While browsing for life insurance options, you may have stumbled across disability insurance options or riders to your policy. Disability income insurance protects your income and your loved ones if you can’t earn a living due to injury or illness. Since life insurance on its own does not cover disabilities, it may be worth looking at some coverage.
How Does Disability Insurance Work?
Disability insurance, like regular life insurance, is a contract between the insurance company and the policyholder. With this type of insurance, in exchange for paying your premiums, the insurer agrees to pay you a monthly benefit if you become disabled and can’t earn a paycheck.
This type of insurance is meant to replace part of your monthly income when you can’t work because of an injury or illness. It helps you buy groceries, pay bills, and cover other expenses to support you and your family.
Why is disability insurance so important?
Disability insurance is important because it provides financial protection for what is perhaps your most valuable asset — the ability to earn a living. If you were affected by an illness or injury and were left unable to work, having this type of insurance would provide a monthly benefit that would help substitute your income.
According to statistics, a quarter of young workers will become disabled before they retire, leaving them without an income for an unknown amount of time. Long-term disability insurance fills in the gaps if you’re too ill or injured to work. The cost of this coverage itself can cost between 1% and 3% of your annual salary, which is a small price to pay to replace your future income potentially until you retire.
What Does Disability Insurance Cover?
Disability insurance covers illnesses and injuries that affect your ability to work at your regular occupation. Although this may sound simple and straightforward, many people are not sure what counts as a disability and what doesn’t.
For example, you may associate disability with a bodily injury, like a fracture. But what about mental illness? Can depression be defined as a disability?
If you said no, think again. The most common cause for long-term disability in Canada is mental illness, followed by musculoskeletal issues like arthritis.
To clarify this definition of “disability” further, injuries such as fractures, spine injuries, or broken bones are still disabling injuries. But this means that the definition of a disability is much broader than what you may think and is not always visible.
Disability insurance covers virtually every type of condition that can prevent you from working. This includes:
In addition to these conditions, some non-illness or injury conditions like pregnancy are generally covered. If a condition is excluded (like a pre-existing condition), your policy will notify you of this exclusion.
Do I Need Disability Insurance?
If you’re asking yourself if you need disability insurance, ask yourself this: would your monthly income be adversely affected if you suddenly fell ill or sustained an injury that prevented you from working?
If the answer is yes, then getting this type of is likely worth it and you should consider putting an insurance plan in place to protect your income – this can be in the form of disability riders on a traditional policy, or an entire disability policy on its own.
Is Disability Insurance Worth It?
Disability claims happen more frequently than you think: 1-in-3 people will become disabled for more than 90 days. And if your disability lasts longer than 90 days, there’s a good chance it’s an extended disability. How will you continue paying for the cost of living during a period of total disability? If you can’t answer that, then you should consider getting disability insurance for financial protection.
If you are employed and have a group LTD benefit, you should note that this group disability benefit is often not enough. There are also more benefits to having your own long-term disability policy, such as being able to customize it to your liking. For example, you can get an own occupation policy, which pays out if you can’t do your job, even if you were working elsewhere. Compare that with any occupation policy commonly found in group LTD. This is where you lose your monthly benefit if you can work in another occupation that you qualify for based on your training, education, and experience.
What you should consider when applying for disability insurance
Before applying for this type of insurance you should consider a few things, such as your circumstances. It’s easy to assume that only people with dangerous jobs are at risk of getting a disability, but statistics tell a different story. More than one in five Canadians aged 15 and over has one or more disabilities.
Frankly, just about everyone who earns a paycheck needs some form of disability income insurance. It acts as financial protection for what is perhaps your most valuable asset: the ability to earn a living.
Before you purchase this policy, consider the following questions:
- How much is the monthly premium?
Like any other life insurance product, you’ll have to pay a premium every month to keep your disability policy active. Be sure to plan out your budget and finances accordingly so that the monthly premium doesn’t affect your other financial obligations.
- How does the policy define disability?
Some policies pay a monthly benefit if an injury prevents you from performing your regular occupation duties, but allows you to do other types of work. Other policies don’t pay a monthly benefit if you can work any job at all.
- How much of a monthly benefit will you receive?
A disability insurance plan pays out a percentage (generally 60% to 80%) of what you earned before you became disabled.
- How long will the policy pay benefits for?
Some policies pay out a monthly benefit for a few months. Others payout for several years or until you reach a specific age.
Pros and cons of long-term disability insurance
The pros of buying long-term disability coverage generally outweigh the cons, especially if you’re able to find an affordable policy.
You can spend benefit payments however you want
Disability benefits are tax-free because you typically pay for your policy with after-tax dollars
Benefit payments can last until you retire, or until you recover
If you want more comprehensive coverage, you can customize your life insurance policy for more coverage with disability riders
Coverage costs more the older you get or the more dangerous your occupation is
Policies can come with exclusions that don’t cover pre-existing conditions
If you never experience a disability, you’re paying for coverage you don’t need
Disability Insurance vs. Alternatives
Alternatives to disability insurance can give you some of the coverage you need, but not all:
- Workers’ compensation is provided by most employers, but it only pays benefits for injuries that happen on the job.
- Short-term disability insurance is best used to complement long-term disability coverage. It can provide benefits during a long-term policy’s elimination period, but is unlikely to last as long as you’re out of work.
Everyone should consider getting some form of disability insurance to protect their income. It’s particularly important if your family counts on your income or you’ve put a lot of time and money into a career and don’t want to risk losing that investment.
Getting a policy is simple: Work with a licensed agent to compare disability quotes or options, fill out an application, and go through a simple medical exam to secure a policy and protect your earnings.
Frequently Asked Questions (FAQs) about disability insurance
If you get an injury or illness that prevents you from doing work that you did before the injury, you qualify for a disability insurance payout. You may also receive a monthly benefit if you are partially disabled. That is, you have a medical condition that prevents you from performing one or more important duties of your occupation.
Getting disability insurance can help you avoid losing your income. If you or your family depends on your income, you could think about using disability income insurance to reduce the risk of losing it completely. For instance, after losing your salary, would you be able to cover housing, food, and other necessities? Furthermore, how long? Additionally, losing your capacity to work may make it more difficult to save for financial objectives like retirement or higher education.
Although both types of insurance provide an insured person with financial protection in the event of certain unique circumstances, the circumstances in which they will provide said protection is different. This means that the main difference between critical illness and long-term disability insurance coverage is how you can qualify to receive payments from the insurance company.
The inability to do your job is the qualifying event for disability insurance, whereas a diagnosis of a serious illness qualifies you for a claim payout for critical illness insurance.
Yes, many disability insurance policies do provide coverage for mental health conditions, but the extent of coverage and specific terms can vary widely depending on the insurance provider and the policy you choose. Mental health conditions can include a range of issues such as anxiety, depression, bipolar disorder, schizophrenia, and other psychological or emotional disorders.
Disability insurance typically covers both accidents and illnesses. It provides financial protection if you become disabled and are unable to work due to a covered injury or illness. Disabilities can result from various causes, including accidents, injuries, chronic illnesses, and other health conditions. The specific terms and conditions of the disability insurance policy will outline what types of disabilities are covered and the criteria that need to be met to qualify for benefits.
Managing what’s important to you
Building and finding the right package for your financial protection can be difficult if you aren’t sure of your options. Speaking with a financial representative can help you identify the best path for you.
At Protect Your Wealth, we would be more than happy to provide further analysis for your specific circumstances. We’ve been providing expert life insurance solutions since 2007, including term life insurance, critical illness insurance, and disability insurance. Or, if you are interested in learning more about the options available to you, check out our guide on the best life insurance companies in Canada.
Contact Protect Your Wealth today at 1-877-654-6119 to learn more about your options! We’re proudly based out of Hamilton, and service clients anywhere in Ontario, British Columbia, and Alberta, such as Stoney Creek, Nanaimo, and Airdrie.