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Tax Implications of Critical Illness Insurance

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Is critical illness insurance taxable in Canada? This is one of the many questions that we get from clients who are considering implementing critical illness insurance. Like most of our clients, you’re probably asking this exact question before finalizing your decision as to whether or not critical illness insurance is worth it to implement.

In this article, we’ll explore whether critical illness insurance is taxable in Canada. By understanding the tax implications of a critical illness insurance policy, you can make informed decisions about your coverage and have the right expectations when it comes to your critical illness policy.

Key Takeaways

  • Critical illness insurance payout is not taxable.
  • Premiums for critical illness insurance are considered personal expenses and not tax-deductible.
  • Benefit payments received from critical illness insurance are tax-free.
  • Consult a tax professional for specific tax implications and to understand different scenarios.

Critical Illness Insurance Explained

Critical illness insurance is a type of living benefit insurance policy that offers a lump-sum payment if you’re diagnosed with a critical illness that’s listed in the policy. Typical illnesses covered include heart attacks, strokes, cancer, and other severe conditions. The aim is to offer financial relief at a time when you need it the most, allowing you to focus on recovery instead of worrying about when or where your income is going to come from while you’re recovering from a serious health condition and are unable to work for a living.

There are two general types of critical illness insurance:

1. Basic,

2. Comprehensive

Basic Critical Illness Insurance

Basic critical illness insurance, which you mostly see advertised online, only usually covers the top 4 most common critical illnesses. These are heart attack, stroke, cancer, and coronary artery bypass. The Manulife CoverMe critical illness insurance that you may have seen being advertised, and offered online covers 5 illnesses, which includes aortic surgery, in addition to the top 4 critical illnesses in Canada.

Comprehensive Critical Illness Insurance

Comprehensive coverage, on the other hand, covers between 25 to 26 critical illnesses, depending on which insurance carriers you’re getting your policy from. I always suggest my clients implement critical illness insurance with the most covered conditions as you never know which one you may get inflicted with. Most Canadian insurance carriers don’t cover acquired brain injury. From my experience, there are 4 insurance carriers that cover acquired brain injury in addition to the 25 illnesses that most carriers offer. Each of them has its own unique extra features on top of the 26 covered illnesses. 

If you’re working on a budget, you may opt for the basic coverage that only covers the 4 most common critical health conditions in Canada. If this plan is still a bit for your budget, one insurance carrier offers cancer-only protection.

The only problem that I see when you only aim to cover yourself from one or four serious illnesses is that you never know what kind of illness you may experience in the future that’s why I suggest comprehensive coverage.

Critical Illness Insurance vs Disability Insurance

A lot of our Canadian prospective clients get confused with critical illness and disability insurance. Though both, are considered living benefits; they are completely different coverages. Let’s take a closer look at each of them below:

  1. Coverage:
    Critical illness insurance provides a lump-sum payment if you’re diagnosed with a covered condition, such as cancer, stroke, or other serious health conditions. This is a one-time payment that you can use to cover various expenses, including medical bills, cost of living, and debt payments.

On the other hand, disability insurance offers monthly payments if you’re unable to work due to illness or injury. It provides ongoing financial assistance to help you meet your everyday expenses.

  1. Taxable Benefit:
    While disability insurance benefits may be subject to taxes (group benefits when paid by the employer), critical illness insurance payouts are generally not taxable. This means that the lump-sum payment you receive from your critical illness insurance policy is tax-free. It can provide significant financial assistance during a difficult time without adding to your tax burden.

  2. Medical Expenses:
    Critical illness insurance can help cover medical expenses that aren’t covered by your regular health insurance. It can provide financial support for treatments, medications, and even home modifications. Disability insurance, on the other hand, focuses more on replacing lost income during your recovery period. It aims to replace a portion of your income, and depending on the type of coverage, you may be covered for both illnesses, and injury. One thing to note in regard disability insurance coverage is that the illness need not be a serious illness. You can claim disability benefits for any illnesses that may prevent you from showing up for work to make a living.

Critical Illness Insurance vs. Health Insurance

Critical illness insurance and health insurance serve different purposes and provide coverage for distinct aspects of your healthcare needs. While health insurance plans focus on covering health and wellness expenses not usually coverage by Canada’s provincial health insurances, including prescriptions, vision, dental, and extended health services such as massage therapy, physiotherapy, and chiropractor services, critical illness insurance is specifically designed to provide financial protection in the event of a serious illness. It offers a lump-sum payment upon diagnosis of a covered condition, which can be used to cover expenses not covered by regular health insurance, such as experimental treatments, home modifications, or debt repayments.

Here is a table comparing critical illness insurance and health insurance:

Critical Illness InsuranceHealth Insurance Plan
Provides coverage for specific critical illnessesCovers a wide range of extended healthcare costs
Offers a lump-sum payment upon diagnosis providesOffers ongoing coverage for medical expenses
Can be used for personal living expenses during recoveryCovers doctor visits, hospital stays, and prescription medications
Covers additional costs like treatment and home modificationsOffers protection against high medical costs
Provides financial support in a single paymentProvides peace of mind for routine healthcare needs

It’s important to note that critical illness insurance payout is generally tax-free, while health insurance premiums may be tax-deductible as eligible medical expenses. However, the tax implications may vary depending on individual circumstances and specific insurance policies. It is advisable to consult a tax professional to understand the tax liabilities associated with both types of insurance coverage.

Factors to Consider

If you’re considering critical illness insurance, here are some factors to consider before making a decision:

  1. Health and Family History: Evaluate your health and family history to determine if you’re at a higher risk of developing a critical illness. If you have a family history of specific conditions or if you have pre-existing health conditions, critical illness insurance may provide valuable financial protection.

  2. Financial Stability: Consider your current financial situation and whether you’d be able to cover medical expenses and maintain your lifestyle if you were to be diagnosed with a critical illness. Critical illness insurance can provide a lump-sum payment that can be used for medical bills, debt, or other expenses.

  3. Peace of Mind: Think about the peace of mind that critical illness insurance can provide. Knowing that you have financial protection in the event of a serious illness can alleviate stress and allow you to focus on your recovery.

Ultimately, the decision to get critical illness insurance is a personal one. It’s important to carefully evaluate your individual circumstances, consult with a licensed insurance professional, and consider the specific terms and coverage options available in Canada.

How Much Critical Illness Insurance Should You Get?

To determine how much critical illness insurance you should get, evaluate your individual circumstances and financial needs. Consider factors such as your current income, expenses, and any existing insurance coverage. It’s important to strike a balance between having adequate coverage and ensuring that the premiums are affordable for you.

To help you make an informed decision, here’s a table outlining different coverage amounts and their potential benefits:

Coverage AmountPotential Benefits
One times annual incomeProvides a safety net to cover immediate expenses
Two times annual incomeOffers additional financial support for medical treatments and living expenses
Multiples of $50,000Provides flexibility to tailor coverage based on individual needs

Keep in mind that the higher the coverage amount, the higher the premium payments will be. It’s essential to choose a coverage amount that allows you to cover your expenses without dipping into your retirement funds or compromising your financial stability.

Additionally, consider your age and health when deciding on the coverage amount. Younger individuals may find higher coverage more beneficial, as they have a longer time horizon to potentially face critical illnesses. On the other hand, older individuals may find that lower coverage amounts are more appropriate.

Remember to consult with a licensed insurance professional who can provide personalized advice based on your specific circumstances. We can help you assess your needs and guide you in selecting the right amount of critical illness insurance for you.

Types of Critical Illness Insurance in Canada

When considering critical illness insurance in Canada, you have several types of policies to choose from. These different policies offer varying coverage and benefits to suit your specific needs.

Here are three types of critical illness insurance policies you can find in Canada:

  1. Basic Critical Illness Insurance: This type of policy provides coverage for a specific list of critical illnesses, such as cancer, heart attack, stroke, and organ transplant. In the event of a covered medical emergency, you’ll receive a lump sum payout to help cover medical expenses, debt, or other financial obligations.

  2. Comprehensive Critical Illness Insurance: This policy offers coverage for a broader range of critical illnesses, including conditions like Alzheimer’s disease, Parkinson’s disease, and multiple sclerosis. It provides a lump sum payout upon diagnosis, allowing you to have financial support for various expenses during your recovery.

  3. Return of Premium Critical Illness Insurance: With this type of policy, if you don’t make a critical illness insurance claim during the policy term, you’ll receive a return of your premiums paid. This option provides the potential for a refund if you remain healthy and don’t experience any covered illnesses.

What Age Does Critical Illness Insurance End

Critical illness insurance policies comes in various terms, and coverage length. As you approach a certain age or milestone, critical illness insurance coverage may cease. The age at which critical illness insurance ends can vary depending on the insurance provider and the specific policy. Generally, most critical illness insurance policies in Canada have an age limit of age 75 or up to 100 years old. This means that once you reach the specified age, your coverage will no longer be in effect. It is important to review the terms and conditions of your policy to determine the exact age at which your coverage will end.

The most affordable critical illness insurance that you can implement is a 10-year term critical illness insurance policy. Note that, this could also be the most expensive, you aim to keep the policy long term, as the premium increases at each renewal can be exorbitant since the new term premium is always based on your attained age.

Another affordable option is a 20-year term critical illness insurance. With this option, you will be contributing the same amount of premiums in the span of the policy’s 20-year term. Should you wish to renew your policy at year 21, the new premiums will be based on your attained age.

10 and 20 year term policies will end on the year when the term expires, so regardless of your age, that’s when your policy ends. While there’s always option to renew these policies, I don’t necessarily advise it since it’s going to be more expensive at each, and every renewal.

What I suggest, my clients to implement is a term to age 75 critical illness insurance coverage, with return of premiums at death, and at policy cancellation or expiry. This if the monthly contribution is within your budget. The advantage of having a critical illness insurance coverage that’s level up to age 75 is the fact that you won’t have to deal with premium increases until you retire. Which makes it more affordable overall compared to shorter term policies such as 10, and 20 years. Adding the return of premium riders, on the other hand, makes it a point that you will get your money back, in case you never have to make a claim on your policy. Meaning, if you don’t get sick, you get all your contributions back – which can be an additional savings sources for your retirement.

The longest coverage that you can get is a term to age 100 critical illness insurance. This makes it a point that you’re financially secured against critical illnesses even after you retire. This of course, is more expensive than a term to age 75 coverage. And since, you will mostly likely only need the protection, until when you retire – I usually recommend a level to age 75 coverage, which you can cancel at age 65, and get all your money back provided you didn’t get critically ill, and didn’t make a claim.

Are Critical Illness Premiums Tax-Deductible?

The premiums you contribute toward your critical illness insurance protection aren’t tax-deductible because this is a personal coverage, hence considered a personal expense.

Here are three key points to keep in mind regarding the tax-deductibility of critical illness premiums in Canada:

  1. Personal Expenses: Critical illness insurance premiums are considered personal expenses and aren’t tax-deductible. This means that you can’t claim these premiums as a deduction on your personal income tax return.

  2. Employer-Paid Premiums: While premiums paid by employers for critical illness insurance may be tax-deductible for the employer, they’re included in the employee’s taxable income. This means that if your employer pays for your critical illness insurance premiums, you may have to pay taxes on the amount of the premiums.

  3. Tax-Free Payout: Although the premiums aren’t tax-deductible, it’s important to note that the payout from a critical illness insurance policy is generally tax-free. This means that if you receive a lump sum payment from your critical illness insurance policy due to a covered illness, you won’t have to pay taxes on that payout.

Are Critical Illness Insurance Payouts Taxable?

If ever you need to make a claim against your critical illness insurance policy, know that the critical illness payout is free of tax. Yes, you will receive the whole amount of your critical illness insurance benefit. For example, one of my clients needed to make a claim on her critical illness insurance policy back in 2019. Her coverage was for $100,000.00. She received the whole $100,000.00 payout tax-free. In orther words, critical illness payouts are generally non-taxable!

Is Critical Illness Insurance Worth It in Canada?

The very reason why most Canadians don’t implement critical illness insurance is the fact that they think that they will get critically ill, or so they hope. Like any other serious life event, we don’t know what’s going to happen in the future. Most of us carry a spare tire. Well, most cars in Canada sold today, have a spare tire, and no one ever drives a car without a spare tire.

Why do you think we carry spare tires wherever we go? Because, we never know when we could get a flat. We hope that it never happens but it may – hence, we carry a spare tire to continue our journey.

Carrying insurance protection such as critical illness policies isn’t that much of a difference with carrying a spare tire. You just bring it as a back up, in case something happens, and you find yourself unable to work due to a serious health condition. As I always mention, if you need to actively work for income – you need insurance!

What if it never happens? Then you’ve lost the premiums you’ve paid into your critical illness benefits, which is no different to when you’re paying for vehicle insurance. The only difference is that your ability to earn a living is more important than the most expensive car you’ll ever own.

If you’re hesitant in implementing a critical illness coverage because you don’t want to lose the premiums you’ve contributed if you don’t get sick. Topping it up with return of premium options, makes it even more worth it. Think of it like a long term savings account that will pay out a huge amount in case you get sick but one you can cash out, if you don’t!

How to Claim Critical Illness Insurance Payout

In terms of a critical illness claim, it’s pretty straight forward. Start by contacting your insurance advisor, or the life insurance company and inform them of your diagnosis. They’ll provide you with the necessary forms and documentation requirements. Make sure to carefully complete the forms and gather all the required medical records and supporting documents. Submit the completed forms and documents to your insurance provider according to their instructions. Once your claim is received, it will be reviewed by the insurance company to ensure that it meets the policy’s criteria for a valid claim.

How Critical Illness Insurance Benefit Pays Out

When you receive a critical illness insurance benefit in Canada, the payout is typically provided as a lump sum payment. This means that you’ll receive the entire benefit amount in one payment, rather than receiving monthly benefits like with disability insurance.

Here are three key points to understand about how the critical illness insurance benefit pays out:

  1. Lump Sum Payment: The critical illness insurance benefit payment is given to you as a lump sum, which means you’ll receive the full amount in one go. 

  2. Flexibility in Usage: The benefit payment isn’t restricted in its usage. You have the flexibility to use the funds as you see fit, whether it’s for medical expenses, making necessary home modifications, or even taking time off work to focus on your recovery. The choice is yours.

  3. Coverage for Specific Medical Conditions: The critical illness insurance benefit is designed to provide financial support for specific medical conditions covered by your policy. These can range from heart attack and stroke to cancer and organ transplants. It’s important to review your critical illness insurance plan to understand the specific medical conditions covered and the corresponding benefit payment for each condition.

Contact us for your Financial Services Needs

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To schedule a consultation about your financial goals, or if you have any questions about insurance in Alberta, Manitoba, or Ontario, please book a virtual meeting to talk to an advisor today! We’re proudly based out of Winnipeg and service clients anywhere in Ontario, Manitoba and Alberta, including Guelph, Edmonton, and Brandon.


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