How Much Critical Illness Insurance Do I Need?
What is critical illness insurance?
Critical illness insurance is a policy that pays out a living benefit to you if you get diagnosed with a serious illness like cancer, stroke, or heart attack.
- Term coverage (although some are permanent)
- Monthly premiums
- Flexible lump sum payout if diagnosed
Overall, critical illness insurance may be a valuable coverage for families where one person’s income plays a major role in keeping the household afloat and you do not have enough savings to cover an emergency.
How much critical illness insurance do I need?
The ideal amount of critical illness coverage covers six to 12 months of income plus recovery-related expenses. $50,000–$100,000 is a common starting point for critical illness insurance for many working Canadians.
Your ideal critical illness coverage amount depends on two things:
- Predictable costs: Your household’s specific financial support needs (ongoing bills, mortgage payments, dependent care, income replacement)
- Unpredictable costs: Recovery costs associated with a serious illness diagnosis (treatments, travel, home care expenses)
You should also account for other forms of insurance that provide a living benefit to you and your loved ones if you become ill, like disability insurance.
Critical illness policies in Canada generally range from $10,000 to $1M in coverage and span 10-30 years in term length.
Crunching the numbers: How to calculate critical illness coverage
The tax-free lump-sum payment from critical illness insurance is intended to cover whatever costs come up during your illness, from regular monthly expenses, like mortgage payments, to medical treatments. But you must live through the waiting period to unlock eligibility for the payout. The waiting period is the time between purchasing your policy and when coverage actually kicks in. This is different from the plan’s survival period, which is the number of days you must live after diagnosis (typically 30) before the insurer will pay out your claim.
Since every diagnosis comes with its own treatment path and recovery timeline, there’s no one-size-fits-all number to account for out-of-pocket medical costs. That said, you can use a formula to estimate how much critical illness coverage you might need.
Critical illness coverage formula
This simplified formula can help you estimate the amount of critical illness insurance that’s right for you and your family:
- Add: 12 months of your income, six months of your partner’s income, and estimated out-of-pocket medical costs.
- Subtract: Existing emergency savings and other insurance payouts.
The income portion of the formula accounts for your recovery time and your partner’s time away from work to assist with your care. Adjust the number of months up or down based on your situation. A more severe diagnosis will likely result in a longer recovery time.
Here’s an example of how two different people may need different coverage amounts.
How do I estimate medical costs?
Despite provincial health care, Canadian residents often face out-of-pocket medical costs when diagnosed with a serious medical condition. Medical costs can be hard to predict, but you can start by thinking about the expenses your provincial health plan won’t cover, like:
- Prescription drugs
- Private or semi-private hospital rooms
- Specialty treatments, rehabilitation, and physiotherapy sessions
- In-home nursing or personal care support
- Medical equipment like wheelchairs, walkers, or oxygen supplies
- Home modifications like ramps, grab bars, or stairlifts
- Parking, gas, and transit costs for ongoing appointments
- Childcare or household support while you recover
If Jillian were diagnosed with lung cancer at age 43
Jillian, a married woman with no children, should consider $123,000 in critical illness coverage. Here’s why:
- One year of income: $80,000
- Six months of partner income: $45,000
- Immediate medical costs: $28,000
- Disability insurance: $30,000
Jill would want to be able to stop work for a full year if she became ill, and her partner is prepared to take six months off to care for her. This means Jill would need $125,000 to account for income replacement.
Private hospital accommodations can be expensive and Jill knows she would want the best possible care in Ottawa, so she estimates about $28,000 in medical costs. This brings her total out-of-pocket costs to $153,000.
Jill’s disability policy will pay $5,000 monthly as long as she’s unable to work. If her treatment plan spanned six months, she’d receive $30,000 in coverage from her disability insurance. Subtracting this from the $153,000 in other costs leaves $123,000 to be covered by critical illness coverage.
A cancer diagnosis costs Canadians with cancer and their caregivers a lifetime average of nearly $33,000, according to the Canadian Cancer Society. That includes out-of-pocket costs, time costs, and indirect costs.
If Trent had a stroke at age 55
Trent, a single man with no dependents, should consider $60,000 in critical illness coverage, and here’s why:
- One year of income: $60,000
- Immediate medical costs: $20,000
- Emergency fund: $20,000
Trent estimates he’d need $60,000 to replace his income and an additional $20,000 to cover medical expenses in Calgary. He has no other insurance coverage. He’d be willing to take $20,000 out of his personal savings in the face of a life-threatening covered condition. This leaves $60,000 to be covered by his critical illness policy.
If Amira experienced a heart attack at age 36
Amira, a single parent with two kids, should consider $95,000 in critical illness coverage. Here’s why:
- One year of income: $70,000
- Immediate medical costs: $15,000
- Childcare and household help: $18,000
- Savings available: $8,000
Amira would need $70,000 to replace her income for a year so she could focus on recovery. She estimates it could cost $15,000 to cover any rehab and out-of-pocket medical expenses in Regina. She also knows she would need about $18,000 to cover the expense of at-home support, including childcare costs.
Amira would be willing to take $8,000 out of her TFSA to help with living expenses if she became seriously ill. By subtracting $8,000 from the $103,000 that she needs, that leaves $95,000 to be covered by Amira’s critical illness policy.
The cost of critical illness insurance depends on the amount of coverage you need, additional riders (like return of premium), and your state of health when you purchase the critical illness insurance policy. Bundling critical illness coverage with term life insurance can reduce costs for both plans.
What does critical illness insurance need to cover?
There might be quite a few expenses if you become seriously ill, and your critical illness insurance policy should cover all of them unless you plan to tap into your savings.
How the payout can be used: You have ultimate flexibility! The money from a critical illness payout can be used to pay for anything you need, no strings attached. It’s cash in your account for any expenses you and your family encounter as part of your recovery.
Early-stage payouts will issue a partial payment for certain conditions that are considered more treatable and less severe. You can still use this money for whatever you need, you’ll just have less of it. However, it’s still a valuable financial buffer to protect your savings and health.
5 factors that impact the amount of coverage you need
Existing insurance policies, family medical history and the state of your emergency fund can all impact the amount of critical illness coverage you need.
1. Disability insurance
If you have standalone disability coverage, you may need less critical illness insurance.
Disability coverage reduces the income replacement gap because it provides monthly payments while you’re unable to work due to a covered condition. That said, critical illness and disability insurance serve different purposes. disability replaces a portion of your income for as long as you can’t work, while critical illness pays a one-time lump sum upon diagnosis that you can spend on anything.
If you already have disability insurance, you may not need as much critical illness coverage to cover lost income, but you may still want critical illness coverage for expenses like medical costs, home modifications or childcare.
2. Employer benefits
Perks like sick leave, short-term disability, health insurance, and extended health benefits mean you may need less critical illness insurance.
Employer benefits in the event of illness can help your family stay afloat financially if you become ill and cannot work. Workplace benefits are typically less robust than standalone critical illness coverage, but you should still factor them in before you select your critical illness coverage amount.
3. Emergency fund
A robust emergency fund could mean you neescritical illness insurance.
A healthy emergency fund can offset costs if you’re unable to work, so factor a portion of your savings into your critical illness coverage calculations. That said, if you drain your savings during a lengthy recovery, you leave yourself exposed to other financial surprises, like unexpected vet bills, car maintenance, or household repairs. An emergency fund can soften the financial blow of an unexpected illness but it isn’t a direct replacement for critical illness coverage.
You can withdraw from your RRSP at any time (so long as you don’t have a locked-in plan), but the amount you withdraw is considered taxable income for the year and is subject to withholding tax. Withdrawals also impact your contribution room going forward. Consider talking to a financial professional before tapping your retirement savings during a health crisis.
4. Family medical history
If certain health conditions are common in your family, you may need more critical illness coverage.
If your family has a history of certain serious health conditions, you may wish to purchase more critical illness coverage. It’s equally important to check that the policy you’re considering includes that condition as a covered illness — exclusions apply for some policies. Check the fine print before you commit.
5. Current lifestyle and future recovery goals
If it’s important to you that your family maintain a certain standard of living even if you become ill, you may need more critical illness insurance.
If your family is accustomed to a certain income level and lifestyle (travel, extracurriculars, casual spending), then a larger critical illness payout can help. The lump sum payout can also support you in seeking the highest-quality healthcare to aid your recovery. Just remember: higher coverage amounts typically come with higher premiums.
FAQ: How much critical illness insurance do I need?
Bonnie Stinson is an insurance writer and researcher in Toronto with a decade of experience producing helpful, accurate content for Canadians. They have published resources for some of Canada's most innovative and consumer-trusted companies in the health, legal, and fintech sectors.
Bonnie Stinson is an insurance writer and researcher in Toronto with a decade of experience producing helpful, accurate content for Canadians. They have published resources for some of Canada's most innovative and consumer-trusted companies in the health, legal, and fintech sectors.