What is Disability Insurance?
Great question!
Disability insurance, also described as injury coverage (or LTD for Long Term Disability) is an insurance policy that covers your earnings in the event you are unable to work due to an accident.
Why do I need disability insurance?
That’s a good question, but a better one might be: how long could you survive without any income? For most Canadians it’s just shy of three months. This is why every working professional should consider protecting their earnings in case they are unexpectedly taken out of the workforce.
For example, suppose you are making fifty-thousand per year in your salaried position at your job, and on the weekend, you decide to go to Whistler for a skiing trip. On the trip, you accidently fall and become permanently paralyzed from the waist down and the doctors are telling you that you will no longer be able to work – how long could you survive?
Paramedics taking care of an injured skiier.
How do I know how much coverage I need?
These disability policies are directly correlated to the income that you earn, and will take into consideration what other funds are available to you in the event of a claim. Most LTD plans will give you coverage for up to 67% - 75% of your annual earnings. So, for a professional making fifty-thousand per year, they would be eligible for an estimated three-thousand per month (or 36k per year). It is not like life insurance wherein you can select any amount of your choosing (within reason), conversely, its based on your current ability to earn.
How is the policy structured and what affects the premium?
The policy has several different parts to it, some of which include:
1. The waiting period – the waiting period is the time you will wait, once disabled, to start receiving monthly payments. This usually comes in the 30 days, 60 days, 90 days or 120 days. The longer you wait, the lower the premium.
2. The class – every profession has a different ‘class’, which is a scale that rates the risk of your job. For example, an accountant would be less risky (for injury) than a carpenter, so the carpenter would be a higher premium. The class system is alphabetical one with most insurers using ‘A’ as the best and ‘B’ or ‘C’ as the worst.
3. The coverage amount – this should not be too much of a surprise, but the amount of monthly indemnity you select will be a big factor in the premium that you pay.
4. Your health – disability policies, like life insurance policies, are medically underwritten so as to better understand how risky your file is to the insurer. If you are very healthy, you will be discounted, however if you are unhealthy, you will be rated higher.
5. The benefit period – you have to select an amount of time you wish to receive monthly payments in the event you claim. Most companies allow for payments to continue for 2 years, 5 years, or until age 65. Note that the claim period starts from the time you get your first monthly payment.
What are endorsements are available?
Different insurance companies offer different endorsements (with different names), but the most common ones are noted below:
1. Cost of Living – this is an endorsement that can be added to the policy that protects you against inflation. You might have a disability policy in force for several years without claiming, and then you claim way down the road. This can be a problem because one dollar today might be worth less tomorrow. Cost of living protects that downside and risk exposure.
2. Future Income – most of us are always looking for ways to make more for our families and loved ones so we can have a better life. When that day comes, we want the ability to protect it! Future income option allows you to change your coverage mid-term when you need to increase your income and protection due to an earnings increase.
3. Own Occupation – as you can probably imagine, there are several definitions as to what disabled actually means, and when you are considered injured and unable to work. Sometimes the insurance company will mandate you go back if you can do ‘any occupation’, which means if you are a dentist and can still answer the phones (but can’t do dentistry) then you need to do that. We can limit this exposure by selecting ‘own occupation’. This considers you disabled if you can’t do your normal job.
What are some other things I should know?
You might have LTD coverage through your group benefits, but is it enough? You have access to government programs for short-term injury, but what is available to you specifically?
Disability policies encompass a lot of different information, and so its important to talk to a qualified Alteri agent to discuss your available options and needs.