Disability Insurance
The Importance of Disability Insurance

Executive Summary:

What is your most valuable asset?

Your home? Your car? Your most valuable asset is you and your ability to earn an income. Without your income where would you be? How long could you afford to pay for your home? Your cars? Your kid’s school? Contribute to your RRSP’s? Put food on the table?

You can lock in that income and protect it from loss with disability insurance. Disability insurance will replace a percentage of your income if you become disabled and unable to work i.e. unable to do the important activities of your job.

The Details:

This year one in eight Canadians will become disabled for more than three months and half of those will be disabled for more than three years.

How well do you understand your group disability coverage at work? Most people are completely unaware of the details of their plans and more specifically the definitions.

Disability insurance is all about definitions. If you don’t understand the definitions this may lead to interpretation by the insurance company, which may work against you.

Here are a few of the more important definitions that you should be aware of:

Own Occupation

This definition, the preferred choice for disability insurance, will pay a benefit to you even if you choose to take on another occupation but are unable to do your chosen occupation. A surgeon that loses a hand but decides to be a professor would continue to receive disability benefits for not being able to be a surgeon yet while working as a professor. This is the most desirable plan to have.

Regular Occupation

This definition is in most individual plans. You will receive a benefit when you cannot work in your chosen profession and are not working at all. If the surgeon above had this type of policy, the day he decided to work as a professor his disability payments would end even though he can no longer be employed as a surgeon.

Any Occupation

This definition is based on being employed at a job suited to your education, training and experience. The insurance company makes the decision as to what is suitable. Our surgeon, if the insurance company felt he could, would have to answer phones at the hospital (with his one remaining hand), whether he did so or not they could stop further disability income, if pay it out at all. This is the typical definition in your group plan.

Group Plans

A group benefit plan with disability coverage is a great thing to have but unfortunately it may not be as good as you think. Common limitations on most group plans:

  1. Limits on how long you will receive the benefits
  2. Limits or no payments on partial disability
  3. High income earners usually aren’t aware that benefit amounts are maxed out well below their monthly requirements
  4. Tax considerations – if your employer pays any portion of your premium your benefit will be taxable

 

Additional things to consider:

  • inflation protection
  • reviewing the benefit term, will they pay you all the way to age 65 or just 2 or 5 years
  • Do you expect your income to increase? An option to increase the benefit amount is a must otherwise your monthly payments may be well below what you require to live on in the future
  • Finally, certain policies offer the benefit of receiving back up to 70% of your premiums if you never make a claim. Not only are you insured but you have a savings plan in place as well.