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When you decide to get long-term disability insurance, you can apply to the insurance provider. But the application is only the first step. Next is underwriting, where the insurance company assesses if you are a good fit for disability insurance.
Besides your health, what other factors impact the underwriting process? Do you need to undergo a medical exam to buy disability insurance? Get the answers to these questions and much more in this post.
What Is Disability Income Insurance Underwriting?
An insurance underwriter is a person employed by an insurance company to evaluate risk. Their job is to analyze your risk to make sure that it fits the risk profile of a person it wants to insure.
Think of each data point about you like a piece of a puzzle. Your occupation, income, health, and lifestyle make up the large pieces. Then you have smaller pieces that make up each category. For example, your history of illness and injury, time off work, and hospitalization are data points in the health category.
The underwriter will try to complete the puzzle to understand the risk with all the information. If any piece of the puzzle is missing, they can’t do their job. That’s why getting all the information is a vital part of the underwriting process.
Assessing your eligibility for disability income insurance
Before you can buy disability insurance, you have to meet some basic eligibility requirements. These differ based on the insurance company, but here are some common requirements:
- You must be between ages 18-60.
- If you are an immigrant, you have to be resident in Canada for over 12 months.
- You have to be employed at least ten months per year in a stable occupation (some policies offer limited benefits for part-time workers).
- You must earn at least $15,000 per year.
- You have to work at least 30 hours per week. If you work over 60 per week, the insurance company will review it carefully due to the possibility of burnout or overwork.
- Employees in their first year of employment may be eligible, although you may need to provide a letter of employment.
Occupational Underwriting
The premium for disability insurance depends largely on your occupation class. Higher-risk jobs with more physical tasks will have worse claims experience than low-risk occupations. These applicants will have to pay a higher premium than their counterparts. Not only are they more likely to become disabled in a higher-risk job, but a disability may also put them out of work longer.
For example, an arm injury may only disable an office worker for a week. However, the same injury could make a construction worker unable to work for a long time. That’s why identifying your occupation class is vital to the underwriting process.
What are occupation classes?
Most insurance companies use a system of five occupation classes: 4A, 3A, 2A, A, and B. 4A is the lowest risk and is for medical specialists, professionals, and executives with limited sales duties. The risk of becoming disabled increases from 4A to B. On the other end of the spectrum, B is for jobs requiring heavy physical exertion like unskilled or manual labourers. Class B will pay a much higher premium than class 4A for disability coverage.
For some occupations, getting the right occupation class isn’t hard. Jobs like dentists, accountants, engineers, massage therapists, driving instructors, and firefighters have pretty standard tasks. The insurance company wouldn’t have any difficulty identifying the correct occupation class.
However, there are situations where identifying the correct occupation class requires more digging. It would be harder to pinpoint the occupation class for a small business owner who wears many hats for the company—one who does sales, marketing, manual tasks, and much more.
When it comes to occupation class, the specific duties of the job, not the job title, are what matters.
Upgrade your occupation class to save premiums
Many occupation classes are eligible for upgrades based on experience and income. For example, one insurer lets you upgrade from 2A to 3A if you have five years of experience and earned $75,000 in the past two years. The upgraded occupation class will cost a lot less, so you should always check with your insurance advisor if you’re eligible.
However, some occupations can’t be upgraded even if you have the necessary income and experience.
Working from home
The number of people working from home exploded during the pandemic, and it’s a trend that will continue long past COVID-19. But while society was quick to accept this change, insurers are more hesitant in offering disability coverage.
That’s because of the increased risk of determining the loss of time, duties, or income in a disability claim. If you don’t leave your home, don’t work with other employees, and the public doesn’t have public access to your office, it can be challenging to verify your ability to work in case of a disability claim.
To be clear, these questions don’t apply to employees. Instead, the insurance company is more concerned about self-employed people who spend more than 50% of the time working from home.
Work multiple jobs?
The insurance company will consider the hours worked and the percentage of income for each occupation. If you work fewer than a certain number of hours or earn less than a certain amount, the underwriter may ignore it when determining your occupation class.
Financial Underwriting For Disability Insurance
The purpose of disability income insurance is to insure your net earned income. Determining the monthly benefit you can buy is a huge part of financial underwriting. It should be adequate to protect your lifestyle but not so much that it disincentivizes you to return to work.
The insurance company achieves this by letting you buy up to a percentage of your monthly income, usually between 50-75%. For example, if you earned $120,000, you can buy $5,925 in disability benefits for 59% income replacement.
In many cases, financial underwriting is the most complex part of the underwriting process since verifying earnings can be difficult. If the numbers don’t add up, an insurance company is more than happy not to take on the risk.
Earned income
Your earned income is the amount after deducting expenses but before taxes. For example, if you made $100,000 and had $20,000 in expenses, $80,000 is your earned income for calculating your monthly benefit. In this case, the highest benefit you can buy is $4,400.
Earned income can be in the form of salary, bonus, commissions, or fees. Since dividends from your corporation are discretionary, you can’t include them. Here is a table explaining which part of your T1 shows your earned income depending on your employment status:
Employment status | Earned income |
|---|---|
Salaried employee | Line 10100 or 10400 |
Employee or commissioned employee with business expense deductions | Line 10200 or 10400 minus line 22900 |
Unincorporated business owner | Lines 13500-14300 |
Incorporated business owner | Line 10100 or 10400 plus your share of corporate net profit/loss before tax |
You can gross up your earnings by 20% to determine your disability benefits if you are self-employed. So if your net earnings were $100,000, you can increase this to $120,000, which would result in a higher benefit of $5,925/month instead of $5,200/month.
The stability of your earnings is crucial as well. An underwriter is more likely to offer you disability coverage if you show a consistent pattern of earnings year after year. If it increased significantly in the past year, this might not be indicative of how much you’ll make in the future. The underwriter may use an average of the past few years instead of the most recent figure.
Similarly, the underwriter will inspect a decrease in earnings. If it has been dropping for a few years, the insurance company may choose to postpone your application until it has stabilized over a two to three-year period.
Unearned income
This does not depend on your ability to work. It includes investment earnings like rental income, interest, capital gains, and more. Since unearned income continues even if you’re disabled, the insurance company will want to make sure you still have a financial incentive to return to work.
Insurers will generally ignore unearned income that is less than 15% of earned income. However, at amounts greater than 15%, the underwriter may reduce the benefit. If your unearned income is more than 50% of your earned income, you won’t be eligible for disability coverage.
Net worth
A sizeable liquid net worth that you can quickly liquidate may result in over insurance during a disability. In general, the underwriter will disregard net worth under $5,000,000. This amount doesn’t include personal net worth like your home, cottage, jewellery, art, vehicle, and other personal effects. That’s because you are not likely to liquidate these assets during a disability.
Disability loan insurance
This type of disability insurance covers a specific debt like a mortgage or business loan. Unlike other types of disability insurance, this one doesn’t have any income requirements. That’s because instead of insuring your earnings, this insures your debt.
Buy-sell disability insurance
Buy-sell disability insurance provides professionals and small business owners with cash to buy out a disabled partner. Besides your company’s earnings, your company’s value is also an essential factor in underwriting. The underwriter will also want to see financial statements for the past two years.
Business overhead expense insurance
Business overhead expense insurance reimburses you for your business expenses while you’re disabled. During the underwriting process, you’ll need to provide a detailed list of monthly expenses, including mortgage or rent payments, utility bills, and employee salaries.
Medical Underwriting For Disability Insurance
Disability insurance underwriting is much different than life insurance underwriting. What may be a non-issue for life insurance, like a sprain, can significantly impact disability insurance. That’s because medical conditions like back pain, anxiety, stress, and depression increase the likelihood of a disability.
If you have pre-existing health problems, here are a few things the insurance company can do to lower its risk:
Exclusions
The most common tool insurers have to deal with health conditions is to apply an exclusion. With exclusions, the policy doesn’t cover disabilities resulting from a specific problem or part of the body. Common examples include back and neck exclusions.
If the illness or injury is short-term in nature, the insurance company may let you remove the exclusion after recovery. You’ll have to provide satisfactory proof of good health before you can do so.
Rating
For general medical conditions that can cause many disabilities, the insurance company will apply a rating instead. That means it will charge you a higher premium. This applies to health problems like heart disease, cancer, hypertension, obesity, and more.
Modify benefits
Another way to lower its risk is to increase the elimination period and reduce the benefit period. For example, mild asthma may increase the risk of short periods of disability. In this case, the insurance company may increase the elimination period to 90 days or longer.
Decline
If all else fails, the insurer will decline your application. This can occur in situations where none of the other modifications can lower the risk of a disability claim. For example, health conditions like significant heart disease, some forms of cancer, major depression, and uncontrolled hypertension can all lead to declines.
Medical underwriting requirements
Do you have to undergo a medical exam to buy disability insurance? It depends on your age and the benefit amount. For many younger applicants, the medical information on the application is good enough for the underwriter. The table below shows the requirements based on age and benefit.
Age | Monthly amounts | |||
|---|---|---|---|---|
$0-$2,500 | $2,501-$6,000 | $6,001-$10,000 | Over $10,000 | |
18-40 | Non-medical | Non-medical | Urine sample | Blood test and urine sample |
41-50 | Non-medical | Urine sample | Blood test and urine sample | Blood test and urine sample |
51-60 | Non-medical | Blood test and urine sample | Blood test, urine sample, and APS | Blood test, urine sample, and APS |
In the table, non-medical means the medical information will suffice. APS stands for attending physician statement or a report by your family doctor or another physician treating you.
Lifestyle Underwriting
Besides medical information, your lifestyle habits also play a role in getting disability coverage.
Smoker or non-smoker?
A smoker is defined as someone who has used tobacco or nicotine products in the past 12 months. Premiums for smokers are typically 30-40% more than non-smokers.
Hazardous sports and activities
If you participate in hazardous sports and activities, you’re likely to get an exclusion. What do insurance companies consider dangerous? Scuba diving, hang gliding, martial arts, aviation, and motor vehicle racing are a few that will get the attention of your underwriter.
Foreign travel outside of Canada and the US
One of the questions asked on the application is your upcoming travel in the next 12 months. The insurance provider may apply an exclusion depending on the destination, reason for travel, and length of the trip.
Frequently Asked Questions About Disability Insurance Underwriting
Is there underwriting for disability insurance?
Yes, the insurance company will do its due diligence to determine if you’re a good fit for disability insurance. This includes assessing your occupation, financial, medical, and lifestyle information.
How long is the underwriting process for disability insurance?
It depends on how complicated your personal history is regarding the factors above. For example, if you have health conditions that require additional information, it will take longer than average.
Typically, you can expect the underwriting process to take a few weeks to over a month. In complicated cases, it can take several months to complete.
To speed up the process, make sure you respond promptly to requests for information.
What is the most difficult aspect of underwriting disability income insurance?
The financial and medical aspects of disability insurance underwriting are the most difficult. Having relevant financial documents like income statements and T1s will help the underwriter do its job. As will answering the health questions in detail, including the date of diagnosis, treatment received, specialist’s name and contact, and more.
Can you be denied disability insurance?
Yes. If you work in an uninsurable occupation (e.g. handling explosives) or have a severe health issue, the insurance company may decline your application.
In some cases, even minor medical conditions can lead to a decline if they are recent. The insurance provider will want to wait until your health stabilizes before offering you disability coverage in these situations.
What is the single most important factor in underwriting disability income coverage?
There is no single most important factor in underwriting disability insurance. Instead, the insurance provider will gather all the relevant information and assess your risk in totality.
Curious About Disability Insurance Underwriting?
This post scratches the surface of disability insurance underwriting. In reality, the underwriting process is much more in-depth.
As you can tell, a lot of work goes into getting disability benefits. But having coverage gives you the protection you need to provide a financial safety net for your family in case of a disability.
If you want a quote for disability income insurance, please use the form below to request one. You can also contact us at info@briansoinsurance.com or 604-928-1628 for a customized and free no-obligation quote.
Get Your Disability Insurance Quote Now
While we make every effort to keep our site updated, please be aware that timely information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Brian So Insurance and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser. This post is a brief summary for indicative purposes only. It does not include all terms, conditions, limitations, exclusions, and other provisions of the policies described, some of which may be material to the policy selection. Please refer to the actual policy documents for complete details which can be provided upon request. In case of any discrepancy, the language in the actual policy documents will prevail. A.M. Best financial strength ratings displayed are not a warranty of a company’s financial strength and ability to meet its obligations to policyholders.
