Understanding Insurance – Preparing for the Worst

Chances are you have heard of Life, Disability, and Critical Illness Insurance. You probably understand how life insurance works, but when it comes to the other two, many people are confused about how it works and most importantly, how exactly it can protect you.

If you are a professional, having disability insurance is crucial and that’s because Canadian workers underestimate the likelihood that they will become disabled.

In fact, according to Statistics Canada, 1 in 6 working Canadians will be disabled for three months or more before the age of 50. A typical 30-year-old has a four times greater chance of becoming disabled than he does of dying before the age of 65.

How Disability Insurance Works

Disability insurance provides a monthly income if you’re unable to work due to a serious injury or illness. Check to make sure your employer offers disability insurance, even though coverage differs significantly from one employer to another. Typically the plan will provide you with a monthly income if you are unable to work. Many disability insurance plans will include a cap on benefits, such as 60% of your gross income, but only up to $2,500 a month. Therefore, if your salary is $100,000, you will only receive $2,500 a month, which is only 30% of your gross salary.

The key is to figure out how much your day to day living expenses are, such as mortgage payments/rent, food, utilities, travel expenses, and making sure your benefits are enough to cover these expenses for every month you’re not working. If you are a high income earner, and your insurance benefits are capped, you may want to consider a private disability insurance plan on top of your work plan to cover the shortage.

 How Critical Illness Insurance Works

Critical illness insurance, on the other hand pays out a lump sum benefit if you are diagnosed with one of the illnesses specified in the insurance policy. The benefit is tax free and does not interfere with the disability benefits received.

For example, if someone is diagnosed with cancer or suffered a heart attack, the insurance benefit will pay out a one-time cash payment. However, not all benefits are created equal. Some policies will cover only 10 illnesses, others can cover 25. Check your employee benefits package to understand what is covered and how much benefits you are entitled to.

Which Type of Insurance is Best for Me?

If you are a professional and you don’t already have disability insurance, this is the most important to get, and if you do have coverage with work, check to see how much benefits you are entitled to, then work out your monthly bills and if the coverage is not enough to cover your monthly expenses, look into a personal insurance plan for a top-up.

Critical illness insurance is much more limited in terms of payout because you will have to encounter one of the specific illnesses outlined on the plan and there may be other restrictions that prevent you from collecting the money such as pre-existing conditions and it will also take longer to process.

There is one situation where critical illness insurance makes more sense than disability insurance – and that’s if you are not working and therefore do not have earned income. If you are a stay-at-home parent, taking care of kids, you will not be entitled to disability insurance but a critical illness insurance will be important to protect the family.

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