The following is a guest post from Brian So from Brian So Insurance
Life insurance is usually the first type of insurance that comes to mind when people think about protecting their families from unexpected events. While the financial implications of a death to the breadwinner of the family cannot be overstated enough, another risk that is often overlooked is the risk of a disability.
Did you know that 1 in 3 people will be disabled for 90 days or longer at least once before the age of 65 (1)? Considering the elevated odds of a disability occurring compared to death during the working years, you can make a case that disability insurance may be even more important than life insurance.
Also, the average length of a disability that lasts longer than 90 days is 2.9 years (1). How will you pay your bills and make ends meet for 2.9 years without an income? Clearly, there is a need for disability insurance for exactly this type of situation.
You may believe that the group or association disability coverage or government programs may sufficiently protect your income, but each of them have their drawbacks compared to an individually owned disability insurance policy. Let’s take a moment to consider these disadvantages.
The three main programs that insure against the risk of a disability are Employment Insurance (EI), Canada Pension Plan (CPP) and Workers’ Compensation Board (WCB).
Benefits for EI are for short-term absences from work only, with a maximum weekly payout of $524 in 2015. Benefits are payable for a maximum of 15 weeks, so EI does not provide any reassurances to protect against longer term disabilities.
While the EI benefit is for short-term ailments only, the CPP disability benefit can cover longer term disabilities, up to the age of 65. Qualification is based on a strict definition of severe and prolonged, resulting in many claims being denied. Another limitation is that the maximum monthly benefit is $1,265 in 2015, which does not adequately compensate high income earners.
Workers’ Compensation covers workplace accidents and illnesses. While benefits vary across the provinces and territories, they are generally able to replace the majority of your income, up to a maximum amount. The issue with Workers’ Compensation is that you can only rely on it for workplace-related incidences, and accidents make up less than 10% of all disabilities (2), so you’d be left without coverage for the majority of disabilities.
Group/Association Disability Plans
Whether or not group or association coverage provides sufficient income replacement depends on the design of the plan. Coverage that have a long benefit period, large maximum benefit, replaces a larger proportion of your income and has a more liberal definition of disability may obviate the need for an individual policy. But many employers opt for lower plan costs by reducing benefits, so it’s important to open up your benefits booklet to check if you have sufficient coverage.
Another factor to consider is your likelihood of staying with the employer. If you were to leave your current job, will your new employer be able to match the benefits of your old plan?
Individual disability insurance policy
The most flexible and customizable option is to purchase your own disability insurance policy. You can adjust the coverage so that it bridges the gaps among the government and group/association plans. The policy is owned by you, so you can take it with you no matter where you work.
The downside of the individual policy is cost. Whereas the other programs are subsidized by the government, employer, or association, or already included as a part of mandatory premiums (EI and CPP), an individual policy is paid for entirely out of your own pocket.
Premium for an individual disability insurance policy depends on several factors, including occupation class, benefit period, benefit amount and optional riders chosen. Finding the right balance between cost and features is pertinent in purchasing disability insurance.
As you can see, government, group and association programs provide partial protection against a disability. Without supplementing these programs with an individual disability insurance policy, the financial impact of a long-term disability can be devastating.
Author Bio: Brian So, CFP, CHS, is an insurance broker and blogger at briansoinsurance.com. Follow him on Twitter for his musings on life insurance and why the Vancouver Canucks will win the Stanley Cup next season (Seriously).
1. Disability probability based on the 1985 Commissioner’s Individual Disability Table A gender distinct incidence tables for Occupation class 2A, 90 day waiting period.
2. Chances of Disability