Disability Insurance

What is Disability Insurance?

Disability Insurance is insurance coverage that is designed to provide a monthly benefit (income replacement) to an insured that is unable to work because of an injury or sickness. The benefit amount is usually a percentage of income and for a specific time period after a covered illness or injury occurs. Disability insurance must be purchased prior to the injury or illness.

How is disability defined?

The definition of disability is the essence of the disability insurance policy and can differ between companies and differ between policies.   The definition is a very important factor of the policy because it will determine the circumstances under which your benefits will be paid.   In the most part the definition of total disability fall into three categories:

Definitions of Total Disability

• Own Occupation – protects the insured own specialty and typically states that the insured is unable to perform the important duties of his or her own occupation and is under the regular care of a physician.  It is usually made available only to individuals in the top occupational classes.  It is defined as a person’s usual work at the start of the total disability.  If the insured satisfies this definition, he or she would be considered totally disabled, and after the waiting period would be eligible to receive total disability benefits.

• Regular Occupation – states that insured would be totally disabled if he or she were unable to do the substantial and material duties of his or her occupation and that the insured is not working in another reasonable occupation.  These benefits are not payable if the insured chooses to work in another occupation. 

• Any Occupation  - does not protect the insured’s occupation at all but instead insures against the individual’s ability to earn an income.  Under this definition the insured is deemed totally disabled if he or she is unable to work in any reasonable occupation based on the insured’s education, training and experience.  If the insured is able to wok based on this definition, he or she would not receive benefits.

Other types of disability

Residual Disability – means you are not totally disabled, but due directly to injury or sickness, you are unable to perform one or more of the important duties of your occupation or you are unable to perform the duties of your occupation for as much time as usually required.  With this benefit, if the client returns to work on a part-time basis and suffers a loss of income sufficient to qualify, usually 20%, he or she will still be entitled to a percentage of the total disability benefit in the policy.

Partial Disability – means you are not totally disabled, but due directly to injury or sickness you are unable to perform one or more of the important duties of your occupation or you are unable to perform the duties of your occupation for a least 50% of the time usually required.  Partial disability measures the ability of the insured to do the job, without regard to loss of income.   Partial disability benefits are based on fixed percentages of the total disability benefit.

Who needs disability insurance?

A person that needs disability insurance is someone who works to earn an income and depends on this income to pay for his or her living and lifestyle expenses. This is the situation for the majority of people. Many times these people don’t realize the risk until disability interrupts their stream of income and their savings are drained. By then, or coarse, it’s too late.

It is an appropriate product for single “no dependent” clients. However, for those who have a family, protecting themselves during a disability also protects their dependants.
Some exceptions may be individuals with a high level of investment income, students, or individuals whose spouse continues to provide enough income to cover living expenses.

What is the structure of a Disability Insurance Policy?

• Benefit Payment – benefits are almost always payable on a monthly basis, while the disability continues.  Upon recovery from a disability, the policy continues.  Benefits could potentially be payable again for a subsequent disabilities or for the recurrence of a prior claim.
• Waiting Period (elimination period) – is the length of time after the start of a disability before the benefits become payable.  The waiting period can range from 30 days up to 730 days (two years).  The traditional disability insurance waiting periods are 30, 60, 90, 120, 180, 365 and 730 days.   The longer the waiting period the lower the premium for the policy.
• Benefit Period- Is the period for which the benefits are payable during disability.  The maximum benefit period is selected at the time the policy is applied for.  The traditional benefit periods offered are:
  • 24 months
  • 60 months
  • To age 65

  The To age 65 benefit period is the minimum benefit period that truly covers the catastrophic long-term disability risk.

What is your greatest asset?

Most people, if asked what their greatest asst is, would probably name their home, car or investment portfolio.  While these are unquestionable important assets, a closer examination will show that they are actually minor assets compared to a person’s greatest asset… their ability to work and earn an income.

(Click here to see chart)

What are the risks of disability?

Out of 1,000 people, the number who will be disabled

for at least 90 days prior to age 65 are:

Source – 1985 DTS Table, Society of Actuaries

What is the Duration of Disability?

Average duration of disability that lasts at least 90 days:

Source – 1985 DTS Table, Society of Actuaries

What are the chances of Death vs. Disability?

Incidence of Disability as Compared to Death at Various Ages

Source – 1985 DTS Table, Society of Actuaries, CIA 86-92 Table

Disability Contracts

Every disability contract has rules describing how the insured can continue the policy as long as the premiums are paid on time.  When a disability insurance policy is purchased on an individual basis, there are basically three types or renewability provisions available: non-cancellable, guaranteed renewable and conditionally renewable.

Non-Cancellable – is the most beneficial for the insured.  Under this provision, as long as the insured pays premium as they come due, the insurance company:

1. Cannot cancel the policy, regardless of changes in the insured’s occupation or health.  In essence, the insured owns the contract and has the unilateral right to cancel it.
2. Cannot change any provision or add any restriction to the policy.  If the company changes the provisions for its policy in the future, it cannot go back to existing policies and make any changes to policies in force without the agreement of the policy owner.
3. Cannot increase the premium or add any additional charge for the policy, without the agreement of the policy owner.

The non-cancellable will have a time limit and in most common cases is to age 65. 

Guaranteed Renewable – has the same first two provisions of a non-cancellable policy which is the company cannot cancel the policy and it cannot change any provisions or add and restrictions, but reserves the right to change the premium for the policy.

The company cannot normally single out an individual policyholder and raise only his/her premium.  The company can only change the premium for all insured of a specific class who own the specific contract that is being changed.

Conditionally Renewable - gives the insurance company the most flexibility in making changes to the policies in force.  The policy usually does not provide for any premium or policy provision guarantees and, in fact, does not guarantee the actual continuation of the policy.  Any changes or cancellation that the insurance company initiates would have to be done by class I most cases.   However, sometimes there are specific criteria outlined in the contract that would allow the cancellation or adjustment of a single individual.

Optional Riders

(definitions provided by Canada Life Product Manual and can differ between company to company)

Accidental Death Benefit Rider – Provides a lump sum benefit to the beneficiary in the event of the insured’s death by accidental means. The accident must occur prior to the policy anniversary nearest the insured’s age 65. Death must take place within 365 days following the accident.

Cost of Living Rider – Increases the monthly disability benefit in accordance with annual changes in the Consumer Price Index (CPI). Cost of Living increases are designed to protect the “purchasing power” of your disability benefit from decreasing due to inflation.

First Day Hospital Rider – Provides a dollar amount for each day you are hospitalized due to injury or sickness during the elimination period.

Future Needs Rider – To protect future insurability, the Future Needs Rider (FRN) guarantees the right to purchase future increases regardless of health or occupation (subject only to financial underwriting).

Health Care Profession Rider – Provides Disability Income Protection in the event that the insured is restricted in the performance of his/her job should he/she test positive for HIV, Hepatitis B or Hepatitis C.

Own Occupation Rider – Amends the Total Disability definition to “unable to perform the important duties of your regular occupation.” (“Not working in any other occupation” clause is removed.)

Partial Disability Extension Rider – The Partial Disability Extension Rider extends the partial disability benefit to the end of the chosen benefit period. (Some restrictions apply)

Return of Premium Rider – Refunds a percentage of premiums if claims have been minimal or non-existent. The Return of Premium Rider creates a unique” Win-Win” situation. Healthy or disabled: the policyholder will receive a benefit.

Some policies may have more riders available. Ask your insurance advisor which ones are suited for you.

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