Critical Illness Insurance vs Disability Insurance: The Key Differences

What would happen to your loved ones if you suddenly became ill or suffered an accident and couldn’t work? Would you be able to fund specialist medical care from savings alone? And what about your mortgage and monthly childcare expenses?

If you’re asking yourself questions like these, odds are you’ve encountered critical illness insurance and disability insurance while researching the best ways to protect yourself and your legacy.

In this guide, we’ll discuss the similarities and differences, pros and cons of these two policy types.

What are critical illness insurance and disability insurance?

Before comparing critical illness and disability insurance, it’s helpful to explain how each of them works. 

About critical illness insurance:

Critical illness insurance provides supplementary healthcare coverage in case of a medical emergency, such as a stroke, cancer diagnosis, organ failure or a heart attack. Treatment costs for these kinds of ailments can easily exceed traditional policy maximums, and a critical illness insurance policy protects you from having to dip into your savings to close the gap.

About disability insurance:

Disability insurance protects your income and earning potential in case of an accident that prevents you from working. 

Many employers offer short-term disability insurance as a standard benefit, though coverage seldom exceeds 90 days. Individuals may opt to purchase long-term disability insurance in Canada for additional protection in case of a serious accident.

Critical illness insurance vs disability insurance:

On the surface, these two policy types have many similarities - to the point that you may wonder if you need both. Look more closely, and you’ll soon recognize some important differences between critical illness insurance and disability insurance, particularly when it comes to payout types and timing. Below we take a look at critical illness insurance vs disability insurance

Type of PolicyCritical Illness InsuranceDisability Insurance
PurposeCovers any additional medical costs associated with severe illnesses, such as cancer, stroke or a heart attackReplaces monthly income during periods when you cannot work due to a qualifying accident or injury
Payout TypeOne-time lump sumMonthly 
Claim EligibilityUpon diagnosis of a covered medical conditionUpon diagnosis of a covered medical condition
Covered ConditionsMany policies will cover costs relating to: 
  • Stroke
  • Organ transplants
  • Cancer
  • Coronary bypass
  • Renal failure
  • Paralysis
  • Loss of limb
  • Heart attack
Many policies will cover costs relating to: 
  • ALS
  • Hearing and vision loss
  • Mental health, including PTSD, bipolar disorder and depression
  • MS
  • Seizures
  • Back and head injuries
UsesPayments can be used to cover a range of needs, including:
  • Treatments and specialists not covered by a traditional policy
  • Critical medical services
  • Daily living expenses
  • Mental health services
  • Mortgage payments
  • Home improvements and major purchases to improve accessibility and mobility during recovery and rehab
Payments can be used to cover day-to-day living expenses, including basic healthcare
Taxable PaymentsPayouts are tax-freePayouts are tax-free
Tax Deductible Premiums
Waiting PeriodNo. Payouts are generally made shortly after claims are filed.Yes. Many plans include a waiting period of 30 to 90 days before benefits are paid.
Length of CoverageLifetimeEnds at 65
Payment CapNone. Comprehensive coverage can range from $150,000 to $3 million for an adult.Many plans cap monthly payments at $5,000
Disability insurance vs critical illness insurance: the important differences

Aside from the differences in payment structures, it’s important to understand that these two insurance types exist to meet distinct needs. 

  • Critical illness benefits are intended to cover one-time costs associated with a serious or life-altering medical event that temporarily prevents you from working and leads to unexpected expenses.

When considering whether to purchase critical illness insurance vs disability insurance, keep in mind that a comprehensive financial plan may include both. Let’s look at an example.

Mike works as an engineer in an oil refinery in Alberta, where he regularly interacts with heavy machinery and hazardous, highly flammable materials. His wife, Emma, recently gave birth to a baby girl and they have a three-year-old son.

Due to the inherently risky nature of his work, Mike carries long-term disability insurance. In the event that he suffers a serious injury due to an equipment malfunction or chemical accident, he will receive monthly benefits that ensure his family does not face economic hardship while he recovers. 

Mike also carries critical illness insurance so that, should he develop cancer or suffer a heart attack, both of which run in his family, he will not have to work while recovering or forgo recommended treatments due to costs.

Good to know

In sum, the question of “critical illness insurance vs disability insurance” shouldn’t be an “either-or” scenario, but likely a “both-and”.

Who should buy critical illness insurance?

No one likes to think about the possibility of a serious illness, and it’s entirely possible that you will never experience a life-altering medical event. 

To answer the question, “Do I need critical illness insurance?” consider the following:

  • Will you still be able to meet your financial obligations if you suddenly need to pay for intensive medical care?
  • Are you able to afford the loss of income and significant costs that often come with a serious illness?

For many people, insurance provides valuable peace of mind. Knowing that you or your loved ones are protected in case of a sudden illness can be a comfort, freeing you to focus on healing.

Purchasing critical illness coverage also ensures that you have the freedom to pursue the medical care recommended by your doctors without worrying about costs.

Good to know

Use our critical illness insurance calculator to how much coverage you need and to find the best policy for you.

Who should buy disability insurance?

You might assume that only someone working in a high-risk profession would need disability insurance due to the increased chance of a major accident. While it’s true that those working dangerous jobs or in hazardous environments can definitely benefit from this additional coverage, other individuals in need of employee disability insurance include:

  • Sole providers. Single-income households are particularly vulnerable to economic shock if the sole breadwinner suddenly stops working. Employment insurance disability benefits protect your family from a sudden loss of income while you recuperate.
  • Parents. Similar to sole providers, parents can protect their children from additional stress in the case of an accident by purchasing disability insurance to supplement any government Employment Insurance (EI) benefits.
  • People with recurring injuries. Workers who struggle with persistent injuries, such as back pain or migraines, can purchase disability insurance to protect their income and quality of life during periods when rehabilitation or chronic pain makes working difficult or impossible.

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How do I get critical illness insurance?

You can purchase critical illness insurance directly from an insurer online or, if you already carry life or permanent disability insurance, through your current insurance provider.

If you plan to purchase critical illness insurance as part of a comprehensive financial plan, it may be wise to work with a broker or other adviser. Financial planning professionals can help guide you to the best products for your budget and goals, and they may be able to negotiate on your behalf.

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How much does critical illness coverage cost?

The price you pay and your monthly premiums for critical illness insurance will vary based on the type of policy you purchase and your overall level of personal health.

Typical monthly premiums for someone under the age of 25 start as low as $10, while someone over the age of 60 might expect to pay at least $50 per month.

How do I get disability insurance?

Similar to critical illness insurance, you can do your own research and buy disability insurance directly from the insurer online.

Given the complexity of the employment insurance disability benefit scheme in Canada, however, you may feel more comfortable speaking with a broker or financial advisor. These professionals will work with you to find the best policies, premiums and prices for your budget and needs.

How much does disability insurance coverage cost?

The monthly premium you pay for Canadian disability insurance varies depending on a number of factors, including your age, overall level of health and income level. 

In general, disability insurance rates will range between 1% and 3% of your monthly salary, though some plans may charge up to 9%. In the event that you need to claim disability insurance benefits, expect to receive monthly payments equivalent to between 60% and 70% of your income. 

Marie makes $60,000 per year as an office manager and would like to purchase long-term disability insurance to “top up” her Canadian Employment Insurance disability benefits. Marie can expect to pay between $50 and $150 per month in premiums. Should she ever need to claim benefits, her insurer will likely pay between $3,000 and $3,500 each month for the term allowed under her policy.

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Is critical illness insurance taxable?

No. Critical illness insurance payouts are issued as a tax-free lump sum.

Be aware that the Canadian Revenue Authority considers critical illness insurance premiums a personal expense, however, and not tax deductible.

Is disability insurance taxable?

No. Disability illness insurance payouts are not subject to tax.
The monthly premiums you pay to maintain your disability insurance, however, are not tax-deductible. 

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