Disability Insurance — Guest Post
Posted by John Draper | Filed under Guest Post, Insurance
This Guest Post comes from Brian Poncelet, an independent certified financial planner who has been working with clients since 1994. Check out his website at www.rightinsurance.ca. Heeeeere’s Brian:
From The Wealthy Barber:
“Disability insurance is the most neglected of all forms of insurance, yet for many people, it’s the most critical insurance need…. A thirty year old has a one in four chance of becoming disabled for one year or more at some point in his or her life…When people are disabled, they don’t just cease to be an asset to their families…they become a liability.”
When I review benefit handbooks, many of my clients are surprised to learn the details of the actual coverage that they carry. Most disability benefits only cover 60% of the employee’s salary and exclude bonuses. Many plans will only cover the first five years of disability and most plans are not indexed to inflation. Many clients are unaware that their disability benefits are not portable and a move to a new company results in a different benefit plan.
As the working population ages and companies are more cognizant of expenses, there is a growing trend for employers to offer “flex dollars” benefits. With this plan the employee is given an allotted sum of dollars from which he must choose from a shopping list of benefits (health, dental, life, short term disability, long term disability, critical illness insurance). While the employee can top up each element of coverage, in general, as the employee gets older, the same dollar allotment buys fewer benefit
The Disability Contract
When you pay for the premium out of pocket there is no tax-deduction, but you receive the benefits tax free. This compares to a company paid policy where you are taxed on the benefits.
A personally owned non-cancellable disability insurance policy is a contract between the individual and the insurance company. As long as the premiums are paid, the policy cannot be cancelled or altered in any way without the individual’s consent.
There are three common clauses used to determine the criteria and length of time for which an insurance company is obliged to pay a claim if you become disabled. This determines whether you can be forced to work, even in some other field at a reduced level of income. These clauses are known as:
- “Any occupation” requires that you must be unable to work in any occupation, regardless of the change in duties or income.
- “Regular Occupation” clause states you must be unable to perform the important duties of your own occupation and not working in any other gainful occupation.
- “Own Occupation” is the most complete yet most expensive clause as it permits you to receive full benefits if you are totally disabled not working in your field but choose to work in another field.
Ask yourself “How likely is it that I could be totally disabled out of my specialty and still be able to work in another?”
Additional contract terms to know
Elimination Period (waiting period) – This is the length of time that must elapse after the onset of the accident or sickness before the insured becomes eligible to receive disability benefits. The typical elimination period for private coverage is 90 days.
Non-Cancelable Contract – Under the provisions of this contract, as long as the premiums are paid, the insurance carrier cannot:
- Cancel the policy
- Change any provisions or add restrictions
- Increase the premiums or add any changes to the existing policies
Features of Disability Insurance
Waiver of Premium: It is important to continue premium payments even after you become disabled especially since you may not receive benefits for 90 days. Many insurers take over paying future premiums while the insured is receiving a disability benefit and some will refund the premiums that were paid during the elimination period.
Future Increase Option: This benefit allows one to increase the benefit by a certain amount at specified intervals without providing evidence of health. You only need to prove earnings. This may be of interest to those who want a robust policy now but to keep premiums low, they take the lowest coverage and enhance the coverage at later time. A chartered accountant, who buys disability insurance and later becomes a roofer, would be an extreme example.
Cost-of-Living Benefit: This benefit ensures that while on claim, the purchasing power of your benefit dollar is increased at specific periods (every 6 or 12 months). There are two formulas which can generally be utilized when applying for coverage:
- CPI index (with or without minimums and maximums)
- Simple interest
Portability: As a general rule, you want the plan to remain as unrestrictive as possible so that future changes in your status or location can be accommodated. An example would be an oil engineer who moves to Saudi Arabia but owns disability insurance purchased 10 years before. Only private plans offer this feature without restriction.
Like all insurance, disability insurance is not well understood by most people. The old adage is true “you get what you pay for”, so do your research.
Level of Benefit
Residual Benefit: A residual benefit is payable if the person is able to work on a limited or reduced basis. For example, an individual with back pain may only be able to tolerate sitting at a desk for 2 hours per day. The level of payout is based on the proportion of lost income relative to the time lost. This provision is essential since most individuals make claims for partial rather than full disability.
Partial Benefit: A partial benefit is also payable if you are working at a reduce level. However, the payout is based on the amount of lost time and duties and there is no requirement to show a loss of income. This is an attractive clause for those who are newly employed and show limited prior earnings (e.g. a new graduate doctor).
Paying for the policy
Why should I pay for a policy when I can just contribute to my RRSPs or savings and hope that I will have enough money should I become disabled? Consider this: If you are forced to withdraw from your RRSPs you will have to pay taxes. A withdrawal of $5,000 could be as little as $2,600 in the end depending on your tax bracket. Additionally, if you are forced to withdraw during a bear market, such as we are currently experiencing, you will be forced to withdraw more units from your mutual funds and potentially at a loss.
If you own an individual disability insurance policy paid from your cash, any claims payment come to you tax free once you have satisfied the waiting period or other contract requirements. This will apply even if you are currently unemployed.
In summary, disability insurance is only one element in the “Risk Management Strategy”. Is it worth spending less than 3% of your gross income to protect your greatest asset, the ability to earn a steady income? Other coverage’s to consider include Life insurance, Critical Illness insurance and Long Term Care insurance.
December 31, 2008 at 10:28 am
What about those that don’t qualify? Dh is a type 1 diabetic and has been since he was 17 – he is 35 now. Eventhough his doctor says he is very well controlled he had a hard time getting life insurance and was flat out denied disability insurance. His work plan has also put a cap on his short term/longterm disability benefit and his life insurance – much less than what we would need.
I am not employed – but have dependents – do I need it?
December 31, 2008 at 11:36 am
Sally, unfortunately, if you have any pre-existing conditions, you will be denied disability insurance, which is why it is so important that people take out a plan while they are still young and healthy — just when they are least likely to pay attention. As for your eligibility, you have to have an income that you are insuring to get disability insurance, so you would not qualify. I’m sorry the answers are all “no” today. You could get life insurance and critical illness insurance, and may want to speak with a specialist about those. gail
December 31, 2008 at 2:06 pm
What a mouthful. As an unemployed student, about to graduate, with no understanding of insurance, that was helpful; I’m going to file this post away for future reading. Thank you.
December 31, 2008 at 3:55 pm
Thanks – do you think there is any chance of critical illness at this point? Won’t he be denied based on his “pre-exsisting” condition? We both have life insurance. Thanks for the help.
I agree that people need to think about insurance when they are healthy!
December 31, 2008 at 4:33 pm
The only insurance we don’t have is Critical Care insurance. My husband and I both have disability insurance through our work; Universal Life Insurance; 10 Year Term Life Insurance (for the time we intend to live in our house before we sell it) + Life Insurance through our work (a year’s salary for both of us).
We’re on a budget – paying off our mortgage; doing home renovations mostly ourselves & paying for 2 kids’ universities – sooooo…….. do you think we can get away WITHOUT getting Critical Care Insurance? They just invented that one – and we’d rather not spend any more money in this direction. Any thoughts?
And….HAPPY NEW YEAR!
December 31, 2008 at 5:38 pm
I am 58 and recently applied for critical illness insurance and was turned down as I have Type II diabetes. I have through my work, disability insurance, and am so thankful that I got that when I started my work life 40 years ago. My ex-husband worked in a manufacturing plant and had an accident at work at least 25 years ago and has been covered by disability insurance ever since. Buying insurance you can afford when you are young is SO IMPORTANT and keeping it as a priority is important throughout your life.
January 1, 2009 at 1:25 am
Thanks for all the time and effort and information you put on this site and your books and tv show Gail. I wish you and your family all the best in 2009!
January 2, 2009 at 10:58 am
The problem with insurance companies? They don’t want to pay anything out unless they absolutely have to. They will look for any reason not to pay your claim. I got a disability policy when I was 22 at 24 I was diagnosed with depression I took my meds and I’ve never been off work for more than a couple of weeks.
I never touched my policy until I got into an accident ( Im self employed and I injured m back ) I contacted my insurance company submitted my claim. I didn’t think my depression would have any effect on my claim. The insurance company said that because I didn’t tell them about my depression that my policy was now void ( who knew how they even found out but if they had asked me I wouldn’t have lied )
Moral of the story? Unless you have a good solid case insurance companies in this instance are a complete sham. Insurance isn’t there to protect you its a way for the companies to make money and then deny your claim any way they can. What a let down is all I can say.
On a sidebar…. the same goes with the banks policy when you get a mortgage…or the car dealer policy when you get a car. They say that if you die your mortgage insurance will pay off the balance so your spouse won’t have to worry, however again if you have a preexisting health problem the insurance cover will deny your claim.
See this link for more info
http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/1066242956533_61652156/?hub=WFive
January 2, 2009 at 3:13 pm
Hi Sally,
Does he have Type 1 diabetes mellitus (I think dh may be a typo)?
If he has this and it under control he can get life insurance (this will be rated…much more expensive) if he can get it, it may make sense because it will only get more costly later in life!
Unfortunately the critical illness insurance and the disability insurance is not possible.
One idea, though far from perfect, is accident only (disability). This means if he had a accident (like a car accident or slip and fall) he can be covered. This will be cheaper but not much use if he gets sick.
As far as yourself, Sally if your income is important to your family then you should consider the coverage for yourself. But without details it is difficult to say what you may or may not need…plus if your money is limited, you have to make choices where to put the money.
Brian
January 2, 2009 at 3:40 pm
Hi John,
Let me tell why it is important to tell disclose everything. There was a lawyer in Alberta who was a part time rancher who spent part of his day on his horses rounding up cattle etcand also of course being a lawyer. He put down his daily activities which included riding horses. Sure enough after his policy was issued he fell from his horse. He could still do his work (lawyer stuff) but could not ride his horse, because he disclosed this activity and this was part of his daily duties he was covered..once every thing has been disclosed and the policy has been placed, it is now the insurance companies problem.
This is like a dentist who helps his brother in-law with his roofing business in the summertime, the insurance company may still cover the dentist but at a higher rate or have an exclusion. If he doe not disclose this, he is asking for trouble come claim time.
This is not to say some insurance companies do not pay when the should. But a lawyer once said “when you buy an insurance policy you bought the right to sue”.
If you have no insurance policy you have zero.
regards,
Brian
January 3, 2009 at 2:56 am
Features of Disability Insurance,As for your eligibility, you have to have an income that you are insuring to get disability insurance,
January 4, 2009 at 10:23 pm
I am self employed for the last two years and thanks to Gail I have woken up to the fact I need disability insurance. My question is this why am I being quoted two hundred dollars a month while my friend (same age and job) is paying only 40$ a month? I understand it maybe due to the type of coverage she is asking for and when she got it. Is my quote out of line? I am 42, non smoker and normal weight and no health issues.
I feel like someone could could take me for a ride and I would have no idea….help please!!!
Thanks for the information and the blog on it!
January 5, 2009 at 11:00 am
Hi Abbey,
My thinking is your friend may have accident only coverage (this means if she get sick she may not be covered) Without looking at the details it sounds too cheap for good coverage but I could be wrong. Remember if you pay less, usually you get less. The good thing is you are are in good health what you pay today will not increase in the future.
If you want, you can drop me a e-mail and I can give you my thoughts based on what you want the disability coverage to do ( the more details you give the better I can help). There is no cost for this and I will not try to sell you anything.
regards,
Brian
February 6, 2009 at 9:09 am
[...] Disability Insurance [...]
June 3, 2009 at 2:46 pm
I am applying for long term disability insurance through my professional organization. I have a history of depression and taking medication for depression. No hospitalization, no suicide attempts, nothing at all like that. Do you think there is any way I will qualify? Also, can I apply for LTD if I am self-employed? I have it now through my employer, but I recently started doing contract work in case I get laid off. I have a cancer policy and STD policy that are portable if I leave my job.
September 15, 2009 at 4:40 am
My employer does not have long term disability insurance as part of their benefit package. Because I have had hip surger, breast lumps removed, asthma, high blood pressure, etc. I generally do not qualify for individual long term disability insurance. I cannot imagine there is no insurer out there for people like myself with pre-existing conditions. what about people with MS? Are they completely out of luck? Is there some insurer out there that offers long term disability insurance for people like me?
September 15, 2009 at 4:41 am
That last post should have my name as “Janice Chadola”
September 15, 2009 at 2:17 pm
Hi Janice,
I have MS and cannot get any type of insurance. It is crazy. You’d think I could be insured for other conditions with MS as an exemption – but no such luck! The insurance I do have was acquired prior to my diagnosis. If you change jobs in future – you might want to enquire as to the group policy benefits prior to accepting an offer, however watch out for exclusions for pre-existing conditions.
Take care.
October 22, 2009 at 11:51 am
Suppose, for instance, that you’re A neuroscientist who’s been successful in discovering exactly what goes on where in the brain when a certain kind of painful sensation is felt. ,
October 22, 2009 at 9:58 pm
Hi Janice,
One idea if (if your company will pay for it) is to get group critical illness insurance. The amount generally is small about $25,000 to $50,000, but since there is no medical and everyone has to get it, you could be covered with no questions asked. This would not cover your MS but you could get covered for other things like cancer, stroke, etc. This is not perfect, but maybe not a bad solution.
Dianna, you can maybe able to get life insurance, yes you may be rated (higher costs). The key questions is is it progressive (getting worse) or Relapsing-Remitting. Feel free to drop me a line, I may or may not be able to help.
The Nortel people on disability unfortunately are in a bad spot. Generally get insurance while you are healthy. If you have a group plan get a plan with a two year waiting period this works out to be relatively cheaper as well. Ususally the insurance companies (group plans) get tougher to collect after that.
Ps. Gail, I still owe you some thoughts on permanent life insurance for you to review!
Cheers,
Brian
October 23, 2009 at 9:19 am
For a long moment we all just look at each other. ,
February 22, 2010 at 3:00 am
This is really something I can understand. Thanks for the article I have subscribed to your rss.
April 7, 2010 at 12:56 pm
There is Just that the RSS is not responding properly with my google chrome browser
September 2, 2010 at 12:40 pm
I think one of the issues is that disability insurance is a very high risk area, something most insurance companies dont want to be involved in.