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Disability insurance protects your most valuable asset—your ability to earn an income. Without it, chances are you won’t meet your ongoing financial obligations if you become disabled. It will be a struggle to pay your mortgage, buy groceries, and maintain your lifestyle.
So how does disability insurance work? And if it’s such a critical part of a financial plan, why is it so often overlooked?
In this post, we explain what disability insurance is and how you can protect your most valuable asset.
What Is Disability Income Insurance?
Disability insurance, also known as disability income insurance, is a type of insurance that pays you benefits if you can’t work due to a disability. The disability benefits provide you with income protection during a period when your income is interrupted.
How does disability insurance work?
First, you buy disability income insurance from an insurance company. Then, if you can’t work due to an injury or illness, the insurance company pays you a recurring benefit.
The disability benefits begin after you satisfy a waiting period, also known as the elimination period. Benefits range from 50% to 75% of your pre-disability income. While the shortest policies pay for a few months, longer ones pay for several years. The waiting period, benefit period, and benefit amount all depend on the type of disability insurance policy.
How you use the benefit is up to you. As the benefit is meant to replace your income, most people use it to meet their financial obligations and pay for living expenses. You might also need the payments to cover any extra medical expenses due to your disability.
Why do you need disability income insurance?
What is your greatest asset? Is it your home or another investment? Neither. Your most valuable asset is your ability to earn an income. Throughout your career, you will end up making millions of dollars. That’s why you need disability insurance to protect your most valuable asset.
Did you know that one in three people will become disabled for 90 days or longer before age 65? This staggering statistic underscores the importance of disability insurance for income protection. Without it, how will you meet your financial obligations if an injury or illness takes away your ability to work?
Who should get disability insurance?
Anybody with an earned income. Whether you’re an employee, self-employed, seasonally employed, small business owner, contractor, or have another form of employment, you need disability insurance.
What does disability income insurance cover?
Disability insurance covers injuries and illnesses that prevent you from doing the regular duties of your job. Whether that’s a car accident, heart disease, cancer, or a prolonged mental health issue, disability insurance covers it all.
However, like any other type of insurance, there are exclusions. Common exclusions include disabilities caused while you’re incarcerated or participating in a war. Disabilities caused by normal pregnancy and childbirth are also excluded, although those caused by complications are covered.
Exclusions vary from one insurance company to another, so you want to make sure you get one with as few exclusions as possible.
What is the definition of disability?
Your ability to make a disability claim depends on the definition of disability. A restrictive definition makes it harder to file a claim, while a looser definition makes it more accessible.
For the most part, you are considered totally disabled if you can’t perform the important duties of your job for the first two years and you’re not gainfully employed elsewhere. This is called the regular occupation period.
After that, you are considered totally disabled if you can’t perform the duties of any job that you qualify for based on your training, experience, and education. This is the any occupation definition of disability which makes it harder to receive benefits.
Most disability insurance plans let you extend the regular occupation period beyond two years. Some professionals can buy the own occupation rider, which eliminates the requirement that you can’t be gainfully employed elsewhere.
How do you make a claim?
Going through a disability is a stressful experience. But filing a claim doesn’t have to be. With any claim, you begin by completing a claim form. It includes sections for you, your physician, and your employer to complete.
Once received, the insurance company will appoint a claims adjudicator for you. This person will coordinate with you, your employer, and your physician to better understand your claim and potential for returning to work.
Once approved, you will receive benefits after the waiting period ends.
Types Of Disability Insurance Coverage
There are several types of disability insurance plans. Besides buying disability insurance yourself, you might also have coverage from other sources like group insurance or government benefits.
Short-term disability insurance
As the name suggests, short-term disability insurance provides disability coverage over the short term. This ranges depending on the disability insurance plan, but the maximum benefit period is usually four months.
Unlike long-term disability insurance, you can’t buy short-term disability insurance privately in Canada. The only way to obtain it is through group coverage via your employer or association.
Long-term disability insurance
This type of individual coverage provides disability benefits for a much longer time. The benefit period is measured in years, not weeks, like short-term disability insurance.
Some only provide monthly payments for up to two years. Five or ten years are standard benefit periods, although the best long-term disability coverage pays until age 65. By getting a disability income until retirement, this maximum benefit period gives you the best protection.
You begin receiving benefits after a 90 or 120 day waiting period. With individual coverage, the monthly benefit you receive will be tax-free. The disability benefits range from 50% to 75% of your pre-disability income, giving you adequate income protection.
Business overhead expense insurance
While long-term disability insurance pays for your personal expenses, business overhead expense insurance reimburses you for your business expenses. This type of insurance is vital for small business owners whose business relies on them to generate income.
The disability policy reimburses small business owners for overhead expenses like rent, utilities, liability insurance, employee salaries, and more.
Group disability coverage
Unlike individual coverage, group coverage protects you and other people under the same plan. Everybody covered under the program has the same waiting period and benefit period, although the monthly benefit will differ based on income. There may be a cap on the maximum monthly benefit, so high-income earners may find the group coverage insufficient.
You’ll typically find both short-term and long-term disability coverage through group insurance. When the short-term disability benefits end, you will receive benefits under the long-term disability coverage.
Group insurance is most common in employer-sponsored and association plans. If your employer pays for your disability coverage, you will receive taxable benefits. However, you will receive a tax-free monthly benefit if you pay premiums.
Government programs
Employment Insurance: This government program provides short-term disability coverage, especially crucial for people without group coverage and the self-employed. It pays a taxable weekly benefit of 55% of your earnings up to $650/week for 26 weeks in 2023.
Canada Pension Plan: This mandatory government program pays a taxable monthly benefit if you have a prolonged mental or physical disability. The maximum CPP disability benefit is $1,538.67/month in 2023, which starts after a waiting period of four months.
Workers’ Compensation: Unlike the other two government programs, Workers’ Compensation only pays a monthly benefit for disabilities caused by an illness or accident at the workplace. Since the provincial government administers the Workers’ Compensation program, benefits vary depending on your province of residence.
Although these programs provide some disability insurance benefits, you shouldn’t rely solely on government programs for income protection. Each program has its shortfall, so you’ll need to supplement existing coverage by buying disability insurance.
Mortgage disability insurance
Some disability income insurance policies cover a specific debt instead of providing income protection. It works by paying your lender your regular monthly payments if you’re disabled due to an injury or illness.
Because mortgage disability insurance is tied to your debt, it doesn’t give you the best disability benefits. If an illness or injury prevents you from working, it won’t cover your other expenses and medical bills.
How Can You Get Disability Income Insurance?
Most insurance companies don’t sell it directly to consumers, choosing to go through the broker channel instead. Therefore, the best disability income insurance you can get is through an insurance advisor.
How can you customize your long-term disability insurance policy?
With disability plans, you can adjust the elimination period, benefit period, and benefit amount to fit your need. You can also add riders, which are optional coverages that improve your disability benefits.
For example, you can add a rider that pays partial disability benefits if you can still work but in a reduced capacity.
There’s also the future insurance rider, which lets you buy additional coverage later in life without medical underwriting.
How much does it cost?
Disability income insurance generally costs between 3-5% of your annual income. Some variables that influence costs include:
- Your age, smoking status, gender, and occupation.
- The disability policy design like the elimination period, benefit period, benefit amount, and optional riders.
What to look for in a disability insurance plan?
Disability plans vary by the insurance carrier, so you need to do your due diligence to make sure you’re getting the best long-term disability coverage. Here are a few key features to look for with individual coverage:
Guaranteed renewable and non-cancellable: This provision means the insurance company can’t cancel your policy, reduce disability insurance benefits, or increase the premium.
Income verification: Some disability plans don’t pay the full monthly benefit you bought. Instead, the insurance company will review your income before the disability to see if the benefit is justified. You’ll want to find a policy that guarantees disability benefits from the outset without needing to verify your income at claim time.
Exclusions and limitations: A policy is only good if it pays you disability insurance benefits if an illness or injury prevents you from working. Some disability plans have more exclusions and limitations for specific illnesses.
Is there underwriting for disability income insurance?
Your risk of getting a disability plays a considerable role in whether you qualify for disability insurance. That’s why you have to disclose information about your health status and medical history when you apply. The insurance company will assess your risk in the underwriting process.
If you have pre-existing medical conditions, it may offer you a disability policy with an exclusion for that condition. This means it will not cover any disability resulting from that condition. The insurance carrier may also increase the elimination period, shorten the benefit period, or increase the premium. In the worst-case scenario, it will decline disability insurance coverage on you.
Is disability income insurance worth it?
If you depend on your earned income to meet your financial obligations, you need disability insurance. Fortunately, individual coverage doesn’t have to be expensive. For a small cost, you can protect your most valuable asset from an illness or accident.
Disability insurance is one of the most vital things you can do to build a financial safety net. That’s why you shouldn’t overlook it and the benefits it provides.
Need Disability Insurance?
If you’re thinking about buying disability insurance, we can help. We work with all the disability insurance providers in Canada, so we know how to find you the right coverage. While keeping your budget in mind, we design a disability insurance policy customized to your specific need.
Contact us at 604-928-1628 or info@briansoinsurance.com for a consultation or a free, no-obligation quote.
Besides disability income insurance, you might also want to explore another living benefit like critical illness insurance. It pays a tax-free lump sum benefit if you are diagnosed with a major illness like cancer or heart attack. With both disability and critical illness insurance, you guard yourself against unexpected disasters derailing your financial plan.
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.
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