Disability Insurance vs. Critical Illness Insurance

I really didn’t understand the difference between these two different types of insurance policies. Luckily I have smart friends who answer my dumb question. What is the difference between Critical Illness Insurance and Disability Insurance?.

Chantal Marr answered my query (she is part of LSM insurance one of my advertisers, and she is also my insurance consultant for this blog as well), and I think I now understand the big difference between these two policies.

What is the Difference ?

Critical Illness Insurance

Critical Illness Big Winner! (really?)

Chantal’s answer is concise and easily understood:

Disability Insurance pays out a monthly benefit that is tied to your ability to earn an income.  Critical Illness pays out a lump sum benefit but is is not tied to your ability to earn an income.  Disability Insurance underwrites your occupation and Critical Illness does not.

Chantal has also written a more detailed description and discussion of these insurance vehicles with: Critical Illness insurance vs. Disability Insurance Why You Need Both.

Both Critical Illness Insurance and Disability Insurance?

I do not agree that you need both insurances, I think Critical Illness insurance strikes me as a bit ghoulish, in that you get a big pay out for getting a critical illness. Do you need a large lump sum payment if you are diagnosed with a critical illness? I am not sure, I would have thought that if you have a good health insurance plan, and you have some kind of disability insurance, that would be nearly enough, but I am sure Insurance folks would argue you need the critical illness to be completely covered (again, I don’t agree with that).

As for the Disability Insurance, read over your policy carefully if you are purchasing one to ensure you understand how “Disabled” is defined, and how you qualify (or don’t qualify) for funds (but you should do that with all Insurance policies). Understanding what Disabled means, is the key to the policy, as what you think of as disabled and what your insurer thinks of as disabled may not be the same thing.

Is There Another Part ?

The other part of any Disability Insurance Policy is figure out who is insuring you. I have written previously about Self Insured Disability Insurance that decimated many families during the Nortel fiasco. Make sure that whoever is insuring you, is financially sound.

Image courtesy of Ambro/ FreeDigitalPhotos.net


The $6 Million Man?

Our friends over at PBS News Hour (the best news program out there (sorry Daily Show)), had a very off topic but interesting piece on the work towards bionic body part replacement that is going on in the medical world. This topic is dear to my heart because of my late Dad and other folks in my family dealing with disabilities and me constantly wondering, isn’t there some way to help them with these disabilities.

Are we heading towards the $6 Million Man? No, not yet, but with more understanding of how the brain actually works, and our ability to hook into the outputs from the brain, and finally our ability to understand the mechanisms of our body (let me tell you a knee is a complicated little system), and recreate that system synthetically.

Some of this is science fiction, but then again, without the ideas of science fiction, will we move forward? The other issue (which does have something to do with money) is who is going to fund this work? How will this all fit into the already crippling health costs out there? Another interesting question to answer.

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What is Your Financial Plan B ?

My kids being rather sporty has allowed me to be exposed to some very elite athletes who are very talented and their talent makes you sure they will go far in this sport, however, what happens if something goes very wrong? What is your financial plan b ?

This past weekend a very talented player on one of my daughter’s rugby team damaged her ACL (at least that is the initial diagnosis), and after dealing with one of my other daughter having her ACL broken, I know that this is a devastating injury, with a long recovery time (and some long-lasting issues as well). This player was going to play for a University team and was an elite level player, but now what?

This same kind of tragic accident/incident can happen in anyone’s life and it begs the question What is your financial plan B? Plan B, typically is the name given to the steps you must take if your initial plan fails, or is in someway derailed, and everyone should at least have a generic Plan B for their finances to deal with a catastrophic failure of some kind?

financial plan b
The Ultimate Financial Plan B

What do I mean by a catastrophic financial failure?

  • Sudden death of the main family bread-winner is the easiest financial catastrophe that everyone should have a plan in place (i.e. Life Insurance and/or a Will). Yes that is a simple example, but you’d be surprised how few folks don’t even think about that one.
  • Loss of job of major bread-winner (or possibly even both): This one I have lived through, and I thought I had a plan, but believe me, it was not in enough detail, and the more you plan, or think about this, the less gut wrenching it can be if it happens to you (or your spouse). I assumed I was going to get a “settlement” for getting laid off, which I did, but folks who got hit a month after I did, ended up with nothing, and those folks really were in deep trouble, can you deal with that kind of a disaster?
  • Economic disaster (read 2008), where stock values and fortunes can decrease (if not disappear) over night, can you deal with a sudden portfolio drop? Are you close enough to when you might need those funds that you should maybe take your profits now?
  • Health failure, not death, but the major breadwinner is unable to work, how will that work? Do you need disability insurance, or do you create a “nest egg” or “disaster fund”? Can you deal with this?
  • A pandemic that shuts down the global economy? Nah, that would never happen.

What does your Financial Plan B look like? Have you had to use your Plan B?


Long Term Disability Insurance

Nortel screwed over their employees who had Long Term Disabilities, because Nortel was self-insuring. No one came to their rescue either, their long term disability insurance did not help. Other companies self-insure, so you need to be careful with your LTD insurance

I have written before about the plight of the folks who were in the Nortel Disability plan (and are now in a bad predicament), but they lost one of their most active advocates in Peter Burns over the weekend. Peter attempted to put a face to the folks effected by the Nortel Disability debacle (because Nortel was self-insured, the disability insurance pay outs became simply another group of creditors).

My connection to this story is that I used this insurance, assuming I was protecting my family, when I worked at Nortel. I was lucky that I never had to test the insurance’s usefulness. I am aware of former co-workers who are now in a much worse financial place because of the January deadline which cut off these folks from the benefits they thought they were purchasing.

Given there are a lot of folks who do worry about the future and attempt to protect their families with disability insurance, they need to find out how this disability insurance actually works. If it is with your employer and they self-insure, you can easily end up in the same predicament as the former Nortel employees.

The insurance looked like it was being run by SUN Life, but in fact they were simply administrators, and it was Nortel who was paying the bills (which was cheaper for Nortel at the time), but now with Nortel being a bankrupt husk of itself, now things are very different. The disability payments got thrown in with the hundreds of millions owed to vendors, customers and partners, and thus were not going to get paid much at all. As of January the pay outs have stopped and now these folks are living on whatever disability income they can get from the Government.


A good example of doing the right thing and still ending up in a bad place. It is important to understand who underwrites your disability insurance. If it is your firm, this is a big issue.

Other views on this subject.


Disaster Planning or the Worst Case Scenario

Given the Pandemic of 2020, I think we can safely say, Disasters are not planned, so disaster planning is that much more important.

Disaster Planning?

Any financial planning you may be doing , needs to include a Disaster Recovery plan. I have had a few folks tell me that this is morbid, but as a Project Manager I have learned that you are being naive if you do not have some kind of disaster recovery plan in place, to deal with unexpected events in your life, in general, and in your financial life, in specific.

What kind of catastrophic financial events? Some simple examples might be:

  • Bread winner loses job, if your household’s main income earner loses their job, what might happen? If you don’t have a plan in place for that, and an emergency fund to deal with this, you are asking for trouble. I used to think I couldn’t lose my job, but it eventually happened, and luckily I was taken care of, but I was not prepared, and it could have been much worse. Different experts suggest 3-6 months pay in reserve, I’d say a year’s pay is your ultimate goal, having lived through it. If you think you don’t need an emergency fund because your company pays severance, that is what I thought, but then I saw what happened to my Co-Workers when Nortel went very south.
  • Bread Winner passes away, again, if you have a family and don’t have Life Insurance, or a big packet of money hidden somewhere, you are living on the edge. Does your loved ones know whether you have life insurance and what to do should you die? They need to know (as well). As soon as you get married, get life insurance (Term in my opinion), yes it’s an expense, but you need it. Is there an up to date will? Hope there is, or there could be a big mess financially to follow.
  • Bread Winner disabled, disability insurance is a tricky topic with me. I have it through work, and bought it at my former employer, and my opinion is that you should get it, if you don’t have it, but I have seen compeling arguments that simply building up savings enough is just as good a way to deal with this contingency (I don’t agree, but it is another option). What about a power of attorney? Once someone is disabled mentally getting a power of attorney is a lot harder to put in place.
  • Stuff Gets Broke, a generic topic covering stuff like Home Insurance, Car Insurance and the like. Again, you need this insurance if you care about your stuff, and in most instances in a lot of places you must have these insurances (Car Insurance at least). If your house is paid off do you need Home Insurance? I think so, if just for the liability side of things, but for unforeseen things like fire and such as well.

Why Have These Stop Gaps?

Having these financial stop gaps in place you are protecting yourself and your family’s interests, but it is worthwhile doing a plan about each of these scenarios, to see how things might work. You don’t need to go into gross detail, but if you walk through the scenario you might learn the importance of:

  • Keeping your loved ones informed on where things are. If your spouse doesn’t know about your banking, or where your insurance is with, how will he or she find out? Where is your will or power of attorney? Again, are they up to date?
  • Are you sure you have enough insurance coverage? If you run through a scenario you might realize that you need both spouses incomes, and thus you might need to have the same coverage on each spouse.
  • If you go through the scenarios and feel confident you are prepared, you then have given yourself the great present of peace of mind, and that is important.

Saying that you did this 10 years ago and it was fine is asking for trouble as well, many things change over 10 years, review it and make sure your plans are still up to date and current.


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