Critical illness insurance alongside your mortgage

Two different problems

Life insurance answers one question: what happens to the household if someone does not come home. It is the most important question, and it is not the only one a mortgage has to survive.

The other disruption is an illness that someone survives. Treatment takes months. One income stops or drops. The other person takes unpaid time off to drive to appointments. The mortgage payment does not pause for any of it.

Critical illness insurance is built for that second problem. The Financial Consumer Agency of Canada describes it plainly: critical illness insurance usually covers a one-time lump-sum payment if you are diagnosed with a critical illness, and the amount you receive depends on the amount of coverage you choose.

What tends to be covered, and what to ask

The conditions named most often are cancer, heart attack and stroke, with Alzheimer's disease among the examples the agency lists. Canadian policies vary widely around that core: some are short lists of a handful of conditions, others run to two dozen or more.

The important caution is the agency's own: insurance companies may differ in how they define critical illness and what conditions they cover, so read the policy carefully before signing and make sure you understand what it does and does not cover.

That is not fine print pedantry. With this product, the definition is the product. Two policies that both say they cover cancer can treat an early stage diagnosis completely differently. Three questions separate contracts far more than the monthly price does:

How many conditions, and how are they defined? A short list at a low price is a real option, but know that it is what you are buying.

What is the survival period? Contracts usually require you to live for a set number of days after diagnosis before the benefit is payable. Ask for the number.

Is there a return of premium option? That is the feature that pays back the premiums you paid if you never claim. It costs more each month, and for some households it is what makes the product worth having.

Why the lump sum matters

The money is not tied to a receipt, and it is not tied to your mortgage. You decide what it is for.

In practice that tends to mean a year of mortgage payments while someone is in treatment, or a partner taking unpaid leave to be at the hospital, or travel and parking at a treatment centre in another city, or a drug that provincial coverage does not include, or a renovation to make a house workable during recovery. The agency gives daycare and accessibility renovations as examples of what it can help with.

A benefit on a policy you own and pay for yourself is generally received tax free in Canada, so the figure on the contract is the figure that arrives. Where an employer or a corporation pays the premium the treatment can differ, which is worth confirming for your own situation before you rely on it.

Compare that with the coverage attached to a mortgage, where the lender is the beneficiary and the payment goes to the balance. A serious illness usually needs flexibility more than it needs a smaller mortgage, which is one of the differences set out in the full comparison.

Where disability insurance fits

These three products are often confused and they do genuinely different things.

Life insurance pays a lump sum when someone dies. Critical illness pays a lump sum on diagnosis of a covered condition, whether or not you stop working. Disability insurance replaces income while you are unable to work, generally between 60% and 85% of it up to a maximum, for a set period. Long-term disability coverage typically starts when short-term coverage, employer sick leave or EI sickness benefits run out. One detail worth knowing there: if you pay the entire disability premium yourself, the benefits are received tax free, whereas employer-paid premiums generally make the benefits taxable.

For a household with a mortgage and young children, the common order of priority is life insurance first, because it covers the outcome the family cannot absorb, then disability, then critical illness. Budget usually decides how far down that list you get, and there is no shame in stopping partway.

How much, and for how long

Critical illness is often sized in a much smaller way than life insurance. Where a life policy is measured against the mortgage and the years of lost income, a critical illness benefit is often sized against one to two years of household running costs: enough to keep the mortgage current and the household steady through treatment and recovery.

The term is usually matched to the same working years the life policy covers, so that both end around the time the mortgage and the childcare years do. Sizing the life policy first is the sensible order, and how much coverage a mortgage really needs walks through that calculation.

What this means for you

Get the life insurance in place first. It is the foundation, and it is usually less expensive than people expect; you can see an estimate in about two minutes.

Then, if there is room in the budget, look at critical illness as the thing that keeps the mortgage current during the months a family is dealing with an illness rather than a death. Read the definitions rather than the brochure, ask about the survival period, and ask whether a return of premium option is available. Those three questions tell you more about a contract than the price on the front of it.