Guest Post: Disability Insurance

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.

Non-Cancellable Contract

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.

Cost-of-Living Benefit

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

Residual 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.

Partial Benefit

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:

14 thoughts on “Guest Post: Disability Insurance”

  1. I appreciate the definitions of the terms in the disability policies, that’s good information.

    But honestly I wonder if I will ever read an article from an insurance sales person who doesn’t throw in biased statements used to scare and persuade people into buying insurance.

    Withdraw $5000 from an RRSP and pay $2600 tax… 52% tax? This is complete BS, I sure hope that was an honest mistake and not an underhanded trick you actually tell potential clients to make them feel more vulnerable.

    For starters, the highest tax rate in Canada is 48% Quebec if you make over $126,000/year. Instead of quoting the highest number possible how about giving the average. In Canada the average family pays combined income tax of 20.6% (according to StatsCan).

    If you sell investments at a loss you can carry that back 3 years and get a tax refund against previous gains. If you manage a simple asset allocation you can also sell fixed income investments first to lower the impact.

    Plus we have a thing called a tiered tax rate, that means each range of income is taxed at different rates. Ever advise someone that in reality if you’re disabled your income will be lower and that you’ll probably have lots of write offs from medical expenses putting you in an even lower tax bracket? Or that you could qualify for the disability tax credit which can drop you taxable income considerably?

    What about the Canadian Pension Plan Disability Benefit? Or the disability assistance/supplement amount the government pays? Do you ever mention that there is a new Registered Disability Savings Account which matches contributions up to 300%, useful for long term care.

    I’m not sure about other provinces, but here in BC every worker is covered by the workers compensation board. So is it worth mentioning that since statistically you’re most likely to be disabled on the job that you might already be covered. Another significant area of risk is from car accidents, which of course would also be covered from existing insurance.

  2. That was an interesting infomercial, I did not realize it was advertising until I clicked on the link at the end.

    Like any other piece of personal finance, it is advisable to consult with your (non-commission) financial planner on whether disability insurance is recommended for your own personal situation.

  3. Hi Jordon,

    You made some interesting points but you are assuming a lot.

    This was taken from

    What do we mean by “disability”?

    The CPP definition states that a disability has to be both “severe” and “prolonged”, and must prevent you from being able to work at any job on a regular basis.

    There is no common definition of “disability” in Canada. If you qualify for disability benefits from other government programs, or private insurers, this is not a guarantee that you’ll qualify for a CPP disability benefit.

    In a nut shell, if you have your own disability plan you can collect before you can collect from the government. In fact if you can only work part time (with the right policy you can collect)

    Go to

    Frequently asked questions. This Registered Disability Savings Account is great is you have extra cash and have a disabilied child you wish to help. But what if you become disabilied yourself? You are back to square one.

    Collecting on workers compensation is a similar story to collect as the government CPP. You must get sick or injured that is work related. Let’s say you are in a accident on the weekend (not work related) are you covered? No! Go to for more insormation (if you live in BC the story is the same for other priovinces)
    You talked about covered by exsiting insurance (what insurance are you talking about?)

    Jordan the $2600 tax on the $5000 (yeah that was my fault!) But the concept is still right you would lose the the ability for the RRSP to grow larger over time.

    In general when you are disabilied (can not work) you take a pay cut. Most people spend all of their money with a smaller amount towards savings. talking about write offs is useless if your income drops too low. It’s like putting money into your RRSPs if you are in a low tax bracket.

    Hope this helps you.


  4. Anjo,

    Any fee only advisor would tell you to get more and better coverage than you have at work. Most fee only advisors will review your benefits book, which will tell you the shortfalls of company coverages..for that bit of advice, that will cost you hundreds of dollars or thousands as part of over all plan…then you have to buy the plan from a licensed insurance agent who will get a commision. Why pay double?

    You don’t have to pay a fee only advisor money to tell you the obvious about disability insurance.


  5. Anjo,

    I can across this

    “One problem, though, is that small investors will find fees in the range of $1,000 to $5,000 too high as a percentage of their assets. They will likely only be able to obtain assistance within a commission-based framework. Another problem, says Robinson, are a different set of conflicts of interest, as the example of hourly billing and retainers in the legal profession highlight”.

    So unlees you want to part with $1,000 to $5,000 and have advice which you may not like, you may be lighter in the wallet (I don’t think you can get your money back after advice has been given.) Follow-up meetings will cost you more, just like seeing a lawyer or a CA. There is no free lunch.


  6. Hello WC.

    Looking at your site I am thinking that you are a lawyer in the US. If you can practise law in different provinces like Ontario let me know. My understanding is (I am not a lawyer) is suing in Canada is more difficult and claims are much lower for your clients. If you have a good disability plan that may be a different story. So the best plan is not to rely on Workers Compensation unless you get sick or injured monday to friday during working hours.


  7. Brian, being that you sell disability insurance do you have like an actuarial table of disabilities from the insurance providers to know the actual percentage chance a person has of becoming disabled and the break downs by sex, age and sources of such disability?

  8. Hi Jordan,

    You asked a great question. The short answer is no I don’t have a table. Here is the reasons why it would be difficult to get:

    Occupation… a roofer maybe likey to be injured more than a accountant.

    Also insurance companies only care about disabilities that occur to their policy owners. Generally people who have disability policies take care of themselves better than the general public and have to be healthy to get it in the first place. Having data on injuries/illnesses on dentists (for example) is something the insurance companies would not want to share with other insurance companies. As an aside, if you talk to your family doctor or dentist they will tell you they got their disability coverage while still in university! (see reasons below)

    Other jobs or hobbies. Example is a lawyer who got a disability policy who also rides horses and rounds-up cattle on his ranch (Alberta) paid abit more than a lawyer who does not chase cows.

    Some companies offer cheaper policies but more fine print. Their experience may be simlar to other companies, but will not pay as many claims.

    Other disabilities may include cancer, or heart attack, most people think a disability may be an injury. A car accident can happen any time any where any age.

    The insurance companies can be on the hook for hundreds of thounsands of dollars over the lifetime of a policy owner. So as a general rule of thumb the younger you are the cheaper it is. Yes you may pay for a longer period of time but compare that to paying a lot more later in life. As we get older, (if you are like me, your back gets sore and you have to see a chiropractor) back problems may be excluded for future coverage unless you got covered before you got problems.

    I hope this helps.

  9. Thanks for taking the time to answer as fully as you can. Unfortunately my suspicion was correct that the information is not freely available to help people make informed decisions. That wouldn’t be in the insurance company or insurance seller’s best interest.

    So can you outline what kind fine print would exclude someone from coverage. I expect a family history of disease such as cancer, heart attack, stroke, or diabetes disqualify you?

    I think I also recall reading some something along the lines that “extreme sports” was prohibited, but I was confused by this loose language. Is snow boarding extreme? What about bungee jumping or ski diving? I’ve done all three and all have a lower rate of death then driving a car, but someone might call it “extreme”.

    Let me know

  10. Jordan,

    The key is to be truthful and the insurance company generally will make and offer. The more stuff you do, like sky diving the more the insurance company will exlude. For example if you have alot of speeding tickets sky dive and bungee dive the insurance company may take take a pass on you. If you only sky dive once or twice a year you may be in luck. Lots of speeding tickets may be a problem. Generally I say apply and you can always turn down the insurance company if you do not like their offer.

    If you drop me an email I can send a sample application that covers all the questions you need to answer. (about four pages)> This covers family history, your sports etc.

    All companies will not show you their cost or profit margins. You have to ask yourself at your company do you know everyone’s income? (assuming you don’t own it or there is more than five people in it.) The best you can do is look at the features and ask yourself is this what I want? Assuming it is priced competitively for all the features you are looking for, also assuming you can not take a 12 month or longer unpaid vacation without cashing in some of your RRSPs or using a line of credit or selling your house.

  11. Brian,

    Why not post a link to the application form here in your article for anyone to read?

    Not knowing the profit margins of an insurance company is fine, what I’m talking about is knowing the risk you are paying to protect against.

    The insurance company knows your statistical chance of becoming disabled is, based on your application answers and the actuarial formula / computer models.

    With that information you could ask yourself (for example) is it worth $350 this year to cover a 0.05% risk?

    It would help further to know what risks you won’t get or need coverage for.

    For example if your greatest risk is injury on the job then you might be paying $350 for a 0.02% risk of disability (since 0.03% is covered by worker’s comp insurance).

    If the greatest risk in your demographic is a car accident, but you don’t drive you might be paying for insurance you don’t need, not to mention car accident disabilities are also covered by vehicle insurance.

    If you have a family history of disease like cancer or diabetes you might be paying for coverage that will not be paid out because of post claim underwriting.

    Since mortality actuarial tables are available you can use them to gleam some information on the risk of becoming disabled, as I believe they are highly correlated.

    The CDC provides a nice reporting tool which filters by age, sex, race here:

    Maybe insurance provides the best risk reduction dollars to dollar, but maybe spending money on a chiropractor, a gym membership, an ergonomic chair or even a safer car would reduce your risk more efficiently.

    If insurance agent’s have their client’s health in their best interest, maybe they would offer risk information to help people reduce their risks voluntarily, like telling them just how risky a speeding is, and how much it would save their insurance premiums to stop.

  12. Ok Jordan,

    The point of an application for all to see is reasonable. Let me get a link or at least the main pages you need to look at. (this should be done by early next week…I am out of the office this week)

    Here is a question that may help you.

    Lets say you were offered two jobs a different companies

    Job A pays $100,000 no disability
    If you are sick or injured for what ever period of time (could be as long as 20 years) …you get zero.

    Job B. pays $95,000 full disability indexed to inflation up to 66% of current pay and if you are partially disabiled (can’t work your full 40 hrours per week or more) this benefits pays the difference. This coverage goes until age 65.

    Which job would you take? Why?

    If you can not take a 12 month unpaid vacation (or longer)and protecting your pay is important to you then consider getting covered. If you have a lot of rental income or lots of income from your investments and do not need to work then don’t worry about it.

    I always tell people once you get disability insurance you may not need it. But if you don’t have it Murphy’s Law works overtime. One idea if you think nothing will happen, is get a ROP (a return of premium) rider. After say every eight years if no claim is made you get 50% your money back if no claims have been made. You do pay extra for this, but the cost of insurance if no claim has been made is much cheaper.

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