What is the Difference between Life Insurance and Critical Illness Insurance?

By Pushpinder Puri, October 20, 2023, 8 Minutes

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What is the Difference between Life Insurance and Critical Illness Insurance?

Critical Illness Insurance is a vital component of financial planning in Canada, providing individuals and families with crucial protection against the financial hardships that often accompany a serious illness diagnosis. This insurance product offers financial security by providing a lump-sum payout upon the diagnosis of a covered critical illness or medical condition. In Canada, where access to healthcare is mainly universal, Critical Illness Insurance fills the gap by addressing the financial aspects of dealing with a severe health crisis.

Key Features of Critical Illness Insurance in Canada

  • Financial Protection: A critical illness diagnosis can lead to substantial medical bills, loss of income, and additional expenses, such as home modifications or caregiving costs. Critical Illness Insurance helps policyholders and their families maintain financial stability during these challenging times.
  • Range of Covered Illnesses: Canadian Critical Illness Insurance policies typically cover a defined list of critical illnesses, which may include cancer, heart attack, stroke, organ transplant, and others. The specific conditions covered can vary among insurance providers, so it’s essential to review policy details carefully.
  • Lump-Sum Payout: The policyholder receives a tax-free lump-sum payment upon diagnosis of a covered condition. This payout can be used at their discretion, whether for medical treatments, debt repayment, daily living expenses, or other needs arising from the illness.
  • Survivability: Unlike life insurance, where the payout is made to beneficiaries upon the policyholder’s death, Critical Illness Insurance provides financial support while the policyholder is alive and coping with the illness. Even if the policyholder survives the illness, they receive the benefit.
  • Policy Terms: Critical Illness Insurance policies in Canada can vary in terms of coverage duration. Some policies may be term-based, while others may be part of permanent life insurance policies. Policyholders should choose a term that aligns with their needs and financial goals.
  • Pre-Existing Conditions: When applying for Critical Illness Insurance, applicants are typically required to disclose their medical history. Some policies may exclude pre-existing conditions from coverage, while others may offer coverage with certain conditions or at higher premiums.
  • Tax Benefits: Critical Illness Insurance payouts are generally tax-free in Canada, offering policyholders further financial relief during a health crisis.
  • Riders and Customization: Some insurance providers offer riders that can be added to critical illness policies for additional coverage or benefits. This allows individuals to tailor their policies to meet their unique needs.
  • Consultation and Advice: Given the complexity of insurance policies and the importance of making informed decisions, consulting with a licensed insurance advisor in Canada is advisable. One of the best financial advisors, like Canadian LIC, can help individuals assess their specific needs, compare policies, and select the most suitable coverage.

Hence, Critical Illness Insurance plays a vital role in the financial well-being of Canadians facing severe health challenges. It offers peace of mind by providing financial support precisely when it’s needed most, allowing policyholders and their families to focus on recovery rather than worrying about the associated financial burdens. As with any insurance product, it’s crucial to carefully read and understand policy terms and consult with professionals to make informed decisions about Critical Illness Insurance in Canada. Consult Canadian LIC to get the best solutions as per your situation.

Read More – What is Critical Illness Insurance here

Difference between Life Insurance and Critical Illness Insurance

Life insurance and Critical Illness Insurance are two distinct types of insurance products available in Canada, each serving a different purpose. The table given below highlights the key differences between Critical Illness Insurance and life insurance in Canada, including their purposes, triggering events, use of funds, premiums, taxation, and other important aspects.

Aspect Critical Illness Insurance Life Insurance
Purpose Provides a lump-sum payout upon the diagnosis of a covered critical illness or medical condition, providing financial support during recovery. Provides a payout to beneficiaries upon the policyholder’s death, offering financial protection to loved ones.
Triggering Event Payout triggered by the diagnosis of a covered critical illness during the policy term. Payout is triggered by the policyholder’s death, as long as the policy is in force and premiums are up to date.
Use of Funds The lump-sum payout can be used at the policyholder’s discretion, whether for medical expenses, debt repayment, or daily living expenses during illness. Beneficiaries use the payout to cover immediate expenses, debts, and ongoing living expenses after the policyholder’s death.
Duration Policies can be term-based or shorter-term, aligning with potential high-risk years for critical illnesses. Term-based or permanent policies can last a lifetime, providing long-term protection.
Premiums Premiums are generally higher due to the lower probability of a critical illness diagnosis during the policy term. Premiums are typically lower because the likelihood of a death benefit payout is higher.
Beneficiaries The policyholder receives the payout upon the diagnosis of a critical illness. Beneficiaries receive the payout upon the policyholder’s death.
Customization Riders can be added to enhance coverage, such as disability riders or return of premium riders. Riders and endorsements are available to customize coverage, such as adding critical illness or accidental death riders.
Taxation Payouts are typically tax-free, providing financial relief during a critical illness. Payouts are generally tax-free for beneficiaries in Canada.
Pre-Existing Conditions Coverage for pre-existing conditions varies by policy and insurer. Some may be excluded from coverage. Policies may be issued without regard to pre-existing conditions, but coverage and premiums can be affected.
Waiting Period Most policies have no waiting period, and coverage becomes effective immediately upon approval. Coverage typically begins immediately upon policy approval or at the start of the chosen term.
Additional Benefits May offer additional benefits, such as rehabilitation benefits or coverage for specific conditions unique to the policy. May include riders for additional coverage, such as accidental death and dismemberment or living benefits.
Survival of Policyholder Provides financial support to the policyholder while alive and dealing with a critical illness diagnosis. Provides financial protection to beneficiaries after the policyholder’s death.
Common Covered Events Covered conditions may include cancer, heart attack, stroke, organ transplant, and others. Typically covers a broad range of causes of death, including illness, accidents, and natural causes.

Purpose:

  • Life Insurance: Life insurance provides a financial payout to your beneficiaries (usually family members or loved ones) in the event of your death. It is designed to offer financial support to your loved ones when you pass away, helping them cover expenses such as funeral costs, mortgage payments, debts, and ongoing living expenses.
  • Critical Illness Insurance: Critical Illness Insurance provides a lump-sum payment to you (the policyholder) if you are diagnosed with a covered critical illness or medical condition, such as cancer, heart attack, stroke, or other specified illnesses. The purpose is to help you cover medical expenses, treatment costs, and any additional expenses that may arise due to your illness, such as modifications to your home or loss of income during recovery.

Triggering Events:

  • Life Insurance: The payout is triggered upon the policyholder’s death, as long as the policy is in force and the premiums are up to date. There is no payout if the policyholder is alive when the policy expires.
  • Critical Illness Insurance: The payout is triggered upon the diagnosis of a covered critical illness or condition while the policy is in force. The policyholder receives the lump sum even if they survive the illness and continue to live.

Use of Funds:

  • Life Insurance: The funds from a life insurance payout are typically used by the beneficiaries to cover immediate expenses, settle debts, and maintain their financial stability after the policyholder’s death.
  • Critical Illness Insurance: The funds from Critical Illness Insurance can be used at the discretion of the policyholder, whether it’s for medical treatments, ongoing care, paying off debts, making lifestyle adjustments, or covering any other expenses related to the critical illness.

Duration:

  • Life Insurance: Life insurance policies are usually purchased for a specific term (term life insurance) or for the policyholder’s lifetime (permanent life insurance), depending on the type of policy chosen.
  • Critical Illness Insurance: Critical Illness Insurance policies can also be purchased for a specific term, but they are commonly shorter-term policies. They are designed to provide protection during the critical years when you may be at a higher risk of developing a serious illness.

Premiums:

  • Life Insurance:Premiums for life insurance are generally lower than those for Critical Illness Insurance because the likelihood of a payout is higher in the case of life insurance (eventually, everyone passes away).
  • Critical Illness Insurance: Premiums for Critical Illness Insurance are typically higher due to the lower probability of a critical illness diagnosis during the policy term.

It’s important to carefully assess your financial needs and priorities when deciding which insurance product to purchase. Some individuals may choose to have both life insurance and Critical Illness Insurance to provide comprehensive protection for themselves and their loved ones in Canada. Consulting with a qualified insurance advisor like Canadian LIC can help you determine the most suitable coverage for your specific circumstances.

Read More – Critical Illness Insurance here

What does Critical Illness Insurance cover in Canada?

Critical Illness Insurance in Canada typically covers a specific list of critical illnesses and medical conditions. The exact coverage can vary depending on the insurance provider and policy, so it’s essential to review the policy terms and definitions carefully. However, common critical illnesses and conditions covered by Critical Illness Insurance in Canada often include:

  • Cancer: Critical Illness Insurance commonly covers various types of cancer, including breast cancer, lung cancer, prostate cancer, and others. Coverage may extend to different stages of cancer, from early diagnosis to advanced stages.
  • Heart Attack: This coverage usually includes a heart attack resulting from a blockage of blood flow to the heart muscle. The severity of the heart attack may affect the payout amount.
  • Stroke: Critical Illness Insurance typically covers both ischemic and hemorrhagic strokes, which result in a loss of blood flow to the brain or bleeding within the brain.
  • Coronary Artery Bypass Surgery: Coverage often extends to the need for coronary artery bypass grafting, a surgical procedure to improve blood flow to the heart.
  • Kidney Failure: Critical illness policies usually cover end-stage renal failure, which requires regular dialysis or kidney transplants.
  • Major Organ Transplant: This includes coverage for the transplantation of major organs such as the heart, lungs, liver, or pancreas.
  • Multiple Sclerosis: Some policies cover the diagnosis of multiple sclerosis, a chronic neurological condition affecting the central nervous system.
  • Paralysis: Depending on the policy, paralysis resulting from a covered accident or illness, such as a severe spinal cord injury, may be included.
  • Coma: Some policies cover a coma resulting from a covered illness or accident, with specific criteria defining the duration and severity of the coma.
  • Blindness: Coverage for irreversible and total loss of vision is often included.
  • Deafness: This coverage typically applies to total and irreversible hearing loss.
  • Loss of Limbs: Coverage for the loss of limbs or their use due to an accident or illness may be part of the policy.
  • Aortic Surgery: Certain critical illness policies cover the need for surgery on the aorta, the body’s largest artery.
  • Benign Brain Tumor: Some policies provide coverage for the diagnosis and surgical removal of benign brain tumours.
  • Parkinson’s Disease: Coverage may include the diagnosis of Parkinson’s disease, a degenerative nervous system disorder.

It’s important to note that the specific illnesses and conditions covered can vary among insurance providers and policy options. Additionally, policies may have varying definitions and criteria for determining the severity of a covered condition, which can affect the payout amount.

Before purchasing Critical Illness Insurance in Canada, individuals should carefully read and understand their policy’s terms and definitions. Contact Canadian LIC- a licensed insurance advisor can ensure that you select a policy that aligns with your specific health needs and financial goals.

What does Critical Illness Insurance not cover in Canada?

Critical Illness Insurance policies in Canada typically come with specific exclusions and limitations as well. These exclusions can vary depending on the insurance provider and the specific policy you choose. While the exact exclusions may differ, there are some common elements and types of situations that Critical Illness Insurance typically does not cover:

  • Non-Covered Illnesses: Critical Illness Insurance policies only cover specific illnesses and medical conditions as outlined in the policy. Any illness or condition not listed in the policy is not covered.
  • Pre-Existing Conditions: Many policies exclude pre-existing conditions. If you have a medical condition that you were diagnosed with before purchasing the policy, that condition may not be covered. However, some policies may offer coverage for pre-existing conditions after a waiting period.
  • Self-Inflicted Injuries: Injuries or illnesses resulting from intentional self-harm or suicide attempts are typically excluded from coverage.
  • Non-Diagnosed Conditions: To receive a payout, a qualified medical professional must officially diagnose the critical illness according to the policy’s criteria. Symptoms alone are not sufficient for a claim.
  • Misrepresentation or Concealment: If you provide false information or fail to disclose important medical information during the application process, the insurer may deny your claim.
  • Use of Alcohol or Drugs: If a critical illness results from drug or alcohol abuse, it may not be covered. Additionally, any illness or injury that develops as a result of engaging in risky activities while under the influence of alcohol or drugs may be excluded.
  • War and Terrorism: Injuries or illnesses caused by acts of war or terrorism are generally not covered by Critical Illness Insurance.
  • Participation in Illegal Activities: If you are engaged in illegal activities when a critical illness occurs, it may lead to a claim denial.
  • Non-Adherence to Medical Advice: If you do not follow prescribed medical treatments and advice related to your illness, the insurer may deny your claim.
  • Waiting Periods: Some policies have waiting periods before coverage becomes effective. During this period, which is typically 90 days from the policy’s start date, no claims can be made.
  • Exclusions for Specific Treatments: Certain treatments or procedures may be excluded. For example, experimental treatments or those not approved by Health Canada may not be covered.
  • Age Restrictions: Some policies have age restrictions, meaning that coverage may not be available to individuals above a certain age.
  • Exclusions for Certain Stages of Illness: Depending on the policy, coverage for some illnesses may be limited to specific stages or degrees of severity. For example, not all stages of cancer may be covered.

Understanding the exclusions and limitations is essential to avoid surprises when making a claim. If you have questions or need clarification about the coverage provided, consider consulting with Canadian LIC, who can help you choose a policy that suits your specific needs and circumstances.

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Faq's

Life insurance is a financial product that provides a payout to your beneficiaries when you pass away. In Canada, when you purchase a life insurance policy, you pay regular premiums, and in return, your chosen beneficiaries receive a lump-sum payment (the death benefit) upon your death.

Critical Illness Insurance in Canada provides a lump-sum payout to you (the policyholder) if you are diagnosed with a specified critical illness during the policy term. This differs from life insurance, which pays out to your beneficiaries upon death.

Common critical illnesses covered by Critical Illness Insurance in Canada may include cancer, heart attack, stroke, organ transplant, and other specific medical conditions. The list of covered illnesses can vary among insurance providers, so reviewing the policy details is essential.

Yes, many individuals choose to have both life insurance and Critical Illness Insurance to provide comprehensive protection. Life insurance helps your loved ones financially after your death, while Critical Illness Insurance provides support if you are diagnosed with a critical illness and survive.

Premiums for life insurance are generally lower than those for Critical Illness Insurance in Canada because the likelihood of a payout is higher for life insurance (everyone eventually passes away). Critical Illness Insurance premiums are typically higher due to the lower probability of a critical illness diagnosis during the policy term.

Some insurance providers in Canada offer critical illness riders that can be added to a life insurance policy for an additional cost. This allows you to have both types of coverage under one policy, simplifying your insurance needs.

The appropriate coverage amount depends on your individual circumstances, including your financial responsibilities, goals, and budget. It’s advisable to consult with Canadian LIC, an expert insurance advisor, as they can help you assess your needs and recommend suitable coverage amounts.

In most cases, life insurance payouts are not taxable in Canada. However, the tax treatment of Critical Illness Insurance payouts can vary depending on several factors, including how the policy is structured. It’s advisable to consult with a tax professional to understand the tax implications fully.

It is possible to obtain life insurance or Critical Illness Insurance in Canada if you have pre-existing health conditions, but the availability and terms of coverage may vary among insurance providers. It’s essential to disclose all relevant information when applying for insurance, and some policies may come with higher premiums or exclusions related to pre-existing conditions.

To choose the right insurance provider and policy in Canada, consider working with Canadian LIC, a licensed insurance advisor who can help you assess your needs, compare options, and find a policy that aligns with your financial goals and circumstances.

Always make sure to read and understand the policy terms, conditions, and exclusions before purchasing any insurance product in Canada.

The above information is only meant to be informative. It comes from Canadian LIC’s own opinions, which can change at any time. This material is not meant to be financial or legal advice, and it should not be interpreted as such. If someone decides to act on the information on this page, Canadian LIC is not responsible for what happens. Every attempt is made to provide accurate and up-to-date information on Canadian LIC. Some of the terms, conditions, limitations, exclusions, termination, and other parts of the policies mentioned above may not be included, which may be important to the policy choice. For full details, please refer to the actual policy documents. If there is any disagreement, the language in the actual policy documents will be used. All rights reserved.

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