A guide to individual disability insurance

Disability insurance is designed to help you and your family cope financially in the event that you become disabled and are unable to work. The purpose of this type of insurance is to protect your earning potential, therefore protecting your savings and lifestyle.  Not all disability policies are created equal and it’s important to understand the differences between group and individual disability policies.

How Does Disability Insurance Work?

Disability insurance works as an income replacement tool.  In the event you become disabled, your disability insurance will pay you an agreed upon monthly amount.  This payment lasts for either the duration of your disability or the period agreed upon in the contract at underwriting; whichever comes first.

Benefits of Individual Disability Insurance

Many employers offer short and long-term disability coverage to their employees through group benefits. This is an inexpensive option that provides you with a portion of your income if you are unable to work at your job due to a disability.  The downside to this insurance is that it can be limited and is dependent on you working for a specific employer.

Individual disability insurance is offered by most major life insurance companies in Canada.  The benefit to individual disability insurance is that you own it, and its effectiveness does not depend on being with a specific employer. This gives you the flexibility to create the type of coverage you want and take it with you wherever you go.

Features of Private Disability Insurance

  • Occupation Class

Every occupation is given a rating based on the occupation class’ claim history.  Your occupation class affects your premium as jobs considered to be high risk are more expensive to insure than jobs that are considered low risk.  For example:  an accountant would be considered to be low risk so they may have a higher occupation class than a forestry worker, who would be more likely to obtain a serious injury while working.

  • Elimination Period

Individual policies give the option to choose your elimination period, or the amount of time you must be disabled before a claim will be paid.   Typically, this is either 30 days, 60 days, 90 days, or 120 days.  The elimination period you choose affects your premium.  The shorter the elimination period, the more expensive your policy will be.  Conversely, the longer your elimination period the less your premium will be.

  • Benefit Period

The benefit period is how long you will get paid a disability benefit if you become disabled.  Typically, you can choose 2 years, 5 years, or until age 65.  The longer the benefit period, the more your premium will be.

  • Definition of Disability

The definition of disability in a policy is something that is often misunderstood.  Not every policy is made equal, and it is essential to understand what constitutes disability in your insurance contract.  There are 3 different definitions of disability:

  1. Own Occupation:   You are considered totally disabled if you cannot perform the duties of your regular occupation.  Your benefit continues even if you engage in a new occupation.
  2. Regular Occupation:  You are considered disabled if you cannot perform the important duties of your regular occupation.  The benefit stops if you engage in a new occupation.   This is the often the default for group insurance policies for 2 years, after which it defaults to the any occupation definition.
  3. Any Occupation: You are considered to be disabled if you cannot perform any occupation that you would be reasonably qualified for based on your training and education.  This is the most limiting definition.

The Bottom Line

Individual disability insurance offers comprehensive coverage that is not often found in group plans.  Working with an advisor to tailor a plan to your needs ensures that your income is protected in the event you become disabled.  Even if you are fortunate enough to have disability coverage through work, it can be a good financial move to top up your insurance privately to make sure you are fully protected regardless of whether you stay in your current group plan.

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This information is designed to educate and inform you of financial strategies and products currently available. As each individual’s circumstances differ, it is important to review the suitability of these concepts for your particular needs with a Qualified Financial Advisor.