Insurance Planning

Disability Insurance

Most families live on the earned income of one or two income earners. The disability of an income earner results in the partial or total loss of this essential income for the duration of the disability. For many families, the loss of income and the increase in expenses caused by disability represent a significant financial loss that could lead to undue hardship and even bankruptcy. For example, if you saved 5% of your annual income for 10 years it would take only six months to wipe out the savings.

A disability is a physical or mental impairment caused by an accident or illness that partially or totally limits one's ability to perform an occupation for which one is suited by education, training or experience. Although the probability of suffering a disability of 90 days or more before the age of 65 is considerably greater than the probability of death before that age, disability insurance is often overlooked in the financial planning process.

Government plans offer limited protection as part of a social security benefit. Group plans generally offer limited protection, but at low cost to the individual while Individual plans offer the most extensive protection but at a higher cost.

Many individuals do not appreciate how little protection they have under their disability insurance coverage. Many have no coverage other than that offered by the Canada Pension Plan and Employment Insurance.

Income replacement plans are not always easy to understand. That’s why we recommend you talk with a qualified insurance broker about carefully protecting your financial future.

Here are 10 tips on what to ask about:

1.       Definition of Disability:

The most important thing to know about your disability insurance plan is what’s meant by disability. There are many variations and there may be different definitions depending on how long your claim lasts.

An own occupation definition means that you’re considered disabled if you can’t perform the duties of your usual job. For instance, a dentist would be disabled if he/she broke an arm, but a lawyer probably wouldn’t be. Own occupation definitions are generally only found in policies sold to professionals.

Regular occupation definitions are commonly used, and are similar to the own occupation definition except that your disability ends if you go back to work at a new occupation. However, as long as you’re not working because you can’t do your regular job, you’re considered to be disabled. You’ll often find income replacement plans that provide a regular occupation definition but only for the first 2 to 5 years of a disability. After that, the definition may switch to an any occupation definition.

An any occupation definition is stricter since you’ll only be considered disabled of you are unable to work at ANY job (generally for which you are qualified).

2.       When will the benefit kick in?

After you’re hurt or get sick, there will usually be an “elimination period” or “waiting period” before the benefit starts. With a long waiting period, you’ll need some other source of income before your benefit begins.

3.       How long will the benefit last?

You’ll usually want a benefit period to age 65 just in case you are severely disabled and can never return to work.

4.       What about recurring disabilities?

what happens if you have a chronic condition like colitis? Do you have to meet waiting period each time you’re sick.

5.       Exclusions

Always check your plan carefully or ask your broker about any circumstances where your claim would NOT get paid. Generally speaking, you want to be sure that you have 24 hour protection for all types of injuries and illnesses.

6.       Offsets or Reductions

Be sure you know whether any disability payments would be reduced (and by how much) because of other sources of income or limits in your plan.

7.       What if you can work part-time?

It’s quite common that an illness or injury might make it impossible for you to work full-time but doesn’t completely incapacitate you. Does your income replacement plan have a “partial” or “residual” benefit? A plan with “residual” benefits pays you a disability benefit in proportion to how much your income drops.

8.       Guarantees

Does your plan guarantee the premium rates and/or the policy provisions? Some individual income replacement plans are “non-cancelable” and the insurance company cannot raise the premiums or restrict the benefits.

9.       Portability

Portability means that you own your income replacement coverage wherever you go. This is a downside of employer-provided disability plans because if you quit or lose your job, you might be without any kind of income protection. And, you might not be able to qualify for an individual income replacement plan—insurance companies generally require that you be working steadily (sometimes for a year) and be in good health.

10.     Adjustments for Inflation

Does your coverage keep pace with any increases in your income? More importantly, will your benefits grow over time if you’re disabled? Say you had to stop working at age 40 because of multiple sclerosis—without any cost of living adjustments you would have to live on a fixed income until age 65.

Newer benefits and options are constantly being added to disability contracts. Health maintenance benefits, return to work assistance benefits, healthcare professional riders, long-term care benefits and critical illness benefits are among those benefits that have recently been added to some disability contracts.

The information contained in this commentary is designed to provide you with general information only, and is not intended to be comprehensive advice applicable to the circumstances of any individual. We strongly urge you to seek professional assistance before acting upon information included herein.