Disability insurance can save you from financial ruin
A sudden disability – from accident or illness – could ruin your family financially. Depleting your savings, cashing in investments, or selling your home can be the result of huge disability and rehab costs not covered by health insurance. That’s where disability, or income replacement, insurance comes in.
Disability insurance is not automatically part of your health insurance coverage, whether a provincial government plan or a private group or individual plan. It is a separate type of insurance coverage and is available with a variety of terms and conditions, depending on the type of insurance plan purchased.
This type of insurance pays a so-called “living benefit,” meaning that money is paid to you while you are still alive. Life insurance, of course, pays out only when you die. Disability insurance provides a monthly benefit if you should become disabled and unable to perform your regular daily tasks. It ensures that you have a regular monthly income – typically some percentage of your current employment income – that lets you pay the bills while you are recovering from your disability and avoid the real financial hardship you could face if you’re forced to deplete your own savings, redeem investments, or even sell your home to cover expenses.
Not all disability insurance is alike
A wide variety of disability insurance is available, but not all coverage is equal. Some policies pay benefits that are tax-free, others are taxable. Some provide only temporary coverage, and some coverage stops the minute you change employers.
Various government plans offer some form of short- or long-term disability coverage, including provincial Workers’ Compensation boards, federal Employment Insurance, and Canada and Quebec Pension Plans. But in these cases, coverage is scanty and the qualifications for “disability” are very limiting.
Larger companies typically offer some form of group disability insurance as part of their benefits package. But benefits may be taxable if you make a claim, and coverage ends when you leave your job. It’s important to find out from your employer 1) whether you in fact are covered under a group disability plan and 2) what the terms and conditions are. At a minimum, ask your Human Resources department about coverage for the following benefits:
- Sick leave. Very short-term absence ranging from a few days to a few weeks.
- Short-term disability. This typically kicks in for periods of three months to a year.
- Long-term disability. This takes effect after your short-term disability or Employment Insurance benefits end, and may last as long as two years. It usually replaces 60% to 70% of your regular income, with some maximum monthly dollar limit imposed.
What to consider for individual plans
When you change jobs, your coverage stops. If you’re self-employed, you should consider individual disability plans. These plans can be customized to fit your needs, whether you have employer group coverage or not. Three basic individual disability plans are: “Noncancellable guaranteed renewable” plans, which can’t be cancelled and premiums can’t be increased during the policy period; “Guaranteed renewable” plans can raise premiums for an entire specified group only; “Commercial” plans may be cancellable on the anniversary of the contract.
For individual plans, talk to you advisor about adding a waiver of premium payments rider while you’re disabled, the ability to increase coverage without a medical exam or questionnaire, and benefits based on loss of income instead of just the loss of your ability to work. Ask your advisor about options for length of coverage, which range from specified periods to the entire length of your disability to age 65, to lifetime coverage. In addition, if you’re self-employed, premiums for disability insurance may be tax-deductible as a business expense.
Here are a few basic questions to ask when shopping for disability insurance:
- What’s the coverage? How much of my current income will be replaced? And how long do benefits run?
- Is anything excluded? Is my coverage limited by pre-existing conditions?
- What’s the waiting period? How long after a claim do benefits kick in?
- Is there a premium waiver? Do I still have to pay premiums during my disability period?
Disability insurance can be complicated. Don’t let that stop you from looking into it. Talk to your independent advisor, who can help you sort out the jargon and determine the kind of coverage you really need. Remember, though, disability insurance shouldn’t be taken for granted. Like any other piece of emergency pre-planning, it can get you out of a dangerous situation when you need it the most.