Disability Insurance Protection: Protecting your ability to earn an income

In this 3rd post on the Insurance Planning topic, we will focus on the second of the ‘Living Benefits’ – Disability Insurance protection. Continuing from the last post on Critical Illness, this post will illustrate the importance of protecting your ability to earn an income, through Disability Insurance. Disability Insurance is generally the most underserved and undersold part of the Insurance Industry, as a) many Advisors are not having the conversation with their clients and b) many clients don’t realize the importance of protecting their ability to earn an income. However, the numbers state that the probability of injury or disability before age 65 is much higher than getting critical illness or death before age 65. With facts like this, both the general public and Advisors need to pay much more attention to this type of coverage.

What is Disability Insurance Protection?

Disability Insurance provides you with a monthly income in the event you are unable to work due to injury or disability – this is different from Critical Illness Protection or Life Insurance, which provide you with a lump-sum payment in the event of a sickness or death. Disability Insurance, essentially, protects the ability of you to earn an income through your own efforts, and can protect your ability to pay bills, feed your family, have a home, etc… As with Critical Illness, this coverage falls under the ‘Living Benefits’ category, as you are still living while you are receiving these benefits.

Do You Need It?

As mentioned in the Critical Illness post, nobody plans to get sick, and it’s actually the same with Disability – nobody plans on getting injured or disabled – however, these things do happen. Below are some statistics that we all should be aware of and take into consideration when assessing our own needs. Disability Insurance is especially important for those who are self-employed or working on a contract basis where they are not receiving benefits from the employer.

Here’s a quote from the book “The Wealthy Barber” that might help put things into perspective.

“Disability insurance is the most neglected of all forms of insurance, yet for many people, it’s the most critical insurance need…. A thirty year old has a one in four chance of becoming disabled for one year or more at some point in his or her life…When people are disabled, they don’t just cease to be an asset to their families…they become a liability.

Below are some statistics in regards to the chance of becoming disabled:

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

  • 1 in 3 people, on average, will be disabled for 90 days or longer at least once before age 65.
  • The average length of a disability that lasts over 90 days is 2.9 years.

Think you are already covered?

Some people have some protection through their employer as a group plan or get covered by Workers Compensation, and others feel that government benefits will help out, but are these plans really protecting you properly?

Workers Compensation: Only covers work related accidents/injuries and may contain some limitation on length of payments, the amount of coverage (varies per province) and types of injuries covered. This is only for those who are working on an employer-employee relationship – not for self-employed individuals.

Employment Insurance: Generally covers for 15 weeks, replaces 55% of insured earnings and is taxable. This benefit is generally not eligible for business owners or self-employed.

Group Plans offered through employment: May contain some limitation on length of payments, the amount of coverage (usually cover only about 60% of the salary) and types of injuries covered. You do not have full control of the plan and once you leave the company you are working for, you are no longer covered, and it can be cancelled by employer. Generally, there might also be several limitations or exclusions from the work sponsored plan (i.e. no 24 hour protection, only covers work-related injuries, etc..).

Canada Pension Plan: Offer limited coverage and can reduce the amount of benefit received from the other sources. Also, the definition for ‘disability’ is very strict compared to those of a stand-alone plan. There is a 4 month waiting period before benefits start and benefits are taxable.

Benefits and Contract

When you have a stand-alone DI Policy (i.e. one owned by you), you will be paying from your pocket with after-tax income and there is no tax deduction, therefore you receive the benefits from the policy tax-free. On the flip side, the benefits you receive from a work-sponsored plan can actually be taxable, depending on how it’s set up. The contract on a stand-alone policy is between you and the insurance company directly, and in most cases it is ‘non-cancellable’, which means as long as you are making your premium payment, the insurance company cannot cancel the policy.

Within the contract, there are generally 3 definitions on which your occupation status will affect your coverage and therefore will determine how long the insurance company has to pay you. Some policies will actually require you to go back to work even if it is not in the same field of work you were doing before the injury or if it is at a reduced salary. The 3 definitions for Occupation within a DI policy are:

Any Occupation: Means you are unable to work for any occupation, regardless of what type of duties or income is involved. This means that if you are a Surgeon before the injury and are later able to gainfully work as a receptionist, the insurance company will stop paying your claim as you are still able to do SOME type of work. Remember, you do not necessarily have to be working in another career for the insurance company to cut off benefits – if they determine that you are ABLE to work in another career, they have the ability to stop benefit payments to you.

Regular Occupation: Means that you are unable to work in any occupation that requires you to do the same duties you would have done in your own occupation, or field of work. However, if you choose to work in another field or career, the definition of your occupation now changes to that of the new career you are working in, and benefit payments by the insurance company will cease.

Own Occupation: This is the type of definition that people, especially in specialized careers (i.e. Surgeon, Dentist, Lawyer etc…) should be seeking. This means that you are unable to perform the duties of your own occupation, HOWEVER, can still work in another field/occupation (and receive an income) and continue to receive benefits from the insurance company.

Type of Benefit

Another thing to look at are the definitions of the benefits the insurance companies provides for their clients on their disability products.

Residual Benefit: A residual benefit is payable if the person is able to work on a limited or reduced basis. For example, an individual with back pain may only be able to tolerate sitting at a desk for 2 hours per day. The level of payout is based on the proportion of lost income relative to the time lost. This provision is essential since most individuals make claims for partial rather than full disability.

Partial Benefit: A partial benefit is also payable if you are working at a reduced level. However, the payout is based on the amount of lost time and duties and there is no requirement to show a loss of income. This is an attractive clause for those who are newly employed and show limited prior earnings (e.g. a new graduate doctor).

When Do Benefits Start?

The day benefits start by the insurance company is based on the “Elimination Period” (i.e. Waiting Period). This is the amount of time you have to wait for the company to start paying claims. To assess how long your elimination period should be, you should have a general idea of how long you can survive without having an income coming to you from this policy. The reality is, the longer your Elimination Period is, the lower the cost will be to you. In order to determine this, you must take into consideration the following:

– Do you have a group plan through work? If so, will it cover you? for how long? how much?

– CPP Benefits – will you qualify? how long will it cover you? how much will it give to you?

– WSIB – will you qualify? how long will it cover you? how much?

– Personal Savings – how much do you have in savings? how long will it last if you were to have no income coming in? is it accessible at moment’s notice?

How Long am I covered?

Most insurance companies will offer different options in regards to how long the benefit will be paid to you. Generally, most companies will offer a benefit period of 2 years, 5 years or to age 65. There are other variations of benefit periods, for example a benefit period to age 70 (instead of 65), but the benefit period options will generally be one of the previous 3. The longer the benefit period you choose, the more it will cost you, as there is more risk on the insurance company to provide you with a benefit for a longer term.

Features

Many policies will offer different type of features or ‘riders’ to the policy to enhance the coverage that you get. Some of them include:

Waiver of Premium: This feature will actually result in the insurance company to take over the premiums that you were paying, while you receive the benefits from the policy itself. Some companies will also refund the premiums that you paid during your elimination period.

Future Increase Option: This rider will allow you to increase your benefit in the future with only proof of income. Different companies will have different rules to how much you can increase your benefit and how often you can increase, but this can be very important to those who expect to go from one job to a higher paying job later on, or those who expect their salaries to increase significantly over time (i.e. Physicians who have just finished their rotation, or professionals coming out of school)

Cost-of-Living Option: This rider actually will keep pace with inflation, so to make sure that the benefits you receive are not eroded by inflation and keeps your purchasing power intact. Usually the increases will be every 6 to 12 months.

Making a Claim

Just as in CI, you need to be diagnosed by a medical professional who is licensed in Canada; the same rule applies to DI. Once diagnosed with an injury/disability that will meet the criteria of your coverage, you would submit the required documentation to the insurance company. After it has been approved and the waiting period has been completed, the benefits will start to and can be used in any way necessary.

Protecting yourself in case of illness/injury is very crucial and can be very detrimental to your and your family’s standard of living if you are not covered and something was to happen to you. As you can see, there is somewhat of an inverse relationship between the risks of getting a Critical Illness and getting a Disability. Generally, you’re more likely to get an injury/disability when you’re younger, and the percentage decreases gradually as you get older – this is generally because those who are younger usually have more physical activities they are involved in, will work harder labour jobs and will be more likely to get be involved in something like a car/truck accident. On the flip side, there is less of a chance to get an illness when you’re younger, however the likelihood gradually increases the older you get. This is why it is very important to have both these products as well as Life Insurance to properly protect your family in case of any unforeseen circumstances, and maintain your standard of living.

Having a strong Insurance Plan is a key component and foundation in having a well-developed and strong Financial Plan. An Elite level Financial Advisor can help go through all the details, coverage types and also help you to determine what you actually need for your and your family’s protection. There is never a ‘one size fits all’ solution, and having a knowledgeable Advisor and team working with you can help you get the most value out of your Financial Plan.