Most people own life insurance and understand the value it provides. They know that a premature death could have serious financial repercussions for the people who depend on them. But what if you were injured or diagnosed with a life-threatening illness, and unable to work? Who would pay your bills, support your family and maintain their standard of living?
Most people rely on their income to provide for their living and lifestyle expenses, but without this income, there could be devastating consequences. It is a risk that you shouldn't ignore. There are approximately 3.3 million disabled Canadians, and more than half are between the ages of 14 to 64. You may find it hard to believe that an illness or an accident could affect you, but consider this: the chance that you will suffer a disability rather than death, prior to retirement is 1 in 3.*
Is Disability Insurance Important to You?
Fifty
percent of the population has not considered this question. If you
answer “false” to any of the questions below, then disability insurance
may be important to you:
-
a) I am prepared to sell my home in the event of financial difficulty?
True or False
b) If I were disabled, the government would take care of me?
True or False
c) I do not know anyone who has been disabled for a month or more?
True or False
d) My mortgage payment is less than 10% of my total income?
True or False
e) I could afford to take a two-year vacation?
True or False
If you feel you need disability insurance, where do you start and how do you evaluate the policy? Your financial advisor and your insurance advisor can help. They will confirm that studying your policy is important because it is the definition of a disability that determines the quality of the plan. It will determine the conditions under which you would be qualified to receive a disability benefit if you are unable to work. A good disability policy is one that describes “disability” as a situation where an individual is unable to perform the duties of his or her regular occupation, either partially or fully, due to injury or illness.
Policy Benefits
Make sure that your policy will pay benefits whether your disability
arises from accidents or illnesses. Some will protect you only from
disabling injuries and not illnesses. A few, called “non-occupational
policies” exclude disabilities that arise from the hazards of work on
the assumption that you will be covered by workers' compensation. And
while there will be exclusions that you can't avoid, such as war, or
normal pregnancy, you want a policy that will cover disability whatever
the cause.
Not only are you encouraged to research the definition of “disability” on your specific policy, but also to know that the definition can vary and subsequently have a big impact on you. “Own occupation” or “regular occupation” refers to your inability to perform your usual job. A sales agent who develops a mental disorder that impairs his ability to deal with the public would be considered disabled, even if he was working full time in some other job. Airline pilots would be considered disabled if they suffered an eye injury. The definition “any occupation” refers to a policy that defines you to work at any job for which you are qualified based on education, training or experience.
There are three basic types of disability insurance offered by most insurance companies:
- Conditionally renewable policy. This provides coverage for someone in a fixed profession. If this person changes jobs, depending on the risk associated with the new profession, the policy could be discontinued or the premiums may change.
- Guaranteed renewable policy. Your coverage can never be cancelled (unless you fail to pay your policy premiums) but the premiums can go up, depending on the new job.
- Non-cancellable policy. Your coverage can't be cancelled (unless you fail to pay your policy premiums) nor will the premiums go up.
Elimination Period
The “elimination period” allows you the option to choose when
disability payments will commence, should you suffer an injury or
become disabled because of illness. You may choose from 30, 60, 90, 180
or 365-day payment start periods. If you selected a 90-day elimination
period, you may collect disability income payments starting 90 days
after you first become disabled. This “elimination period” gives you
the opportunity to customize your policy according to your specific
circumstances and allows you to control policy costs. The longer the
elimination period of a policy, the less it costs to own.
Other Features
Other features include the “Cost of Living Adjustment” or COLA , an automatic indexing feature that helps your disability income keep pace with inflation. A “future benefit increase”
gives you the right to purchase additional disability coverage in the
future, regardless of your state of health or circumstances. An
increasingly popular addition to disability insurance is critical illness insurance .
This type of coverage is designed to cover serious illness (such as
cancer, heart disease, stroke, blindness, paralysis, etc.).
Company Plans
Many individuals are initially introduced to their disability policies
through their company plans. These are group benefits and will
generally replace from 65 to 80% of your total earnings. The amount of
disability insurance you qualify for depends entirely on how much
income you earn. In other words, if you earned $40,000 per year, you
could not qualify for coverage of $8,000 per month. The major downside
of these company plans is that if an individual leaves the company,
they can't take their group coverage with them. Many professional
associations, alumni organizations and business groups offer disability
insurance to their members. These are often beneficial for people who
are self-employed, or for people interested in augmenting their company
benefits. Association coverage is much like group or company plans. The
association owns the plan, not you.
Some common questions to keep in mind when buying disability insurance:
- How does the insurance company define disability?
- What kind of coverage is it – “own occupation”, “regular occupation” or “any occupation”?
- What type of insurance is it – noncancellable, guaranteed renewable, conditionally renewable?
- How long are benefits payable?
- How much of my current salary will the policy pay?
- Are the benefits indexed to inflation?
- Are there any limitations or restrictions on the policy that I should be aware of?
- What is the waiting period before I can claim benefits? How much money can I have on my premiums by extending the waiting period?
- If I go back to work and suffer a relapse, what is the waiting period before I can claim benefits again?
- If I go back to work part-time, can I receive partial benefits? Is the waiting period any different than for full benefits? Are there any restrictions?
- Can I increase my coverage at any time? Do I need a medical examination to do so?
Vulnerability
Suffering from a disability or a prolonged or life-threatening disease
can be one of the most vulnerable periods of life. Disability doesn't
wait for a convenient time to strike. People have lost their homes and
businesses because of an unexpected disability. Having appropriate
disability coverage is one of the first steps towards creating a solid
and responsible financial plan and most importantly, much of the worry
associated with the unexpected interruption of that all-important cash
flow would be set aside, once and for all.