This is a guest post from Brian over at Disability Insurance Quotes.
From The Wealthy Barber: “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.”
When I review benefit hand books, many of my clients are surprised to learn the details of the actual coverage that they carry. Most disability benefits only cover 60% of the employee’s salary and exclude bonuses. Many plans will only cover the first five years of disability and most plans are not indexed to inflation. Many clients are unaware that their disability benefits are not portable and a move to a new company results in a different benefit plan.
As the working population ages and companies are more cognizant of expenses, there is a growing trend for employers to offer “flex dollars” benefits. With this plan the employee is given an allotted sum of dollars from which he must choose from a shopping list of benefits (health, dental, life, short term disability, long term disability, critical illness insurance). While the employee can top up each element of coverage, in general, as the employee gets older, the same dollar allotment buys fewer benefits
The Disability Contract
When you pay for the premium out of pocket there is no tax-deduction, but you receive the benefits tax free. This compares to a company paid policy where you are taxed on the benefits.
A personally owned non-cancellable disability insurance policy is a contract between the individual and the insurance company. As long as the premiums are paid, the policy cannot be cancelled or altered in any way without the individual’s consent.
There are three common clauses used to determine the criteria and length of time for which an insurance company is obliged to pay a claim if you become disabled. This determines whether you can be forced to work, even in some other field at a reduced level of income. These clauses are known as:
- “Any occupation” requires that you must be unable to work in any occupation, regardless of the change in duties or income.
- “Regular Occupation” clause states you must be unable to perform the important duties of your own occupation and not working in any other gainful occupation.
- “Own Occupation” is the most complete yet most expensive clause as it permits you to receive full benefits if you are totally disabled not working in your field but choose to work in another field.
Ask yourself “How likely is it that I could be totally disabled out of my specialty and still be able to work in another?”
Additional contract terms to know:
Elimination Period (waiting period)
This is the length of time that must elapse after the onset of the accident or sickness before the insured becomes eligible to receive disability benefits. The typical elimination period for private coverage is 90 days.
Under the provisions of this contract, as long as the premiums are paid, the insurance carrier cannot:
- Cancel the policy
- Change any provisions or add restrictions
- Increase the premiums or add any changes to the existing policies
Features of Disability Insurance
Waiver of Premium
It is important to continue premium payments even after you become disabled especially since you may not receive benefits for 90 days. Many insurers take over paying future premiums while the insured is receiving a disability benefit and some will refund the premiums that were paid during the elimination period.
Future Increase Option
This benefit allows one to increase the benefit by a certain amount at specified intervals without providing evidence of health. You only need to prove earnings. This may be of interest to those who want a robust policy now but to keep premiums low, they take the lowest coverage and enhance the coverage at later time. A chartered accountant, who buys disability insurance and later becomes a roofer, would be an extreme example.
This benefit ensures that while on claim, the purchasing power of your benefit dollar is increased at specific periods (every 6 or 12 months). There are two formulas which can generally be utilized when applying for coverage:
- CPI index (with or without minimums and maximums)
- Simple interest
As a general rule, you want the plan to remain as unrestrictive as possible so that future changes in your status or location can be accommodated. An example would be an oil engineer who moves to Saudi Arabia but owns disability insurance purchased 10 years before. Only private plans offer this feature without restriction.
Like all insurance, disability insurance is not well understood by most people. The old adage is true “you get what you pay for”, so do your research.
Level of 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.
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).
Paying for the policy
Why should I pay for a policy when I can just contribute to my RRSPs or savings and hope that I will have enough money should I become disabled? Consider this. If you are forced to withdraw from your RRSPs you will have to pay taxes. A withdrawal of $5,000 could be as little as $2,600 in the end depending on your tax bracket. Additionally, if you are forced to withdraw during a bear market, such as we are currently experiencing, you will be forced to withdraw more units from your mutual funds and potentially at a loss.
If you own an individual disability insurance policy paid from your cash, any claims payment come to you tax free once you have satisfied the waiting period or other contract requirements. This will apply even if you are currently unemployed.
The insurance company could be on the hook for hundreds of thousands of dollars depending on the age and income to be paid out over a lifetime…hence the time needed to underwrite this policies. Courts usually favour the client in times of claims vs. any dispute with the insurance companies
In summary, disability insurance is only one element in the “Risk Management Strategy”. Is it worth spending less than 3% of your gross income to protect your greatest asset, the ability to earn a steady income? Other coverage’s to consider include Life insurance, Critical Illness insurance and Long Term Care insurance. Visit my website:http://www.disability-insurance-quotes.ca/