August 23, 2022

Disability Insurance – 3 Things You Need to Know

One of your most important assets is the ability to earn income. Over your lifetime, your potential earnings can be worth far more than your car or house. While most people insure these types of assets, insurance for your income is often overlooked.

Disability insurance is an insurance policy that provides you coverage (“replacement income”) if an unexpected event happens and you are unable to work. Most of us rely on our income to pay necessary bills, and disability insurance ensures that you are still able to pay those bills if you are unable to work.

Depending on the type of policy and coverage, disability insurance may provide a tax-free benefit of 40-70% of your current salary in the event you are unable to work. Each policy is unique, so it is important to understand exactly what qualifies as a disability as well as the terms of coverage. There are two types of plans, known as group plans and individual plans.

1. Group disability coverage: Employers often offer “group disability insurance.” This type of insurance is tied to the current employer and is not under your control. Generally, this type of insurance is not customizable.

2. Individual disability coverage: Sometimes, your employer does not have adequate disability insurance, so you can apply for individual coverage. This type of coverage is customizable to the individual, and you control the policy. You can retain the policy if you change employers. It is important to note that group coverage has limitations that are out of your control. Your employer can change the benefit, and details, or cancel the plan altogether. This is where individual coverage can allow you more flexibility in ensuring you are protected in the event something happens to your income. Whether you decide on a group or individual plan, it is important to read your policy in detail and understand what you are (and aren’t) covered for.

3. Common things pay close attention to include:

 

  • Definition of occupation. Ensure that your policy correctly specifies the kind of work for which you are covered. For example, an “any-occupation” policy provides coverage when the insured is unable to work in any job that they could perform based on their skills and experience. In contrast, an “own-occupation” policy provides coverage for a specific job. For example, if a surgeon injured their hands but could still work as a medical consultant, they would not be covered under a “any-occupation policy. Under a “own-occupation” policy, they would be covered until they could return to work as a surgeon.
  • Exclusions. Insurance policies can have exclusions listed in the fine print of the policy and it is important to understand exactly what is excluded from coverage.
  • Definitions of coverage and benefit. It is important to understand the situations in which you are covered for and for how much.
  • Benefit increases and top up. It is also important to ensure that your benefit is linked to inflation and is periodically topped up as your income increases. Let’s take the example of a medical student who aspires of becoming a doctor. While completing residency, the student gets disability coverage on her salary of $ 50,000. If an accident occurs, her coverage amounts to $ 2,795 per month ($ 36,000 per year), a total of 72% of her income. Years later, the individual is now a successful doctor with a salary of $ 250,000 per year. This increase in income has also increased the associated monthly due to changes in lifestyle. On the way to work, the doctor experiences a terrible car accident, and she can no longer work. Unfortunately, her disability policy was never reviewed to increase coverage, and she is still only covered based on her $ 50,000 salary years prior. She is unable to pay her bills with that amount of coverage. This is a prime example of why it is critical to update your policy as your income increases.

 

Having disability insurance is important to ensure your family’s financial well-being. Employment disability insurance may not provide enough coverage to replace your income. It is also important to distinguish between critical illness and disability insurance. It is recommended that you speak with a specialized insurance advisor to ensure that you have the proper coverage in place.

About Northfront Financial

Northfront Financial, based in Calgary, Alberta is a boutique full-service financial planning firm serving professionals and business owners. We pride ourselves on being a different kind of investment firm. This stems from our humble roots, entrepreneurial spirit, and a culture of integrity and professionalism. Our goal is to offer the best investment products, services, advice, and ideas the financial industry has to offer from our experienced team, which includes individuals with the Chartered Financial Analyst® (CFA®), Chartered Investment Manager (CIM®), and Certified Financial Planner™ (CFP™) designations.

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