Disability vs. Critical Illness Insurance

Guest Post by Jack Wolstenholm

Disability insurance and critical illness insurance have quite a bit in common. 

• Both offer protection and peace of mind for life’s most vulnerable moments. 
• Both provide benefits you can use to meet your financial obligations.
• Both are at their most affordable when you are young and healthy.
• Both can be obtained individually or as a part of a group.
• Both are purchases you hope you never need to actually use.

However, they are far from interchangeable. To better understand the key similarities and differences between disability insurance and critical illness insurance, let’s take a closer look at how each one works, what they cover, how much they cost, and who needs what.

How do they work?

Disability insurance replaces a percentage of your income each month if you experience a disabling injury or illness that prevents you from working. Coverage is either long-term or short-term, and can be obtained individually through a private insurance company or as part of a group. Employers often offer group disability coverage as a benefit at little to no cost to employees who elect to participate in the plan.

Critical illness insurance pays out a one-time lump-sum benefit if you experience a covered condition. Critical illness insurance can also be obtained individually or as a part of a group plan, and when employers offer it, they typically pick up the premium costs. Critical illness coverage is sometimes made available in the form of a benefit rider on life and disability insurance policies. This optional benefit comes at an additional cost when added to another policy.

Disability insurance and critical insurance differ in the amount of benefits they will provide, as well as when and how those benefits are paid out. But it’s important to note that both types of policies allow you to use the benefits you receive however you want. Buy groceries, cover medical bills not covered by health insurance, make mortgage payments, replace lost income — these benefits are truly intended for whatever you need when times get tough.

What do they cover?

Disability insurance covers injuries and illnesses that limit your ability to perform the essential duties of your job occupation. What is and isn’t covered varies by carrier depending on the policy’s definition of disability. The two most common definitions of disability are any-occupation and own-occupation. 

• Any-occupation is strict and specific. Under this definition of disability, you are ineligible for benefits if you can work any other job. This is true even if the jobs you are able to perform with a disability pay much less than what you earned prior to becoming disabled. To receive benefits, you must be deemed unable to work in any capacity.
• Own-occupation is broad and generous. A policy with an own occupation definition of disability protects your ability to work in your given profession. You will be covered if a disability prevents or limits you from working the job you had when you became disabled. Even if you’re able to work in another capacity, you will still be eligible for benefits. You may also be eligible if your disability limits the amount of hours you can work or the tasks you can perform.

With this in mind, long-term disability insurance is most commonly used for serious disabling events that prevent you from working for longer than three months (even permanently), like stroke, musculoskeletal disorders, cancer, cardiovascular issues, and pregnancies with health complications. Short-term disability insurance is most commonly used for temporary disabling events that last less than three months and allow for a full recovery. Think minor injuries like fractures, sprains, and strains, and maternity leave for healthy pregnancies.

On the other hand, critical illness insurance is more straightforward. It typically covers first-time diagnoses of serious conditions like cancer, heart attack, stroke, coma, paralysis, kidney failure, organ transplant, bypass surgery, and Alzheimer’s disease. However, it’s important to note that the complete list of qualifying conditions a critical illness policy will cover varies from carrier to carrier. Always check with the insurance company you are applying for coverage with to make sure you understand what its policy does and doesn’t cover.

How much do they cost?

Both disability insurance and critical illness are most affordable for the young and healthy. Cost increases as you age because the risk of becoming sick or hurt and filing a claim for benefits increases, too.

The cost of disability insurance depends on a variety of personal factors and policy choices. Personal factors include gender, age, location, health history, job occupation, and income. Policy choices include the benefit period and amount, elimination period,  and any optional riders you add to your policy.

That said, the average cost of disability insurance is typically between 1 percent and 4 percent of your annual income. Another way to think about this is you can expect to pay between 2 percent and 6 percent of your policy’s monthly benefit amount in premium. As a result, some will pay $10 or $20 a month; others $100 a month or even more. It all depends on your situation.

Like disability insurance, the cost of critical illness insurance can vary widely, and is determined by your personal background and policy choices. It takes all of the aforementioned factors into account except elimination period (since critical illness insurance policies do not have one), and your job occupation and income.

Who needs what?

In a country where one in four people will experience a disability in their working years and two-thirds of bankruptcies stem from medical issues, the value for both disability insurance and critical illness insurance is clear. But how do you know which types of coverage you actually need?

Generally speaking:

• Disability insurance is a smart choice for healthy, employed individuals who rely on their source of income to meet their everyday financial obligations in life. This is especially true for those who have families that rely on their source of income, too.
• Critical illness insurance is a smart choice for those who have a health insurance plan with a high deductible they couldn’t afford to pay, concerns about their family health history, and/or insufficient emergency fund savings.

Of course, there is no one-size-fits-all solution. To find your best-case coverage scenario, it’s important to do your own research, consult a reputable licensed agent, and shop around to compare rates. That way, you can lock in reliable coverage at a cost you can afford.

Jack Wolstenholm is the head of content at Breeze, a digital-first-insurance company offers simple, affordable disability and critical illness insurance online.