Insurance for Disability

None of us ever truly believe we will be disabled by an accident or sickness that will leave us unable to work. Yet, one person in three will experience a disability. The probability of being disabled is greater for women, and with older age.

Disability can bring serious financial consequences to those who are unable to “pay the bills” if they aren’t working. It can diminish --- or even eliminate --- savings and/or require debt to be assumed to replace lost income.

For these reasons, it is best to plan for disability instead of being caught short. Private sources of disability income insurance put income control into the hands of the insured. Public sources of disability income, such as Canada Pension Plan/Quebec Pension Plan do not address individual needs. Read about them here.

Sources of Disability Income Insurance

There are several ways to ensure income can be received when it is needed. All disability income insurance policies issue a monthly payment, known as the benefit. They also all have a waiting period. This is a period of time between the onset of disability and the start of payments during which a disabled person must self-fund their income needs.

A good starting point for disability coverage is the group policy provided by many employers. A policy will provide benefits for short-term disability and long-term disability. Short-term disability will typically pay 70-75% of income for up to a year. Long-term benefits begin thereafter. They usually pay 50-60% of income for the length of time specified in the policy. This may be two years, five years, or even to age 65. Many employers contribute towards premiums; a valuable employee benefit for those covered.

For those who do not have employer coverage, it may be possible to join a group plan offered by a professional organization, or a group such as an alumni association. The monthly benefit will be based on either a set-dollar amount or a percentage of income, to a specified maximum.

A personal disability income insurance policy can be acquired from an insurance company. Each policy is customized to the individual and takes many factors into consideration at the time of application: age, gender, occupation, income earned, and length of the benefit period are just some. The maximum benefit available is 60% of income from working (to a policy maximum); it is tax-free. This form of disability income insurance carries the highest premium cost.

Creditor disability insurance is offered by financial institutions to their borrowers. The insurance pays a scheduled monthly loan payment on behalf of the disabled borrower, including mortgage payments. The benefit period may also be quite restricted --- to two years, for instance. The benefit is received by the financial institution itself, not the disabled individual.

A person with a mortgage may find an economical approach to insuring is to use the creditor disability insurance available from their bank or other financial institution to cover their mortgage, and then cover the remainder of income needs through a group or personal plan.

Alternative to Disability Income Insurance

Finally, people who do not qualify for membership in a group plan or who do not have income from working in order to apply for a personal policy could use a critical illness insurance policy as insurance-against-disability. This type of policy covers illness caused by heart attack, stroke, and cancer. Many policies also cover coronary bypass surgery. However, up to 20 health conditions can be covered. The person insured by the policy must be living 30 days’ post-diagnosis to receive its lump-sum benefit. The benefit, typically between $50,000 and $500,000, is tax-free and can be used to either replace lost income or to pay other costs. That decision is entirely up to the recipient.

Planning Point - Disability income insurance is often overlooked in favour of life insurance. However, the chance of disability is much higher than the chance of premature death. An insurance policy --- either disability income or critical illness --- should be a part of every financial plan since disability can so completely derail earnings, savings, and financial objectives.