets if you die. It can cover your liabilities (e.g. debts and mortgage) to help your family keep living their life even after you pass away.
Other types of insurance protect your income. Income protection insurance does exactly what it sounds like it should do: if you can’t work, it ensures some money keeps coming in. Income protection insurance is available in two ways: disability insurance and critical illness insurance.
So, which one do you need? Let's find out.
What is disability insurance?
Disability insurance is available as both long and short-term policies. It protects a percentage of your income (usually between 40-70%) for a period set out in your contract with your insurance provider.
Most employers offer some disability insurance. If so, they pay the premiums. If you draw benefits from this policy at any point, you'll have to pay tax on those benefits. However, if you take out a disability insurance policy yourself and pay your premiums, your benefits are tax-free.
Disability insurance can be used for a wide variety of situations.
Short-term disability claims are when you’re unable to work for under six months due to injury, pain, or mobility issues. Long-term disability (LTD) policies typically kick in when your short-term disability, employer sick leave benefits, and EI benefits end. LTD covers a cancer diagnosis and treatment, stroke, or any ailment that requires more time than your short-term plan allows. Most long-term disability insurance plans replace 40-70% of your income.
Remember that disability insurance replaces a portion of your income and doesn't guarantee coverage for expensive medical equipment like wheelchairs or home retrofits.
For that, there is an additional type of income protection insurance called critical illness insurance for these types of expenses, which we'll explore in more detail below.
How much is disability insurance?
It's a good idea to have some disability insurance coverage, especially if you have dependents that rely on your income to support their lifestyle. Your employer may offer disability insurance and might cover the monthly premiums, or it could be a deduction on your paycheque. If the coverage is not available through your employer, you can always purchase your own policy.
If you choose to buy disability insurance beyond that which your employer offers, expect to pay between 1-9% of your salary. This estimate depends on the following factors:
- Your age
- Your desired benefit payout (what percentage of your income you want to be paid out)
- The duration that you'd like to receive your benefit
Ultimately, you should choose disability insurance coverage based on your current lifestyle, the number of dependents you have, your employment situation, and the current state of your finances.
A steady stream of income despite being unable to work is one less thing to worry about in a difficult time. But, for example, what if you suffer a stroke that impacts your neurological system or causes paralysis and suddenly you need mobility assistance devices in your home? That’s where critical illness insurance comes in.
What is critical illness insurance?
Critical illness insurance is a one-time lump sum tax-free payout that covers you in case you are diagnosed with a critical illness. What exactly is a critical illness? Most policies will explicitly lay out what is considered a critical illness, but the policy will generally cover critical health events like heart attacks, strokes, and cancer.
Critical illness is useful for funding modifications to your home like grab bars, transportation to medical appointments, or it could be used as a lump sum payment against outstanding debt.
How much is critical illness insurance?
Critical illness insurance is generally less expensive than disability insurance because the payout is a single lump sum instead of months (or even years) of payouts. Here are some examples of the premiums you might pay for different policies:
- A $100,000 10-year policy for a 40-year-old could be as much as $70 per month
- A $50,000 10-year policy for a 25-year-old could be as little as $6 per month
As you can see from the examples above, critical illness policies can vary widely depending on your age, health, the payout amount, and the number of "illnesses" covered by the policy. It's important to carefully read about the exclusions to make sure a cheap policy isn't too good to be true. Pay extra attention to what is and isn’t covered and know the more illnesses covered, the price tag also increases.
Income protection vs. critical illness: which one is right for you?
Do you need disability insurance or critical illness insurance? The answer to both is "probably," but a definitive answer depends on your responses to these vital questions:
What is your financial situation?
Do you have debts or a mortgage, or other financial obligations that would burden your dependents if you couldn't work? How big is your emergency fund? Are you self-employed, or do you work full-time?
Does your employer offer any coverage?
If your employer already offers disability or critical illness coverage (or both), you may not need your own policies. Ask your employer for copies of the policies and make a note of how much protection there is and for how long.
Are you likely to develop a critical illness or become disabled?
According to Canadian Cancer Statistics, half of Canadians are expected to be diagnosed with cancer in their lifetime. Your chances may be higher due to family history.
Can you afford to buy it? Can you afford not to buy it?
Critical illness and disability insurance policies are some of the most powerful income protection strategies you can employ to ensure your health problems don't burden your dependents. Asset protection, like life insurance, can only take you so far, especially if you need the money before you pass on. Critical illness and disability insurance policies can be purchased inexpensively, so for us, it's not a matter of whether you can afford to buy income protection insurance. The question is, can you afford not to buy it?