Protection Planning
Life Insurance, Critical Illness & Disability Insurance, Explained
Three different products protect three different risks. Here's what each one actually does, in plain language, with a worked example showing how the numbers can come together.
Life Insurance
Life insurance pays a lump sum to the people you choose (your beneficiaries) if you pass away while the policy is in force. It doesn't protect you — it protects the people who depend on your income: a partner, children, or anyone who would otherwise have to absorb your debts and lost income on top of losing you.
A Worked Example: The DIME Method
One common starting framework adds up four numbers — Debt, Income replacement, Mortgage, and Education. Here's what that looks like for an illustrative family: dual income, a remaining mortgage, two kids, and a primary earner making $85,000 a year who wants their partner to have 8 years of income replacement to adjust.
- Debt (car loan, credit cards): $15,000
- Income replacement ($85,000 × 8 years): $680,000
- Mortgage (remaining balance): $420,000
- Education (two kids, combined estimate): $60,000
Illustrative starting coverage figure: $1,175,000
This is a rough starting point, not a recommendation — the right number depends on existing coverage, savings, and your actual family situation.
Sample 1: Family of Four →
Case Sample: Family Of Four
A young family with two children, a mortgage, and one primary income earner:
- Household: two parents, two children (ages 4 and 12)
- Primary earner's gross income: $120,000/year
- Home: valued at $1,000,000, with an $800,000 mortgage remaining
- Goal: protect income until the youngest child turns 18 (14 years), and clear the mortgage so the family isn't forced to sell
Coverage breakdown
- Income protection ($120,000 × 14 years): $1,680,000
- Liability (remaining mortgage): $800,000
Illustrative starting coverage figure: $2,480,000
Illustrative only — doesn't include other debts, savings, workplace coverage, or education goals, which would adjust this number up or down.
Critical Illness Insurance
Critical illness insurance pays a lump sum while you're alive, after you're diagnosed with a condition the policy covers — commonly cancer, heart attack, or stroke. Unlike most other insurance, there's usually no restriction on how the money is used: treatment costs, income gaps, debt, or simply breathing room during recovery.
A Worked Example
Say someone holds a $100,000 critical illness policy and is diagnosed with a covered illness. A payout like that might realistically get used something like this:
- Reduced work hours during treatment (4 months at $6,000/month income): $24,000
- Out-of-pocket costs not covered by provincial health care (travel, drugs, private care): $18,000
- Debt/mortgage paydown to lower monthly obligations during recovery: $40,000
- Remaining buffer: $18,000
Total payout: $100,000
Illustrative only — actual payout depends on the coverage amount purchased, and the diagnosis meeting the policy's specific definition and any survival period.
Disability Insurance
Disability insurance replaces part of your income — as a monthly benefit, not a lump sum — if illness or injury prevents you from working. Coverage typically replaces 60-70% of income, and policies vary widely on how soon benefits start (the elimination period) and how long they last.
A Worked Example
Take someone earning $90,000 a year ($7,500/month) with a policy that replaces 66% of income:
- Monthly benefit ($7,500 × 66%): $4,950
- Essential monthly costs — mortgage $2,400, utilities/insurance $600, groceries/transportation $900, other $700: $4,600
Monthly buffer after essential costs: $350
That gap between the benefit and essential costs — not just the replacement percentage on its own — is usually the number worth paying attention to. Elimination periods and benefit duration change this picture too.
How These Work Together
These three products protect three different risks: life insurance covers what happens if you die, critical illness covers a serious diagnosis while you're alive, and disability covers an extended inability to work. They're not substitutes for each other — most protection plans use some combination of the three, sized to the risks that actually apply to your situation.
Not sure which of these fits your situation?
A short conversation can help you see where the real gaps are, without pressure or a product pitch. You can also start with a full protection review if you'd like a more complete look at your coverage.
Book a 30-Minute SessionThis article is for general education only and is not personalized financial, investment, insurance, or tax advice. All figures above are illustrative examples, not quotes — actual coverage amounts, premiums, eligibility, and payout terms depend on the insurer, product, underwriting, and your individual circumstances. Speak with a qualified advisor before making insurance decisions.