The Basics of Disability Insurance
If insurance as a topic makes some Canadians uncomfortable, then disability insurance in particular can feel like torture. The words “disability insurance” conjure up images that can make anyone nervous. Accidents and hospitalizations aren’t easy conversation starters. Also, people don’t take it seriously; they believe that they will never have to deal with a disability.
Until they do.
In the 30–64 age bracket of the working population, around 33 percent will face a disability. These are cases where the individual will be disabled for more than three months. There is a mistaken perception that disabilities tend to be catastrophic in nature—caused by one-time, traumatic events. Most Canadians don’t recognize that common, chronic conditions such as mental illness cause the majority of disabilities. In fact, less than 10 per cent of disabilities are caused by accidents.
Disability is more common than one might think; therefore, it’s important to understand disability insurance, how it works, what it covers, and how much it usually costs. Once you know the basics of disability insurance, it becomes easy to take the necessary action that will help you protect you and your loved ones.
What Is Disability Insurance?
Disability insurance, also known as income protection insurance, protects you from any loss of income or remuneration due to a disability. If you were to become disabled, disability insurance would provide you a significant part of your regular income. It usually varies between 60 and 80 percent of your normal income.
It’s important to understand that a disability need not result from an accident—it might be due to a degenerative condition that prevents you from earning your regular income. Regardless of the cause of your disability, the life insurance provider will continue to pay you out until you become healthy or for the period of time covered by your disability insurance.
Should You Get Disability Insurance?
If the recent events have taught us anything, it’s that life on this planet is uncertain. Even with the best of plans, things can—and d0—go wrong. Also, it happens when you least expect it. You can’t predict a disruption. But with insurance, you will have a safety net against uncertainty.
If you and your family depend on your pay cheque, and if it’s the only source of income, you should look for ways to protect it. It’s more important if you don’t have a substantial passive income—student loan and mortgage payments don’t stop if you become disabled. A disability insurance policy is the easiest way to safeguard your regular income.
If something might happen to you that would disrupt your income-flow, you should consider getting disability insurance. The premiums you pay will be an investment to ensure your family’s peace of mind when you won’t be at your best. But if you have significant savings, investments, or are nearing retirement age, you may not need disability insurance.
Types Of Disability Insurance
Disability insurance policies come in two forms: short-term disability insurance (STDI) and long-term disability insurance (LTD). As its name suggests, STDI compensates for a loss of income for a short period of time, usually between three and six months.
Workers typically get STDI coverage from their employers. An employee can also opt to get this short-term disability insurance through a private insurance company, but this is usually more expensive.
LTD provides insurance against loss of income for longer durations which can even extend to decades. Employers usually offer LTD but the benefits under company-provided policies are often not enough. This is why employees are encouraged to opt for separate long-term disability insurance policies.
Which Policy Should You Opt For?
At MoneyWizard, we are often asked which policy is the better option. While it depends on the existing coverage from your employer, if any, the short answer is that you should consider getting both. If you cannot anticipate accidents, by definition, then you also won’t be able to predict their severity. You won’t know how long your income will be lost.
An STDI does the job for the short-term. But if the loss of income is for a significant period of time, you will need the additional benefits of LTD. If you opt only for a long-term policy, you should know that it may take anywhere from a month to a year for you to start receiving the benefits, leaving you vulnerable in the short term.
How Does Disability Insurance Work?
If you have a policy and are applying for disability benefits, the percentage of income that you receive will differ according to the conditions of the policy. Life insurance companies usually cap payments at around two-thirds of the income lost. But this isn’t all bad news.
That cap is on your gross income and not how much you take home. Keep in mind that your regular income has deductions. When you consider that disability insurance is usually tax-free, what you get will be close to what you were making earlier. So, with the right policy, there won’t be a significant difference between your income and your disability insurance benefits.
Waiting Period And Duration
There will also be a waiting period before you can take advantage of the benefits. The shorter the waiting period, the more expensive your policy will be. Disability insurance coverage usually runs for two or five years or until the individual turns 65. If your disability insurance policy has been provided by your employer, chances are that you will have a two-year policy period.
To avoid the policy period, you could take an LTD separately. Keep in mind that your individual policy should have a waiting period of two years which will be covered by your office policy.
Own Occupation Policies Vs Any Occupation Policies
Based on the queries and feedback that MoneyWizard has been getting, many people find this distinction confusing.
If you are disabled and cannot perform your previous occupation but are able to perform another job, you can still receive disability benefits under the Own-Occupation rider. However, if you have an Any-Occupation rider, then your benefits will stop if you can perform any other occupation. Own-Occupation policies are more expensive than Any-Occupation policies. If you are a professional with a specialized set of skills, it makes sense to go for an Own-Occupation rider, since a new job may not provide the same income of your previous job.
For example, let’s say that you are a chef who is disabled and cannot cook in or manage the kitchen at your previous restaurant, but you have been able to hold online cooking classes. With an Own-Occupation policy, you will get disability benefits even when you earn income from your new job; keep in mind that online classes may not provide you the same income as when you were a chef.
What Does Disability Insurance Cover?
Most Canadians believe that accidents are the primary reason that people claim disability insurance, when, in fact, mental illness is the number one reason. It’s followed by musculoskeletal issues, then injury or poisoning.
Disability insurance in Canada also covers a range of conditions including headaches and migraines, carpal tunnel syndrome, depression, lupus, heart disease, multiple sclerosis, visual disorders, chronic pain, and back problems, to name a few.
You should know that merely having any of the above conditions will not qualify you for disability insurance. The condition should be of such state that it prevents you from working, leading to a loss of income. A diagnosis is not proof that you qualify for insurance—you will have to prove that you cannot work because of it.
How Much Does Disability Insurance Cost?
Disability insurance premiums vary according to occupation, gender, age, and any pre-existing conditions. While comparing costs if you are buying it separately, you should consider the duration of the coverage, the benefit amount, how close you are to your retirement age, and whether it will be an Own- or an Any-Occupation policy.
A typical LTD policy may cost you up to three percent of your annual income. LTD policies are beneficial as they are tax-free. As mentioned earlier, this means that your benefit amount will be close to what you were earning at your job.
STDI policies, on the other hand, could vary in cost depending on where you get it from. If it is from your employer, it may not cost you anything; if you plan to buy it separately, it could turn out to be expensive.
Except for a small percentage of the population, most Canadians need a regular income. It helps you pay your bills, take care of your children’s education, make mortgage payments, and save for your retirement, among other things. A short-term disruption to your flow of income can force you to cut back on your expenses.
But a long-term disruption can torpedo your lifestyle. If you are disabled and without insurance, your entire life could take a turn for the worse. You could deplete your savings, sacrifice even the necessities, and even be forced to sell your house.
Think that scenario is rare? That most people won’t have to worry about it? Well, over 12 million Canadians have benefited from disability insurance. As you can imagine, they were the lucky ones who had a safety net.
Back pain, headaches, and deteriorating vision are all too common now. In a highly competitive workplace, any one of these could seriously affect your performance and even make you unable to do your job. For these reasons, it helps to take disability insurance seriously.
Ask your employer whether they offer any disability insurance, and if they do, enquire about the benefit amount and the duration of the policy. Ideally, a disability insurance policy will offer you coverage for a long duration, come with an Own-Occupation rider, and provide you inflation-adjusted benefits.
Finally, remember that disability insurance is not a substitute for life insurance. If you develop a disability and pass away, your family will not receive any payments. Therefore, disability insurance should be taken alongwith a life insurance policy to guarantee your family’s financial security.
Frequently Asked Questions
If I have LTD coverage at work, do I need an individual policy too?
In most cases, the disability coverage you receive through your employer may not be enough for you in the long-term. Since these are group policies, the benefits will be inadequate. The coverage won’t be enough, and the policy will be for a shorter duration.
If you were to change your job or if your employer were to leave the program, you would lose the benefits. Therefore, it makes sense to get an individual policy, too.
Who pays for short-term disability coverage?
It can be paid for by either the employer or the employee. Usually, employers pay for STD coverage. The policy duration is usually up to six months.
What is not covered by disability insurance?
Remember that disability insurance is meant to offset a loss of income due to an illness, injury, or accident. It doesn’t cover medical care associated with any disability. Plus, the coverage of pre-existing conditions will vary between insurers.
Can I have two disability insurance policies?
While you can have multiple disability insurance policies, the benefit one delivers will offset any benefit that you may gain from another plan. Even with several disability policies, your total benefit will still be between 60 and 80 percent of your normal income.