Disability Insurance - A Brief Overview

Disability Insurance is primarily intended for the self-employed and independent contract workers who can not afford to miss extended periods of work and are not covered by an employer’s insurance policy.

Whether you are a sole owner or have a partner, the financial risks to your business and family are very significant if you suffer a serious accident, injury or illness that prevents you from working for an extended period of time. Not only does your current income stop, future income also stops and, in most cases, many of the business and personal expenses continue. There are leases, loans, salaries and other commitments to be met and no income.

If you have Workers Compensation, it will pay a percent of your income but only 8% of disabilities are covered by workers compensation as the accident occurs off the job or it is an illness. These payments will likely be less than what you will need. One of the leading causes of divorce is the financial stress that accompanies a long-term illnesses.

Considerations - Picking the right INsurance Policy for Your Needs

Disability insurance is designed to protect your income. Be careful picking a plan in your first year in the field as when you are starting out, there is no income to protect. Consequently, you will only qualify for a minimal amount – likely $1,000 per month or less. Be careful as there are policies available for whatever amount you want up to $3,000 or more per month but they do an income test at time of claim and look at what your actual income was and they only pay out about 66% of this income regardless of the amount you were paying.

Consider purchasing a personal disability policy at least one year before you are planning to go out on your own based on your income at that time. The need for a year is that most applications ask a question concerning your intention to leave the current employment within a year – provide a yes answer and you do not get the insurance. Ensure it is the type of policy where coverage continues if you change jobs in the future and the monthly benefit coverage is underwritten when you purchase the policy. This means they will pay what you have purchased and the insurer will not do an income check at time of claim. Be sure to inform your insurance broker about your long-term employment plans.

Consider whether you want to wait 30, 60, or 90 days before payments start. The premiums for a policy that pays after 30 days are about twice the cost of a policy that waits 90 days. A broker with expertise in disability insurance can help you think through this important decision.

Disability insurance is a specialty and you need to talk to someone with expertise. The best disability insurance broker may not be the same person who sold you life insurance. Ask about how you will be paid if you can only do part of your job or how the claim will be processed as you return from your disability. There are residual or partial disability payments when you return to work that are unique. Further, do you want to wait 30, 60, or 90 days before payments start? The premiums are about twice the cost for 30 days compared to 90 days. This is another excellent reason to have at least 90 days worth of expenses available for an emergency in cash or short term investments.

Some disability insurance policies will cover business expenses like leases and loan payments. This rider can be added regardless of your income level. Some also allow you to add a rider that will continue to make contributions to your RRSP if you are disabled which can be critical to your retirement and long-term financial picture.

Money Saving Tip 1:

If there are two or more employees that you want to cover with disability insurance, it can be very tax advantageous to have a Corporate Income Loss Program where the corporation pays the premiums and it is tax deductible.

Money Saving Tip 2:

Some policies will return all the premiums less any claims. The cost of adding this option can be considered an excellent investment.