If you become seriously ill or suffer an injury, you may not be able to earn an income while you are recovering. Disability insurance provides a monthly cash payment to you if you are unable to work because of illness or injury.
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Why is disability coverage important?
Since you likely rely on your income to maintain your lifestyle, a temporary or permanent loss of income could be financially devastating. Disability insurance is designed to replace a portion of your lost income. You can only buy disability insurance if you have employment or self-employment income. And because disabilities can last for months or even years, having guaranteed income while you’re off work can be critical.
You may already have disability insurance through your group benefits plan at work. But group disability plans can be more restrictive in terms of the percentage of income they replace and the definition of disability.
If you get coverage through work, check it carefully. You may want to supplement it with an individual disability policy that tops up your workplace coverage or provides the coverage you need if the definition of disability is too limited.
Another benefit of disability insurance is that you’ll be covered even if you switch jobs. If you move to an employer that doesn’t offer disability coverage, having an individual policy ensures that you always have this important protection in place.
Your chances of having a disability may be higher than you might think. According to Statistics Canada, about 6.2 million people, or 22% of Canadians aged 15 and older, reported being limited in their daily activities because of a disability in 2017. And 43% of those reporting a disability described their disability as being severe or very severe.
When is the best time to get disability insurance?
If you’re considering disability insurance, it’s ideal to apply for coverage while you are still healthy. If your health deteriorates or you’re disabled in an accident, an application for disability coverage will often be denied or you may only qualify for more limited coverage. And it will likely cost more.
The odds of a disability occurring are higher than the odds of suffering a premature death. For this reason, disability insurance can be more expensive than life insurance — and more difficult to qualify for if you’ve had any health issues. You can minimize your cost — and increase your chances for acceptance — by applying at a younger age.
How does the definition of disability impact your coverage?
There are different types of disability coverage. How disability is defined is the most important feature of a disability insurance policy. That’s because it describes the circumstances in which you’re entitled to receive disability payments.
There are three common definitions of disability:
1. Any occupation coverage
You’re considered disabled if you’re unable to work at any job for which you’re qualified by reason of education, training, or experience. This is the most restrictive definition of disability because you do not receive payments if you’re able to do another (potentially lesser) job that you’re qualified for, even if you can’t do your own.
2. Regular occupation coverage
You’re considered disabled if an illness or injury prevents you from performing the duties of your regular job and you are not working elsewhere. This is a less restrictive definition of disability because it links disability to your job.
3. Own occupation coverage
This coverage provides payments when you are disabled in your regular job, whether or not you are working elsewhere. This is the most favourable definition of disability to have in a policy.
How disability is defined in the policy will affect the payments you’re entitled to. Some policies will only make payments if you’re unable to perform all functions of your job, but not if you’re able to do another (potentially lesser) job.
What other features could a disability insurance policy include?
Your insurance policy will have features that determine when your coverage begins and for how long. When reviewing your policy, look for:
1. Waiting period
Your policy’s waiting period — the time before benefits start being paid — can vary from 30 days to a year or more. The longer your waiting period, the lower your premiums. If you think you can survive financially on other sources for a few months, you can save money on your premium by choosing a longer waiting period.
2. Payment period
Some policies pay benefits for two or five years. Others continue to pay until age 65. The most common benefit period is until age 65 because it allows payments to be made for your entire working career. Consider shorter periods only if premium costs for longer coverage are unaffordable.
3. Option to increase coverage
Ideally, your plan will offer a “future insurability option”. This is a valuable benefit because it allows you to increase coverage at regular intervals as your income rises — without the need for proof of good health.
You can reduce the cost of disability insurance by choosing:
- A lower coverage amount.
- A longer waiting period.
- A shorter benefit period.
Disability insurance can replace some of your lost income if you miss work due to illness or injury. Keep in mind:
- Workplace disability coverage may not provide the protection you need. Check your workplace coverage and consider supplementing it with individual disability insurance.
- The insurance policy’s definition of disability will determine the type of coverage you are entitled to.
- The coverage amount, waiting period, and benefit period will affect your coverage options and how much you pay for the disability insurance.