When life throws a curveball in the form of a serious illness, critical illness cover can prove to be a lifeline. It provides a tax-free, lump sum payout when you're diagnosed with a specified health condition. This money can help you cover debts, daily living expenses, or other expenses. 

Critical illness is available as both a stand-alone policy and an insurance rider. Which one is right for you depends largely on your personal circumstances. 

This guide explains the ins and outs of critical illness insurance and shows how its two avatars stack up against each other. 

What is critical illness insurance?

Critical illness insurance pays a lump sum if you’re diagnosed with a serious illness. To receive the benefit, your illness typically has to be life-altering or threatening, like a stroke, heart attack, or cancer. The type and number of illnesses covered by your policy will be specified in the policy document, so read it carefully to understand what is covered. 

Your policy pays out only if you are diagnosed with one of the covered conditions. You can use the benefit amount, which is tax-free, for anything you like, whether it’s to pay for home adaptions, mortgage payments, or day-to-day expenses. Most critical illness policies only pay out once. Coverage ends automatically after a successful claim. 

When you buy critical illness coverage, you need to decide two things: the benefit amount and policy term. For example, you could choose a policy term that lasts until the last mortgage installment has been paid off. You could leave the coverage running until you reach a certain age, such as 65 or 75. 

Regardless of the length of the policy term, your premium rate is locked in for the length of the entire term. How much premium you’ll pay depends on several factors, such as:

• Coverage amount
• Policy term
• Number of illnesses covered,
• Your health 

Some policies require a medical exam as part of the application process while others ask you only a few health-related questions to assess insurability.

Typically, critical illness insurance plans don’t cover chronic conditions, such as asthma or fibromyalgia. Pre-existing conditions or illnesses related to alcohol or drug use are also usually not covered. 

Comprehensive critical illness plans cover up to 26 illnesses and conditions and cost more than basic plans, which provide coverage for five or six major illnesses. Depending on the insurer, you may be able to add extra features to your plan, such as partial payout and return of premium riders. 

Critical Illness Insurance Pros and Cons

What is a critical illness rider?

A critical illness rider is an add-on that you can purchase with your life insurance policy. Like critical illness insurance, the rider pays a lump sum if you’re diagnosed with one of the specified conditions. These conditions often include life-threatening conditions such as stroke, heart attack, cancer, and kidney failure. 

Compared to critical illness insurance, the rider usually cover fewer illnesses and conditions and provides a smaller payout. So, in a sense, it is a pared-down version of a stand-alone insurance policy. 

How does a critical illness rider work?

A critical illness rider is usually available with life insurance policies, though some mortgage and disability insurance plans also offer it. 

Here’s a step-by-step breakdown of how a critical illness rider works. 

Purchase: When you take out a permanent or term life insurance policy, the insurer may give you the option to buy a critical illness rider for an additional payment. This additional sum is added to your monthly premium. 

Coverage list and benefit amount: The policy document will mention which conditions are covered and the benefit amount you’ll receive if you’re diagnosed with one of the covered conditions. Typically, the benefit amount is not more than 50% of the sum assured. 

Exclusions: Some critical illness riders may not cover pre-existing conditions or illnesses due to self-inflicted injuries or drug abuse. 

Survival period: Critical illness riders often have a survival period — a small period you must survive after a diagnosis before you can claim benefits. The survival period is usually 30 or 31 days. 

Payout: If you’re diagnosed with a covered condition and complete the surviving period, the insurer will issue the pre-determined amount. 

Reduction or termination: After the benefit amount is paid out, either the sum assured will be reduced by the amount paid or the critical illness rider will terminate, depending on the terms of your policy. 

Critical Illness Rider Pros and Cons

What are the key differences between critical illness insurance and critical illness riders?

The purpose of both critical illness insurance and critical illness rider is the same: to provide financial assistance if you’re diagnosed with a serious illness. 

However, they operate on different scales. Critical illness insurance offers more comprehensive coverage but is more expensive than a critical illness rider. 

The following table highlights the key differences between the two. 

Which option should you pick?

Is a stand-alone critical illness plan a better option, or does a critical illness rider offer better value for money? 

The answer is highly personal and only you can decide, but here are a few things to consider as you think about it. 

A critical illness insurance policy might be right for you if...

• You need sizable coverage, say $100,000 or more
• You want protection against a wide range of serious medical conditions
• You don’t want to be in a situation where critical illness benefit reduces your life insurance payout
• You want coverage that you can tailor to your unique needs
• You don’t mind paying a higher monthly premium for comprehensive critical illness insurance cover 

A critical illness rider might be a suitable option if...

• You don’t have a separate policy for each of life insurance and critical illness insurance
• You want basic critical illness insurance cover 
• High coverage amounts and optional features aren’t particularly important for you

How can I buy a critical illness insurance policy?

From determining the amount of coverage you need to get an affordable rate, we’ve simplified the critical illness shopping process with these five easy steps. 

1. Determine the coverage amount

Before you start shopping for critical illness insurance, determine the amount of coverage you need. This depends on your unique circumstances, as well as monthly expenses that can be realistically budgeted for. 

Start by calculating your monthly expenses and add a buffer for any extra costs that may arise due to your illness, such as medication costs, travel expenses to a treatment facility, or the cost of medical equipment. 

Next, multiply this figure by the number of years you’ll likely need help to cover these expenses to come up with an accurate estimate. For instance: 

• Amount needed for monthly expenses: $1,800
• Number of months you need it to cover: 96 (8 years)
• Total coverage amount needed: $172,800

2. Determine the policy term

Most people need critical illness insurance cover during the years when they have the most financial responsibilities. For instance, if you have a mortgage, it might be a good idea to maintain critical illness until the home loan has been paid off. 

3. Compare quotes

Critical illness insurance premiums vary greatly by insurer. Compare quotes of at least three to five providers to ensure you’re getting a good deal. 

If you have unique needs, such as getting critical illness coverage with pre-existing conditions, working with an experienced independent broker may improve your chances of securing the right coverage at an affordable price. 

4. Complete the application process

Provide personal information, like name, full address, contact information, and answer the health-related questions on your application. It’s important to answer all questions truthfully. Lying on a critical illness insurance application is a type of insurance fraud and can have serious consequences for you, including denial of coverage. 

5. Pay the first premium

The insurer will review your application and issue you a policy offer if they do decide to write you a policy. Read the offer carefully, and if you agree to its terms and conditions, sign the document and pay the first premium. Your coverage begins immediately after the first premium payment. 

How can I buy a critical insurance rider?

When you buy a life insurance policy (or a disability insurance or mortgage insurance policy), the insurer may give you the option to buy a critical illness rider for an additional cost. 

The cost of the rider is added to your monthly premium. How much you’ll pay for a critical illness rider depends on your age, health, the critical illness benefit amount, and the number of illnesses covered.  

Adding a rider to your life insurance plan is a relatively low-cost way to customize your coverage to meet your unique needs. But keep in mind that you can buy this rider only at the same time when you take out a new policy. 

Conclusion

Critical illness insurance can give you peace of mind if you were diagnosed with a serious illness and couldn’t work. You can purchase it as a regular policy or a rider with life insurance. A stand-alone policy may work best for people who need comprehensive coverage or already have life insurance coverage. In contrast, a critical illness rider is a good choice for those who are happy with basic coverage and are currently shopping for a life insurance policy. 

Regardless of how you decide to buy critical illness cover, Dundas Life can help you. We work with some of the top insurance providers in Canada and get you the right coverage at a great price. Schedule your free call with a licensed advisor today.

FAQs

Is it worth buying a critical insurance rider over a full insurance policy?

If you need basic critical illness insurance coverage and are presently shopping for life insurance, buying a rider might be a better option than purchasing a stand-alone critical illness plan.  

Does a critical illness rider provide coverage for the same things a critical illness insurance plan does?

Critical illness insurance plans can be either basic or advanced. Basic plans usually cover five to six conditions and provide smaller payouts. A critical illness rider may provide the same level of coverage as a basic critical illness plan. However, it usually cannot match a comprehensive stand-alone policy, either in the number of conditions covered or the size of the payout. 

Does a critical insurance rider have the same surviving period as a regular policy?

In most cases, the answer is yes. As far as critical illness coverage is concerned, the survival period is pretty standard — 30 or 31 days.