Difference Between Critical Illness and Life Insurance

Some people say you need both life insurance and critical illness insurance, while others don't. Everyone, it seems, has an opinion.

Each type of insurance has a different purpose.

Read on to know what life insurance and critical illness insurance are and their key differences. This post will help you make an informed decision regarding whether you need life insurance, critical illness insurance, or both.  

What is life insurance?

Life insurance pays a death benefit to your beneficiaries if you pass while your policy is in force. The payout can minimize the financial impact of your death on your dependents. Your family can use the payout to take care of everyday living expenses, pay for your funeral, clear any debts you have left behind, and cover future expenses, like college tuition fees. 

There are two kinds of life insurance policies: term life and permanent life. Term life plans provide coverage for a pre-determined period after which the period is up and coverage will terminate, unless you renew the policy. 

Permanent life insurance policy plans do not have an end date. They cover you for as long as you live. Many permanent life policies (like whole life and universal life) also include a savings element, called the cash value. You can access the cash value at any time during your lifetime while your beneficiaries receive the death benefit upon your death.

What is critical illness insurance?

Critical illness insurance pays a lump sum amount to you if you are diagnosed with a covered illness. You can use it to cover out-of-pocket medical costs, experimental treatments, childcare, or even daily expenses. 

Each policy is different, but most plans cover the following life-threatening illnesses: 

• Cancer
• Stroke
• Heart attack 
• Multiple sclerosis
• Organ failure

To be eligible for the critical illness insurance benefit, you must: 

• Be diagnosed with a covered illness (i.e. a qualified physician or a specialist must make the diagnosis)
• Survive the stipulated waiting period

A waiting period, also known as a qualifying period, is the amount of time you must wait after your critical illness has been diagnosed before the benefits become payable. The typical waiting period is 30 days, but some policies have longer waiting periods.

You can receive the critical illness insurance payout only once. The coverage terminates after a successful claim.  

What is the Difference between life insurance and critical illness insurance?

The main difference between life insurance and critical illness insurance is that critical illness insurance pays out a lump sum during your lifetime if you develop a covered illness. Life insurance pays out a lump sum only when you pass away.

While both critical illness insurance and life insurance offer protection against life’s what-ifs, they are quite distinct:

Critical illness insurance provides living benefits during your lifetime. In contrast, life insurance policy issues the selected benefits of the policy to your beneficiary after you are gone. Critical illness insurance policy issues a tax free lump sum payment after you develop a covered illness as you cannot receive the critical illness payout in installments. 

In contrast, life insurance policy proceeds can be paid as a lump sum or in installments, depending on the insurer. For example, your beneficiary may decide to receive a certain amount every month for the next 10 or 15 years after your death or for as long as he or she lives. 

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Additionally critical illness insurance includes a waiting period — usually 30 days but it can be longer in certain cases. To receive the insurance proceeds, you must survive the waiting period. So if your plan comes with a 30-day waiting period, you will get the tax free lump-sum payment only after 30 days have passed since your diagnosis. 

Life insurance, by contrast, does not have any waiting period. The provider issues the benefits after your beneficiary files the claim and provides all the necessary documents. 

Can I buy both critical illness and life insurance together?

Yes, you can get critical illness insurance and life insurance together. Many insurance companies let you add critical illness coverage to your life insurance plan, or you can choose to buy it as a separate option.

Some life insurance policy plans cover critical illnesses by default, while others may allow you to add this coverage to your base policy by paying a flat fee. You should check with your insurer whether your policy includes critical illness insurance coverage.

When critical illness coverage is included in life insurance policies, the insured can access a certain percentage of the death benefit — typically not more than 50% — while still alive. However, doing so will reduce the death benefit, usually on a dollar-for-dollar basis.

Critical illness insurance cost?

Generally, critical illness insurance costs more than comparable term life insurance policy but is less expensive than permanent life insurance. 

The cost of how much you will pay for said critical illness insurance policy coverage depends on many personal circumstances, including:

Your age

Because the likelihood of suffering a serious illness increases with age, the older you are, the more your premiums will be.

Your health

If you are in good health, expect to receive a preferred plus or preferred rate. On the other hand, a higher-than-normal BMI or an underlying illness, like diabetes, will likely increase the cost of insurance coverage. ‍

Family medical history

Insurance companies also look at your family health history to determine your premium rate, as you may be genetically predisposed to certain diseases which may increase the likelihood of a payout. ‍

Smoking

Tobacco use is linked to a higher risk of several life-threatening conditions, like certain types of cancer.If you smoke, you will pay more for coverage than a non-smoker. ‍

Number of covered conditions

Many critical illness insurance plans cover only five or six serious illnesses, while others protect a large number of conditions (as many as 26). The more conditions a policy covers, the higher the premium amount will be.

Conclusion 

The main difference between life insurance and a critical illness insurance policy is that the latter gives you access to a lump sum amount while still alive while the former pays out after you pass. Depending on your personal situation, you may need either one of them or both. 

Not sure about your insurance needs? Let Dundas Life help you. Our advisors will take the time to understand your unique circumstances and help you decide what kind of protection is important for you and your loved ones. We will also help you find the right coverage from Canada's top insurers at an affordable price. 

FAQ

What if I never claim my critical illness insurance?

If you never make a claim within your critical illness coverage, you don't get the premiums back unless you have a policy with a return of premium feature, which costs more. Think of it as paying for the security of knowing you're covered, even if you never need to use it.

Is there waiting periods for critical illness insurance?

Critical illness policies often have a waiting period (also known as an elimination period) from the time you buy the policy to when you can make a claim. This is to prevent claims on pre-existing conditions or illnesses diagnosed shortly after the policy starts.

What if I outlive my term life insurance policy?

If you outlive the term, the coverage ends unless you renew it, convert it to a permanent policy, or choose a policy that offers a return of premium feature.