Comparison of long term disability and critical illness insurance protection

 

 

Disability

Critical illness

Availability of policy

Determined by both health condition and occupation / job duties / income level.

Determined only by health condition and health history (of individual and family)

Coverage period

Ends at age 65

Can last until age 75, or even up to age 100.

Benefit

Monthly benefit until the end of a specific period (one year, two years, ..., age 65, or sometimes even for life if disability results from injury)

Lump sum paid 30 days after the diagnosis of a covered specific condition

Tax status of benefit

Tax-free if premium is paid by individual; taxable if premium is (at least partly) paid by employer

Tax free, since premium is paid from after-tax money by individual

What triggers benefit payment

Inability to work (various definitions - 'own occupation', 'regular occupation', or even 'any occupation' only - mean different levels of protection, and sometimes higher level of protection is offered only for limited period)

Diagnosis of one of covered conditions, irrespective of ability to - or even actual engagement in - work. The covered conditions make up the great majority of life threatening situations.

Level of benefit

Closely linked to verifiable previous income; cannot be more than 75% of that

Loosely linked to previous income. About $100K to $150K coverage can be bought by someone without verifiable income; the maximum is about 5 times of annual income plus outstanding mortgage for others.

Availability of partial benefit

Partial or residual benefits are available with many policies

None. It's either all or nothing of the contracted benefit that is paid out.

Inflation protection, retirement saving protection, and future insurability riders

Available, for extra premium.

Not available.

Child protection rider

Not available

Available.

Potential minimum / maximum benefit

From very low (or nothing) to very high, depending on the length of the period during which the benefit is paid out.

The sum contracted (or nothing). Minimum amount: $10K Maximum amount: $2M

Availability of multiple benefit periods

Yes.

No. At payment of the contracted lump sum the policy terminates.

Availability of premium pay-back

Yes, partially, with certain policies, for some extra-premium, if benefit is not triggered for a certain period.

Usually part of policies that all premium is paid back if insured dies before the lump sum payment is triggered. Another option, for some extra premium: all premium is paid back at age 75 if insured is alive and the policy has remained in force until then.

Claim difficulty

Sometimes - especially when it is difficult to get easily verifiable and measurable hard physical / medical evidence about the status of the insured - inevitable subjectivity brings about debates regarding entitlement to the benefit

Less room for debate, since covered conditions are quite well detailed. (The flip side of it is, of course, that many sicknesses and injuries are admittedly not covered.)

Elimination period

Can be 0 day (most expensive), 30, 60, 90, 180, 360, or 720 days. The longer this waiting period (that is the later benefit payment starts after the onset of disability), the lower is the premium

Benefit is paid after 30 days. If death occurs before that, usually all the premium paid is paid back to estate or beneficiary.

Premium

Varies according to occupational classes

The same for everyone

From the above comparison, one can easily conjure up various realistic scenarios in which one or the other of these insurance types does not help much, if at all, while the other solves the financial problem resulting from sickness or injury. There are cases, of course, when both policies are triggered.

Let's say, one has a 90 day elimination period D.I. policy with $2,500 monthly benefit and a $200,000 C.I. policy. What happens if that person get disabled for years or life with one of the conditions covered by the critical illness insurance as well? The first paycheque from the D.I. policy will arrive in more than four months (90 days + first month when he/she is entitled to the benefit). Much of the extra-costs of the illness occur much earlier than that, and are much higher than what can be financed from the D.I. benefit. One the other hand, though that $200K might look a very substantial sum for the first sight, the long term need and the potential payoff from the D.I. are much higher. If that person is 45, and the benefit is payable until age 65, then the total makes $600,000. Could that income flow be ensured from the assumed size of C.I. benefit? Of course, not.

Having various kinds of insurance is not a waste of time or money; it is not an unnecessary luxury for most of us. Sensible diversification is a basic premise of wise money management, retirement saving included. Diversification of insurance coverages against various kinds of risks is similarly worthwhile.

 

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