Life insurance with critical illness: riders vs separate policies
You can combine life and critical illness coverage in three ways: add critical illness as a rider to a life policy, buy two separate policies, or buy a combination product that ties the two together. In the rider documents we reviewed from several Canadian insurers, the critical illness rider has its own amount and premium, and none says a claim reduces the death benefit. Some sites say a rider pays out of the death benefit; that is how some combination and accelerated designs work, but it was not how the riders we reviewed were described. The real trade-off is between the convenience and fee savings of a rider and the flexibility of separate policies. How critical illness coverage itself works is in our critical illness insurance guide.
Three ways to combine the coverage
| Rider on a life policy | Separate policies | Combination product | |
|---|---|---|---|
| Contracts | One policy, with critical illness added | Two independent policies | One policy covering both |
| Amounts | Each coverage has its own amount | Each coverage has its own amount | Often one shared amount |
| Critical illness claim | Rider pays and ends; life coverage continues in the riders we reviewed | No effect on the life policy | Can reduce or end the life coverage |
| Policy fees | Often no second fee | Usually a fee on each, though not at every insurer | Usually one fee |
| Flexibility | Tied to the life policy, with some exceptions | Change, keep or cancel each one separately | Ask what you can change |
How a critical illness rider works
A rider adds critical illness coverage to a term, whole life or universal life policy. At several major insurers, the rider covers the same conditions as their standalone critical illness policy, with amounts from $10,000 or $25,000 up to $2 million, rather than the small capped amounts sometimes described online. Basic riders covering only a few conditions also exist, and one insurer limits a rider added to an existing policy to the life insurance amount. Some insurers let you add the rider after the life policy is issued, with underwriting, and one lets the rider run on its own schedule, such as level critical illness coverage to age 75 or 100 on a 10 year renewable term policy, continuing as a separate policy if the life coverage ends first.
The rider has its own premium, but at several insurers no second policy fee, which is part of the saving. One insurer advertises average savings of up to 15 percent compared with buying the coverage separately. Some extras available on standalone policies, such as return of premium or certain waiver options, are not offered on the rider version at some insurers.
What happens when the rider pays
In the rider documents we reviewed, the critical illness rider has its own amount and pays its full benefit once on a qualifying diagnosis, then ends (some also pay smaller early detection benefits first). None says the payment reduces the death benefit, and in the one rider contract we read in full, a critical illness claim is not among the events that end the life policy. So with these riders, your life coverage continues as long as you keep paying for it. Check your own contract, because designs vary.
Combination products are different. In some, including an older design we reviewed, life, disability and critical illness draw on one shared amount, so a critical illness claim reduces the death benefit. In others, the policy pays once, on diagnosis or on death, whichever comes first. Ask which design you are being offered.
A terminal illness benefit is not critical illness coverage
Many insurers offer a terminal illness or compassionate advance on life policies, sometimes as a contract term and sometimes as a discretionary program, which advances part of your own death benefit if you are expected to die soon. The amounts we found were up to 50 percent of the coverage with a dollar cap, for life expectancy of 12 or 24 months depending on the insurer, and the advance reduces what your beneficiary receives. Critical illness coverage pays a separate lump sum on diagnosis, whether or not the illness is terminal.
Rider or separate policy?
A rider tends to suit you if you want both coverages from the same insurer, value one application and one premium, and want the policy fee savings.
Separate policies tend to suit you if you want different terms for each, such as 20 year life insurance with critical illness coverage to 75 (most riders follow the life policy’s term, though at least one insurer allows a different one), want to compare insurers for each coverage separately, may want to cancel one and keep the other, or want options such as return of premium that some insurers offer only on standalone policies.
If you might drop the life coverage first, ask what happens to the rider. A rider is normally tied to the base policy, but some insurers let it continue or be split off as a standalone policy.
When you apply for both at once, the insurers whose guides we reviewed ask for the more demanding set of medical evidence of the two. A few basic critical illness riders use only the life insurance underwriting. Critical illness underwriting is often stricter, so if your health history is complicated, our guide to critical illness insurance with a pre-existing condition explains why applying in stages can make sense.
Children’s critical illness coverage can also be added to some life policies as a rider, covering each child for a set amount.
Cost and tax
A rider is usually somewhat cheaper than the same coverage bought separately, partly because you pay one policy fee instead of two. Our guide to critical illness insurance costs covers typical premiums. On a policy you own personally, a critical illness benefit paid under a rider is generally received tax free, the same as a standalone policy.
Frequently asked questions
Can I add critical illness coverage to my life insurance?
Often, yes. Several Canadian insurers offer critical illness as a rider on term or permanent life policies, sometimes with full condition lists and amounts up to $2 million. Some allow it to be added after the policy is issued, with underwriting.
Does a critical illness rider reduce my death benefit?
Not in the rider documents we reviewed: the rider has its own amount and premium, pays its full benefit once, and then ends, and none says the payment reduces the death benefit. Some combination products work differently, sharing one amount between life and critical illness or paying once on diagnosis or death, so ask which design you are being offered.
Is a critical illness rider cheaper than a separate policy?
Often somewhat, partly because several insurers charge no second policy fee for a rider. One insurer advertises average savings of up to 15 percent. Separate policies offer more flexibility, and at least one insurer charges no policy fee on its standalone critical illness policies either.
What happens to a critical illness rider if I cancel my life policy?
It depends on the insurer. A rider is normally tied to the base policy, but some insurers let a rider continue or be split off as a standalone policy when the life coverage ends. Ask before you buy if you might drop the life coverage first.
Is a terminal illness benefit the same as critical illness coverage?
No. A terminal illness or compassionate advance pays part of your own death benefit early, often up to 50 percent with a dollar cap, when life expectancy is short, and it reduces what your beneficiary receives. Critical illness coverage pays a separate lump sum on diagnosis of a covered condition.
What to do next
Whether a rider or separate policies fit best depends on the terms and amounts you need and on your health history. A licensed advisor can compare riders, standalone policies and combination products across insurers before you apply.
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