Disability Insurance – The Basics
Disability Insurance, which is income replacement when an individual is unable to work, is one of the most unappreciated offerings of the Financial Services industry. Most people still believe that a debilitating disease or injury won’t happen to them, and if it does, they can handle it then.
There are several types, sources, amounts and features to discuss when determining disability insurance coverage for clients.
What you need to know
Those who are unable to work, for whatever reason, typically need between 50 and 80 percent of their current earnings in order to keep up with all necessary financial obligations. We’ve reduced the total amount because we’ve eliminated current and future savings from their budgets, as well as costs associated with traveling to and from work and any expenses accrued while employed. Furthermore, a disabled person’s lifestyle typically (generally speaking, of course) becomes more restricted and less expensive even with additional medical expenses included.
The most significant reason to utilize Disability Insurance is to replace income that cannot be earned by the affected individual. The disability could arise from a number of scenarios like:
- An on-the-job injury like a strained back or broken leg directly or indirectly related to performing one’s job like slipping and falling in an icy parking lot
- A disease diagnosis or health event like a heart attack or stroke
- Recovering from an accident as a pedestrian, cyclist or driver of an automobile when all or some of the job duties cannot be performed
Each of these scenarios can be financially devastating if no disability coverage is in place. Regardless of an individual’s situation or stage of life or career position, an unexpected and prolonged disruption in earnings will not be absorbed easily.
According to the Canadian Life and Health Insurance Association, one in three Canadians will experience a disability of at least ninety days prior to age sixty-five.
This income loss can be replaced with:
- Government Sickness Benefits from Service Canada
- Up to 15 weeks of benefits for those who have had their earnings reduced by 40% or more are eligible
- As of January 1, 2016 the maximum benefit for those making “insurable earnings of $50,800” or more is $537 per week
- Workers’ Compensation Boards
- Workers who are injured on-the-job are eligible for benefits
- Approvals are often difficult to understand for those who are declined, and the level of monitoring has been reported as uneven
- Individual Benefits
- This is the ideal option that can be custom tailored by licensed insurance agents
- Time Frame
- Lifetime benefits
- For the duration of the disability or until age 65 (retirement age), whichever comes first
- A specified duration, typically less than five years
- Premium payments are waived while on a claim
- Benefits paid for loss of income, not the inability to work
- If the beneficiary is partially disabled or cannot complete a full workload
- Group Benefits
- Typically offered as part of a compensation package, or at least the opportunity to buy disability benefits is offered at a group rate
- Company paid premiums deliver disability benefits that are taxable, so most employers include this as a non-paid benefit
- Often a mix of the following types of benefits
- Sick days
- Paid or unpaid days away from work for part days or a few consecutive days
- Short Term Disability
- Usually coordinated with Service Canada sickness benefits, starting after fifteen weeks and ending after six or twelve months
- Long Term Disability (LTD)
- Replaces about two-thirds of a person’s total income
- Typically takes over after all other disability and sickness benefits have expired
- Usually lasts for two years, and after two years you have to be disabled from performing anyoccupation for payments to continue
- Benefits are often reduced by any disability payments provided from other sources like Service Canada and Workers’ Compensation
- LTD gets a claimant to the agreed level, but will take advantage of other sources too
- Association Plans
- Association Plans function like Group Plans, but instead of the “group” being employees they are part of an affinity group like a professional association, (Canadian Institute of Chartered Accountants, for example), alumni of a university or college or member organization like Canadian Federation of Independent Business (CFIB).
- Additional steps and medical information may be required to enroll but are typically much easier and cheaper than individual plans
- Administration Only Plans
- Some insurance companies offer large employers their services to administer disability insurance (enroll employers, manage coverage and options, process claims and payments) while the employers fund the administrative and claims cost directly without the benefit of underwriting the expected claims.
Investors and employees should be asked a number of questions such as:
- What is the definition of a disability?
- What percentage of income will be replaced once all sources are accounted for?
- Will payments be “coordinated” and maximized, and at what level?
- Will benefits be paid if you can work at a reduced capacity, or at an alternative position?
- How long will the benefits run?
- Will the benefit rate change over time?
- How quickly will the benefits begin? Are there different start-dates based on different types of disability?
- Are any conditions excluded from the plan?
- Can insurance be cancelled by the insurance company?
- If it is group coverage and you leave your employer, can you be covered as an individual?
- Is proof of health required if you want to convert group insurance to individual insurance?
- Can premiums increase as time passes or are they guaranteed?
Disability Insurance can often be confused with Critical Illness Insurance (CII) since there are some illnesses or health situations where the occurrence could trigger a Critical Illness Insurance claim, and the resulting loss of income based on the inability to work could also trigger Disability Insurance benefits.
CII typically pays a one-time lump sum payment when someone becomes seriously ill. Cancer, heart attacks, strokes, paralysis, dementia are examples of diseases and health events that typically qualify as covered by CII.
Pre-existing conditions are excluded while existing coverage should also be examined to see if it is advisable to apply for this type of insurance. Some policies refund premiums if a claim is not made, and since benefits are paid at diagnosis, a full recovery does not require the insured to re-pay the benefit amount.
Therefore, it is important to coordinate Critical Illness Insurance with Disability Insurance to determine the correct course of action for each investor.
When it comes to Disability Insurance, the steps to proceed are simple, but engaging your clients on an issue that “will never happen to me” can prove difficult. The preferred course of action is to gather the necessary information and documents from clients’ personal and company plans, and their permission to discuss the details with their employers and insurance companies. From there you will:
- Assess coverage and coverage type
- Determine maximum benefit rate and the coordination principles for each client
- Gather insurance documents
- Call insurance company, and have your investor agree to place you on the file to discuss coverage, inclusions and exclusions
- Assess overall risk for each investor
- Is there more risk that this investor may collect than the average?
- Family history of illness
- Adventurous lifestyle
- Determine your investor’s appetite for disability insurance and the prospects of not being insured
- Determine the appropriate next steps based on the information and insights gathered in steps 1 and 2 (above)
Jeff Devlin, CFP
Elementus Wealth Management Inc.