Critical Illness Insurance

What does a critical illness policy cover?

Critical illness insurance pays out a lump sum, and tax-free payment, if you are diagnosed with a serious medical condition. Your contract will define which conditions that are covered, but common examples include various forms of cancer, heart attacks, and strokes.

How can the lump sum be spent?

The great thing about critical illness insurance is that there are no restrictions on how the lump-sum is spent once it is received.

Some choose to use the money to cover expenses, medical and otherwise, which are not paid for by the government.  This includes the cost of oral medication, or the cost of alternative treatments which can help cope with the symptoms caused by the illness, or by the process of treatment.

Others pay for any alterations needed to their home so that they can more easily live with their illness – for example, so they can use a wheelchair.

Why do you need critical illness insurance if you are self-employed?

If you are self-employed, critical illness benefits can be crucial to your financial survival. You can use the lump sum payment to cover your personal expenses if you are receiving treatment and unable to work. This includes your mortgage, bills, groceries, and childcare costs.  

You can also use the lump sum to keep your business afloat while you hire, or train someone to take over your responsibilities. The lump sum can also subsidize any drop in revenue that might occur once you step away from your business. 

How much critical illness insurance do you need?

How much coverage you need really depends on your level of savings. If you have a large emergency fund, then you might consider minimal coverage. But your savings should cover the possibility that you are out of work for several months, and maybe even years. Some illnesses might require long recovery times, and strong medication for treatment of cancer, for example, can make it exceedingly difficult to focus on work.

One rule of thumb is to purchase enough insurance to replace your salary for the period of one year, or more. You can consider your net salary because the lump sum critical illness payment is provided tax-free. This  would give you a year to focus on your recovery, and not your finances.

How much does it cost?

The higher the level of coverage, the more it will cost you in monthly premiums. If you are on a budget, but still want critical illness insurance, one option is to purchase some minimal coverage, whilst building up your emergency fund. The combination of your insurance coverage and emergency fund should replace your salary for at least one year, if not more. For example, if you make $100,000 per year, and have $25,000 in your emergency fund, you should purchase $75,000 or more of critical illness insurance coverage.   

What does term mean?

A term is a length of time that the policy will be in force, such as 10 years. If you get diagnosed with a series medical condition during the term, and if this condition is covered under your policy, then you would receive the lump-sum and tax-free payment.

How is it different from disability insurance?

Disability insurance replaces a portion of your income if you are unable to work, and is usually paid on a monthly basis. It covers a broader range of illnesses, but also injuries, that prevent you from working, including back pain or stress, which are often not covered by critical illness policies.

But most disability plans have waiting periods of up to three months, where no income is paid, which could leave a big gap in your income. Critical illness policies usually have minimal waiting periods but cover only a limited selection of illnesses.

Pairing critical illness and disability insurance

Pairing critical illness with disability can be the perfect solution, if you can afford it. This will ensure that a broad range of illnesses that could prevent you from working are covered, and that both immediate and long term gaps in your income are addressed.