Buying Disability Insurance in Canada in 5 Easy Steps
Important things to know before you buy one of the most complex insurance products in Canada: Disability Insurance
If you are without disability insurance benefits at work, self-employed or a contract worker, you probably need to buy disability insurance. Now, buying disability insurance is easier said than done. It is a complex product that only a few life insurance brokers specialize in.
You will definitely need to speak with a broker who specializes in disability insurance, especially if your work situation and income sources are more complex than a normal Canadian worker’s. Running a business, owning rental property, earning commissions, etc. All are sources of income that can create complexity when designing your disability insurance plan.
This article is designed to help you look at some of the major factors you need to consider when shopping for a disability insurance plan. I am not trying to make you an expert of how disability insurance works, but if you keep these things in mind, you will be sure to get a plan that works for your unique situation and easily identify an insurance broker who knows their stuff when talking about disability insurance.
1. Do you need maximum income insured or less?
The first thing to understand about disability insurance is that there is a maximum amount of coverage you can qualify for. This is based on a percentage of your total gross earned income, after business expenses, but before taxation is deducted.
Earned income is income and revenue generated from active work, like making sales, managing a construction company, getting paid for a project you completed, etc. Unearned income would be collection of rents on property you own, payments of dividends or interest from your investments, ongoing royalties from a contract or intellectual property you created, etc. Think of it this way. If the income would continue, even after you became sick or injured it is unearned income. If the income would stop because you couldn’t go to work, its earned income.
So, based on this, you can insure about 60% (give or take) of your earned income. Each insurance company has slightly different maximum coverage amount calculations, but needless to say there is a maximum amount you could qualify for. Hopefully that would be enough to meet all your monthly cost of living bills. Maybe, this amount of money is too much, and there would be excess income flowing from the disability insurance policy. Now this sounds like a good thing, but you still have to pay a much higher premium today for a larger benefit amount.
A good disability insurance policy will cover your living expenses and provide a little extra for those unforeseen medical expenses that go along with being disabled. Anything above that would be surplus income, and you need not pay the premiums for the extra benefit. It is best to do a monthly budgetary worksheet (something your insurance broker could probably do with you) to see how much income is really needed to keep your head above water. That is the amount of disability insurance you should apply for, and thereby keep your premiums down if at all possible.
2. How long can you hold out before you need monthly income?
Personally owned disability insurance has what’s called an Elimination Period – or more commonly known as the waiting period. This is the number of days you would have to remain disabled before your benefits will start. Most policies offer a 30 day waiting period as the shortest time between onset of your disability and the time you can claim (some injury policies have a zero day waiting period, but only for injuries). The 30 day waiting period is the most costly, since the insurance company will be on the hook for minor injuries that could keep you off work for a couple of months.
You can also buy a disability policy with a 60, 90 or 120 day waiting period. If you can afford to cover your own bills for 3 months, the best cost to benefit scenario is the 90 day waiting period. It can save you a lot of money vs. the 30 or 60 day plans, and there is hardly any savings going longer, to the 120 day plan. Also, if you have been disabled for more than 90 days, that is when a disability really becomes long-term and chronic, statistically lasting for almost 3 years on average.
3. Would you want to re-enter the workforce doing ANY job, if possible?
This important consideration comes down to a definition or semantics. What is in a definition? Well, with disability insurance, everything! There are two main definitions of occupation for disability insurance: Regular Occupation or Any Occupation. Here is the actual contract wording of each of these definitions from one of Canada’s major providers of disability insurance:
Regular occupation means the gainful occupation or occupations in which you are engaged at the onset of Disability.
This means an occupation for which you are qualified or may become qualified, giving due consideration to your education, training and experience.
Most group insurance policies through an employer offer a 24 months of coverage as Regular Occupation, and then the definition switches to Any Occupation. With a personal disability insurance policy you can have the definition extended beyond the basic 24 months. You can have either a 5 year or to age 65 regular occupation definition attached to your policy.
The more specialized and skilled you are and the more education and work you put into become whatever “regular” occupation you are, the more important it is to insure yourself through to age 65 as Regular Occupation – and not be forced back into a job you never wanted to do because you are losing your disability insurance benefits.
4. How long do you want insurance benefits to be paid out?
This is an important question because it again can seriously affect the premium being charged. The minimum benefit period is 2 years, or 24 months of disability payouts. Quite frankly, this is far too short. You need a longer benefit period. A 5 year benefit period covers most disability cases, as over 90% of all people on disability return to work within 5years.
For those unfortunate folks who suffer a serious and chronic condition, they might never be able to return to the workforce and to their regular occupation. For these rare but dramatic cases, coverage through to age 65 would be best. Not knowing what the future will bring, the best bet is to always get the coverage to age 65, if you can afford it. If premium cost is an issue, shift back to the 5 years of benefit to save cost and still be fully covered for your monthly income needs.
5. Make sure your insurance broker gives you options
Now you know some basics. These are the important questions to ask your broker and work through some options to find the best disability insurance policy design that meets your needs and your budget. Your insurance broker will also be able to explain and show you some important optional riders that can be added to the plan. These include:
- Cost of living adjustment rider
- Partial and Residual Disability riders
- Pension or retirement savings rider
- Future income option rider
Your insurance broker should also be quoting you from the 3 main life insurance companies offering disability insurance for white collar, professional careers:
If you are working in a blue collar job, like a trades person, one of the best insurance companies specializing in that sort of disability insurance in The EDGE Benefits. Your life insurance broker should be shopping these companies to find you the best policy and the best premiums possible.
Life Guard Insurance brokers have access to all Canada’s best disability insurance providers
Our brokers at Life Guard Insurance have access to all these companies and more. They can shop the Canadian disability insurance market to find you the best policy at the best premiums. Contact us today to be connected with a qualified life insurance broker in your area, specializing in disability insurance.
The article was written by +Mitch Reynolds. If you found this article interesting or it made you think, please feel free to share your comments below. Liking us on Facebook, giving us a +1 on Google or Tweeting this article about how to buy disability insurance in Canada would be very much appreciated.