Disability Insurance

Everybody understands the value of life insurance and most of us who take our finances seriously have a solid life insurance policy in place. But what happens if you are unlucky enough to sustain a serious illness, chronic disease or disability which prevents you from working?

Your ability to earn income is your most valuable asset. Disability insurance is designed to protect you from a possible loss of income. What’s the possibility of this happening? Below are some statistics on disabilities occurring at different life stages.

Chances of becoming disabled for 3 months or longer before age 65*

* Derived from 1985 Commissioners Individual Disability Table A., Disability rate by age and sex, Canada, 2011 , Prevalence of disability among adults aged 15 years and over, by type of disability and sex, Canada, 2011

Why should you consider personal disability insurance?

• Worker’s Compensation only covers work related accidents.
• Unemployment insurance only covers 15 weeks.
• Canada Pension Plan: Are you comfortable relying on the government for a benefit that can change?
• Group and association coverage can fill a valuable role in long-term disability protection. (However, the benefit may be limited by the definition of disability and coverage amount.)

What is disability insurance?

Disability insurance provides you with a portion of your income in the event that you suffer from an illness or accident which means that you can’t work, either temporarily or on a permanent basis.

Studies show that you are actually more likely to sustain a disability during the course of your working life than to die whilst of working age. A disability can have a dramatic and long-term impact on your earning potential – in fact, the Council for Disability Awareness has found that the average absence from work for a long term disability is nearly three years.*

Types of disability insurance

There are two main types of policy – short-term and long-term disability insurance.

• Short-term disability insurance generally offers the policyholder a maximum of 6 months of benefits.
• Long-term disability insurance usually kicks in at the end of a short-term disability insurance. Policies differ in terms of the length of time that they offer benefits for and the criteria that must be fulfilled to be eligible.

An important factor in this regard is the definition of “regular or own occupation” or “any occupation”. A “regular or own occupation” policy covers you if you are unable to work in any capacity – meaning that, even if you could perform a role different to the one that you worked in prior to your disability, you will still receive benefits under the plan. Alternatively, an “any occupation” policy means that you will only receive disability benefits if you are unable to work at all.

It’s important to figure out which type of policy suits you better, depending on the cost of the premiums, the type of work that you do and your personal preference. We can help you with this.

Factors to consider when taking out disability insurance

How much do you or your family depend on your income?

Dependency is the key question here – if you have a spouse, children and/or other individuals who rely on your income contribution to the household finances, disability insurance is likely to be valuable to you.

However, it is likely that, as you age and your children become less financially dependent on you or you have saved enough retirement funds to help you through a potential early retirement due to ill health, disability insurance becomes less fundamental.

How much does your company plan protect you?

Some companies offer a disability policy and this is a common reason for people failing to purchase a personal plan. However, it’s important to understand the level of coverage that your company policy offers you, as it is common for such plans to only replace a small proportion of your income (often capped) across a short-term basis which is unlikely to be sufficient for your needs.

Work out your budget and shop around for the best deal

You could benefit from working with an independent financial advisor to help you in the purchase of your disability insurance. They will be able to search the market in order to find you a customized plan which fits your budget, rather than falling back on off-the-shelf policies which may not meet your individual requirements as well.

Don’t cut back on your level of coverage where possible

That said, it’s easy to underestimate the level of disability coverage that you actually need should the worst happen. Not only would you have to replace your existing expenditure, but you are likely to accumulate new expenses if you were to become disabled, such as the purchase of medical equipment, healthcare or home help, additional childcare, home renovations etc. Make sure that the benefits that your policy pays out are sufficient to cover all of your financial needs adequately.

Key questions to ask when purchasing disability insurance

There can be a lot of small-print involved in a disability insurance policy. Make sure that you understand the answers to the following, non-exhaustive questions before proceeding:

• Terms and conditions of the policy- Including how disability is defined, which conditions are eligible and which are excluded and if pre-existing conditions are covered and, if so, to what extent.

• Policy premiums- Including the total cost of the policy and whether contributions are still required if you are diagnosed with a disability and claiming on the plan.

• Benefits of the plan- Including the level of benefits you will receive, whether they are adjusted for future inflation and whether they are taxable, any waiting periods for receiving premiums and how a disability is diagnosed.

• Group plans- Including how the plan is funded (by an insurance company or self-funded by your employer), how your benefits will be affected if the company goes bankrupt and how your coverage will be treated if you leave your job.

Disability insurance is an important cornerstone to achieving your financial goals.

Talk to us. We can help.