Disability Insurance Protecion

In one of my previous posts I discussed the concept of Living Benefits, more specifically Critical Illness Protection (CI)- that is, protecting you and your family in the event that you or someone in your family was to get a sickness/disease. I also went through some statistics and indicated how we are actually more likely to get sick/injured by age 65, then we are to die. In this post, I'll discuss the other Living Benefit that is offered in the industry, which is Disability Insurance (DI). I'll also go through some common questions people have and discuss some of the unique benefits of this product.

What is Disability Insurance Protection?

When people are asked "What is your most valuable asset?", they generally respond with "Home" or "Car" or something of cost/dollar value. The real answer actually is, your ability to earn an income - THAT is your most valuable asset. Where Critical Illness Protection will provide you with a lump-sum payment in the event of a sickness, Disability Insurance provides you with a monthly income in the event you are unable to work due to injury/disability. Disability Insurance, essentially, protects the ability of you to earn an income through your own efforts, and can protect your ability to pay bills, eat, have a home, etc...

Do You Need It?

As I said in the Critical Illness post, nobody plans to get sick, its actually the same with Disability - nobody plans to get injured/disabled. Below are some statistics that we all should be aware of and take into consideration when assessing our own needs. DI is especially critical 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.”

Here's a chart I got from the SunLife.ca website that will give you a general idea of the what the chances of us being disabled by age 55.

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

Percentage	58%	54%	50%	48%	40%	30%	23%
Age	25	30	35	40	45	50	55

Source: Sunlife.ca

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.

Source: Canadalife.com

Think you are already covered?

Most people have some protection through their employer as a group plan or get covered by Workers Compensation, 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 (often the first 5 years or so), the amount of coverage (usually cover only about 60% of the salary) and types of injuries covered. This is only for those who are working on an employer-employee relationship - not for self-employed individuals.

Unemployment Insurance: Only covers for 15 weeks

Group Plans offered through employment: May contain some limitation on length of payments (often the first 5 years or so), 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 more strict then for having a stand-alone plan.

Benefits and Contract

When you have a stand-alone DI Policy, 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 are actually taxable because you are paying with pre-tax income. 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 used for disability, and that will determine how long and how much 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 or if it is at a reduced salary. The 3 main clauses 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.

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.

Own Occupation: Means that you are unable to perform the duties of your own occupation, HOWEVER, can still work in another field/occupation and continue to receive benefits.

There are also 2 other benefits that can go along with these clauses and I've actually found a good description from another website:

Level of Benefit

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 reduce 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).

(Source: Click Here)

The "Elimination Period" (i.e. Waiting Period) of the policy is generally 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. 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 moments notice?

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 our 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. This can be 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.

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 in tact. 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 clause (any occupation, regular occupation, own occupation), 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 situation if you are not covered and something were 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 your 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 likely to get an illness when your younger, however the likelihood gradually increases the older you get. This is why it is very important to have both these products together to properly protect your family in case of any unforeseen circumstances.

Having a product like this can be a great addition to securing your financial future and assuring some sort of protection for you and your family. If you are not sure whether this is something that would be beneficial to you, please consult your financial advisor before making any decisions. I hope you've learned something from this post, and if you would like to get more information on this type of protection and the choices available, please do not hesitate to contact me!