Disability Insurance 101

So you’ve got disability insurance at work right? If you become disabled, you’re going to get a new paycheque while you’re disabled…right?

It may not be quite that simple. Here’s some points you should consider about your existing or prospective disability insurance policies:

  • What’s your monthly benefit? You could have 2/3′s of income. Or 50% of income. Or any number – it varies by policy. Insurance companies typically want a maximum coverage of 2/3′s of your gross employment income. But remember that’s 2/3′s of your gross income, not your take home. And since disability benefits are normally not taxable income, you would be taking home 2/3′s of your gross – pretty much the same as your pre-disability take home income.
  • Waiting period or elimination. This is the time period you have to wait to get benefits, after you’ve become disabled. A 90 day elimination period means benefits won’t start paying in until you’ve been disabled 90 days. Longer elimination periods mean you’ve got no income for a longer period. Shorter elimination periods are available,but get very expensive fast.
  • Duration of benefits. This is something many people miss completely. If you become disabled, how long are you going to receive benefits? Don’t say ‘forever’, because you’ll be wrong. And don’t say ‘until I retire’ because you are quite likely wrong as well. Typical options for duration of benefits are 2 years, 5 years, or to age 65. But 2 or 5 years are often chosen to reduce costs. Group policies (work policies) frequently will have a 2 year benefit period. If you become disabled, you’ll get paid for 2 years – then it’s over.
  • Cost of living option. This is a rider available on some policies. It increases your disability payments with roughly the inflation rate. If you’re disabled for a couple of years, this doesn’t matter. If you are disabled for an extended period of time then this rider becomes extremely important in maintaining the value of your benefits.
  • Own occupation. Generally after two years of disability the insurance company will tell you to get back to work doing whatever you can – even if it’s not what you were doing before you became disabled. While I’d suggest that from an insurance perspective that if you can work doing anything then you should – but most consumers disagree. Most folks want to know that if they can’t do what they were doing before they became disabled, then they’re still disabled. The solution to this is to get the ‘own occupation rider’ that removes the 2 year restriction on being disabled from your own occupation.
  • Partial and residual disability. OK, this is where things can get messy, and policies can vary widely. What if you’re disabled for a few months. Then back to work for a month. Then off for three months. The second three months – is that a new claim subject to a new 90 day waiting period? What if you can work, but only 50% of the time? Do you get paid 50% and get 50% of your benefits? You need to look at your own policy or your work policy to find out what you have. Personally I prefer the Cadillac of plans for these options as I’d like to think that if I can work even a bit, or even off and on, that I want the opportunity to do so without screwing up what benefits I do have.
  • What disability insurance isn’t. Disability insurance should properly be called ‘long term disability insurance’. It’s intended to cover you if you become disabled over an extended period of time. Short term disability insurance is common with some employers, but is more of a benefit than insurance (60-90 days without income is a severe hardship, but shouldn’t be a life altering problem. And if it is, you can self insure by building your savings.). And it’s not long term care insurance which is something else entirely. Folks frequently mix up these three things.

Here’s your budget challenge. I challenge you to find out what level of benefits your current disability policy offers and then live on that for the next 60 days. Worst case you’ll have saved some money. But you’ll also find out if your current coverage is actually livable should you become disabled. Have to dip into your savings to stay afloat? That certainly won’t last if you’re permanently disabled.

Other things to note

  • In order to save costs, many work policies have a 2 year duration of benefits. If you become disabled, you’ll get paid for 2 years, then you’re on your own. The solution to this is to purchase an individual disability insurance policy with a 2 year waiting period and benefits to age 65 (i.e., no benefits for the first two years of disability, then coverage to age 65. During the initial two years your work coverage would be paying benefits).
  • Because options vary so widely, it’s difficult to compare based just on premium. However if you are looking to lower costs, take note of the 6 points above and put them in order of importance. Do you care about own occupation over only having benefits to age 65 instead of 5 years? Can you live with a longer elimination period in order to get a longer benefit period? Are you prepared to reduce your benefits? My personal preferences are monthly benefit, duration of benefits to age 65, and cost of living over all the other things. I set those three first because I buy disability insurance for the worst case scenario – I’m disabled forever.
  • Both the application and claims process for disability insurance are disliked by consumers. Applications take a bit of work. And when it comes claim time companies are going to expect solid and ongoing proof that you are completely disabled. Frankly, when it comes time for a disability claim, nobody’s happy – consumers, insurance companies, nor agents. And for every story a consumer has about a friend who got screwed over, the insurance companies have a story of consumers building additions on their house while supposedly being completely bedridden. I don’t have an easy answer for this, other than to make sure you actually read your policy or information from work and make sure you know what you’ve got.
  • Individual disability insurance (i.e. Policies you own, rather than work policies) are typically perceived as being expensive. Work policies are frequently perceived as less expensive because in many cases the employer’s paying part of the premium or has tailored the policy to limit benefits (all most people care about is whether they ‘have’ a policy at work. Few ever ask if the benefits and coverage are worthwhile). While the high premiums may seem like a gouge, you may want to consider the reason why premiums are high. It’s not because of the high-flying lifestyles of insurance execs – the disability insurance marketplace is competitive enough to keep a lid on premiums. Premiums are high because insurance companies get a lot of expensive claims. And what that means to consumers is – there’s a pretty high probability of a disability claim before age 65 for many of us. For most of us, we’re the ‘teenaged drivers’ of the disability insurance world. I know that’s slim comfort – but like claim time, there’s little easy solution to high premiums resulting from high claims.
  • If the high premiums of an individual policy more than you’re prepared to pay and you’re prepared to give on benefits for some level of coverage, accidental only disability insurance policies are available. These policies are noticeably less expensive, provide coverage from the first day of an accident (no waiting period), require no medical exam and are very straightforward. In exchange for fast, easy and cheap you give up things such as disability coverage for illness and cost of living increases.

Discussing disability insurance is even less fun than discussing life insurance. But it’s important. For most of us our income is our single greatest financial asset, and disability insurance protects the loss of that asset.

If you’ve got a disability insurance policy at work, today might be a good day to print out this article, go grab your benefits brochure, and compare the above points with what you have. There’s no time like the present to make sure you’ve got the coverage that you think you have. And if you’ve got an individual policy, you might consider doing the same point by point comparison.

Written by Glenn Cooke

Glenn Cooke is a life insurance broker in Canada and president of Life Insurance Canada. He has more information about life insurance on his website.

13 Responses to Disability Insurance 101

  1. What a great article.

    Question – What happens if you are self-employed? Does the disability policy still work on your wages taken from the business?

    I’m just wondering how someone with a business that doesn’t pay the owner much money would be covered. Perhaps the business is new or maybe they want to reinvest the earnings in the business?

  2. Mike, there’s some ways that the insurance companies can gross up your disability benefits to recognized the differences with someone who’s self-employed. They’ll look at your business finances as part of your overall application, not just your straight take home pay.

    For example if you’re income splitting with your spouse, but the entire business income is dependent upon you, then the insurance company is more likely to insure you for a larger amount than just your take home.

  3. Please note that the majority of group policies will cover you to age 65 if you are totally disabled. The 2-year clause is applicable if you are able to return to any type of job.

  4. Hello…what about the income tax implications? Is this income type treated as T4?
    My employer is paying the disability premiums while I am off from work. How can I reduce my taxation liability? Thank for your time.

  5. Insurance policies do differ and I’m glad you enumerated the important factors to consider. I suggest not to depend solely on the insurance agent. Make sure you read the policy because agents may not tell you everything you need to know. This would be a very helpful post for those who are in a dilemma on which disability insurance to get.

  6. Such an enlightening post. A lot of people tend to undermine the benefits of disability insurance. Many do not include it in their insurance portfolios even though they get other insurance types like life insurance, health insurance, etc. Without it, you’re basically gambling against the odds that you could become disabled someday.

  7. I have been away on Long Term Disability
    for a year now. Sun Life had sent a letter in
    the beginning of my LTD saying after assesing
    my case they had found I’m disabled from
    “any occupation”. Now, Sun Life is the third
    party insurance carrier hired by my employer.
    My question is once I hit the 2 years and if
    I am still disabled. What’s going to happen? Will
    Sun Life most likely continue paying me? Or
    will my employer pay me the LTD payments
    after reaching the 2 years?
    Also, can I get pregnant while receiving LTD
    payments? Or Can I go Back to school?
    Considering my disability is considered a Total
    Disability?
    Thank you so much for the amazing info you
    have provided already!

    Knowing that my Group Coverage indicates
    coverage until age 65.

  8. Hi
    I was wondering, what if you have been on disability for a long time say 5 years because of an accident and now you have forgotten everything you knew about your current job PLUS your condition limits you with your current job, will the insurance company pay for you to go back to school? Work Group insurance or individual insurance policy?
    Thanks
    Marie

  9. Ihave beem employed for 23 yrs with the same company, started in 1990, in 1996 i had a brain tumor. The company has been good to me.Last July I had an accident in the company car. They are waiting for a neuro-psyhological test, i’m on ltd till jan 2013. How long is the ltd good for?
    john

  10. Question – Been receiving LTD (Long term disibility) from insurance since 1998 (not from CPP). i paid into the CPP plan for 15 years prior. Will i still qualify for cpp benefits at age 60/65. When doing the calculations will these years of collecting LTD count as forgiven years since i am disabled although payments were not paid by Canada Pension Disibility?
    Please enlighten me…. Thanks

    • Monique
      I am shocked that your LTD payer didn’t require you to apply for a CPP disability benefit, both because they could likely have reduced their benefits to you (at least most LTD insurers offset for CPP) and because it would have been better for you when you reach age 65.

      You will still qualify for a CPP retirement pension at age 60/65, but it will be significantly lower than it might have been if you had been working or receiving CPP disability.

      Those years since 1998 are “forgiven”, only if you’re receiving CPP disability, and not if you’re disabled but only on LTD.

      You should therefore apply IMMEDIATELY for CPP disability. They will only be able to go back a maximum of 1 year, but that’s better than nothing. And your CPP retirement pension will be more at age 65 than if you don’t apply for CPP disability.

  11. There is no more important insurance product out there than DI – frankly it is more important than even Life Insurance FOR THOSE WHO DEPEND ON THEIR INCOME! Death is emotionally and financially costly for those left behind – but disability is even more costly – because YOU still consume. Talk to someone who specialises in this area. I do have some concerns about one carrier’s attitude towards and treatment of claims – but unless your income is meaningless to you – you REALLY need this. Get a proper definition of disability – it should NEVER change to “any reasonable occupation” – be covered for both total and partial disabilities and buy a guaranteed right to increase your coverage

    • stumbled across your article on disability. i have am 63 worked for a unionized company for 40 years recently off since april with acute anxiety/depression. used up my sick care and am now onto ltd carrier. it would appear they will accept my claim but over the phone have indicated they want me to complete forms to apply for cpp disability.that kind of surprised me. is that some thing the ltd carriers make people over 60 do before the carrier sees if they are on for the full amount. i get the feeling it could take awhile for the paperwork and decision from cpp and that no one would then pay me while i wait. Penny

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