Planning for an illness is just plain smart. No one wants to think they may become disabled or suffer from cancer, a heart attack or a stroke.
The reality however, according the Social Security Administration, is that 1 in 4 of today’s 20-year-olds will become disabled before they’re old enough to retire. Whether that’s because of an accident or due to a debilitating illness, you could be wiped out financially with all the bills that will pile up while you’re hospitalized, unemployed and adjusting to a new life.
So you know that it’s important to be prepared with the right type of insurance to protect against an unfortunate accident or illness, but you may be confused by the numerous options available for working adults. What’s the right product for you? Do you need more than one type of insurance policy? Here’s a look at the two most popular types of coverage and when one — or both — is right for you.
Critical Illness Insurance
Critical illness insurance generally covers you if you are diagnosed with cancer or have a heart attack or stroke. Depending on your policy, some other types of illness like multiple sclerosis or kidney failure may be covered as well.
Unlike health insurance, critical illness insurance doesn’t cover your medical bills. Instead, it pays for all the other expenses you incur while you’re not working and receiving medical care. This can range from paying your mortgage and utilities bills to boarding to your pets to retrofitting your home for use with a walker or wheelchair.
How critical illness insurance pays out
The insurance pays out in one lump sum; you have to produce an official medical diagnosis in order to get a check. Even if you recover completely, you still get the money to cover your expenses. (In fact, that’s the idea — that you recover completely without the financial stresses of day-to-day living.)
Plus, it’s tax free — you don’t have to claim the insurance money as income on your returns.
Benefits of critical illness insurance
One of the best features of critical illness coverage is that a policy can be obtained for a person of any age. That means you can get insurance to cover your children so you have added peace of mind. Policies for children can help you cover your household expenses while the adults in the family care for your child. They can also cover child care expenses for healthy children while you’re with your ill child in the hospital.
You can also use the funds from your policy to pay for whatever you find most important. There are few restrictions on how the money must be spent. Whatever bills you have to pay, whatever care you need to provide for your children and pets, whatever changes you need to make to your household to accommodate you when you’re ill — all covered.
Restrictions that may impact your critical illness insurance policy
There are a couple of things to know about critical illness insurance so you aren’t surprised if you need to use it. First, there’s a waiting period, usually 90 days. That means that you can’t collect on the policy if you become ill right away after purchasing it. This reinforces the need to have insurance before you need it — don’t wait until you’re not in good health or feeling ill to look into your options.
As well, if you need it, you’ll have to wait out what’s known as a “survival period” — a set number of days, usually 30, following the onset of your illness before you can collect. This may seem confusing to you until you realize that the funds are to be used to recover from an illness; if you were to pass away, you would not need the money.
Finally, some policies will pay out less as you get older. This is called an “age reduction schedule” and it’s important to know what the policy you’re considering says. It takes into account the fact that if you’re older, you’re less likely to have family to take care of, a mortgage that still needs to be paid off, etc.
You get disability insurance to cover you on a long-term basis if you are hurt or ill and not able to work. You don’t have to try to return to a job or find work while you’re sick or injured. The idea is that you have plenty of time to recover without financial stresses of not having a paycheck.
How disability insurance pays out
Once you’ve been diagnosed with a disability or disabling disease, your insurance policy pays you a monthly amount to live on. You don’t have to pay taxes on the money because you paid for the policy with after-tax dollars.
However, if your employer purchased disability insurance that pays out to you, and the premiums weren’t included as part of your gross income, you may have to pay taxes on the money. Also, disability payments that come from a government source like Social Security or the Veterans Administration may have different rules when it comes to taxation.
Benefits of disability insurance
You can use your disability payments for most household expenses, including medical care or therapy that is not covered by your health insurance. You aren’t limited in what you can spend the money on and you don’t have to justify what you spend.
In most cases, you can add your disability insurance payments to any amount that you qualify for under Social Security or another government program that covers your disability.
Restrictions that may impact your disability insurance policy
Like with critical illness insurance, a disability policy will have a waiting period between when you’re injured or diagnosed and when payments start. This can be between 30 and 90 days depending on your policy. You’ll have to have some savings or other way to manage your expenses during this time.
There is often a stronger burden of proof on you to prove your need for disability benefits. With critical illness insurance, all you need is a diagnosis for payment, but with disability insurance, you’ll need to prove that you are injured enough to be unable to work. This can take time and involve more paperwork, and can be ongoing.
You’ll also need to be aware of how long your disability insurance will pay. Policies are available for your short-term (12 to 24 months) and long-term (2 to 5 years) needs; you’ll need to make sure whatever policy you choose covers a period that’s reasonable for your age, family and household expenses.
Which Should You Choose?
The truth is that critical illness and disability insurance cover two separate things. Critical illness will give you a lump sum of money to pay for adjusting to life with an illness or illness-related disability. Disability gives you a monthly income while you’re recovering.
You may not need disability insurance if you’re not the primary income in the family or have sufficient income to live if you were unable to work. But most people will be relieved to have both if you do become ill or have an accident. Talk to an insurance broker or agent to get costs and details on the policies available to you.