Critical Illness vs. Disability insurance: What are the differences?
Both insurance plans provide a level of protection against the financial losses brought about by sickness. However, disability insurance and critical illness insurance are not the same. In a nutshell, disability insurance gives you a monthly benefit in the event that you are disabled while critical illness insurance gives you a lump sum payment when you are diagnosed with a covered serious illness.
- Top 5 reasons why a critical illness claim is denied
- Do critical illness insurers really pay out: what the statistics shows
- Top 10 critical illnesses that will pay out
- When are you suspected to get critically ill?
Living with Disability
- More than 11 million people in the UK have a limiting long term illness, impairment or disability.
- Based on a Before Housing Costs basis, 20% of individuals in families with at least one disabled member are living in relative income poverty.
- The poverty rate for disabled adults in the UK is 30% - twice that for non-disabled adults.
Source: Office for Disability Issues 2010/11 Disability factsheet
Disability Insurance: Protecting Your Biggest Asset
One’s ability to earn an income is probably the biggest asset for most people, since one’s income is primarily the source of all other assets – his home, his children’s education and investments. If you are a breadwinner, protecting this asset becomes all the more important since there are other people who are relying on you.
Life can throw a curveball – an accident or a prolonged illness can result in your inability to do any work, as well as perform your day-to-day activities. Because of this, your family will suffer from the loss of income, as well as the expenses that being disabled entails. The hospital bills and the need to hire someone to help with day-to-day activities can put a considerable dent on one’s finances. What’s more, a family member may have to stop working in order to act as the disabled person’s carer.
Disability insurance can help by protecting your income. With this, you can receive a replacement for your income.
Government Assistance Can Only Do So Much
The current state-sponsored health care program provides some benefits to help disabled persons with their finances. The usual benefits a disabled can claim would be disability living allowance, as well as an allowance for the disabled person’s carer.
Disability Living Allowance may be payable if:
- You have a mental or physical disability that prevents you from caring for yourself or causes problems in walking
- You are below 65 during the time of the claim
- If you are above 65 years old, Attendance Allowance may be the benefit for you
Although state benefits can help, it may not guarantee that you and your family will be able to maintain your current standard of living. It may not also ensure that your assets are protected – you may need to sell these assets to help fund disability-related expenses.
Weighing the Differences: Critical Illness Cover Vs. Disability Insurance
Below, a table further outlines the differences (and similarities) of the two:
|Disability Insurance||Critical Illness Insurance|
Monthly payments while the Insured is disabled, subject to a maximum number of months, as well as to a maximum percentage of the current income.
Once the Insured recovers or has other sources of income, the benefits may stop or be reduced.
Payment is given as a lump sum once the Insured is diagnosed with a critical illness.
Payment is not connected with the person’s ability to work. He may be able to continue with his work while he is diagnosed with the covered illness.
There is a waiting period from the time the person is unable to work.
There is a waiting period from the date of diagnosis. The Insured must survive this waiting period for the claims to be payable.
|Reasons for the claims to be payable||
It depends on the type of disability policy. There are various definitions:
Payment is upon diagnosis of a critical illness. Some of the illnesses are:
|Length of coverage||
Coverage is usually at age 65. At retirement age, retirement benefits are expected to kick in.
Cover can be until age 75 or even above. But this cover stops once a lump sum payment is made.
If premiums are paid by an employer, monthly benefits are subject to tax. If premiums are paid by the Insured, no taxes are charged.
|This is usually tax-free.|
Partial refunds given if the benefits are not paid.
All premiums paid back if there is no claim (i.e. the Insured dies before making any claim).
Pros and Cons of Disability vs. Critical Illness Protection
If you are considering whether you need disability insurance or critical illness protection, here are some pros and cons of each:
|Disability Insurance||Critical Illness Insurance|
Want to know about other health-related insurance covers? Here are some to think about:
For more information on protecting your income, read the Income Protection Insurance article.
Last updated on: 18.1.2013
Recommended useful information to read:
- Dos and Don’ts when making critical illness insurance claims
- What you should know about your critical illness cover: the exclusions to your policy
- Things to consider before getting a critical illness insurance policy
- Are you at risk? Critical illnesses you may be susceptible to
- Save up on premiums: factors that affect your critical illness insurance premiums