What is disability insurance?
Disability insurance is coverage that provides payments, usually on a monthly basis, to replace a portion of your employment income (generally between 60% and 85%, subject to a monthly maximum) if you become disabled as a result of an injury or illness that prevents you from working. This is in contrast to critical illness insurance, which most often provides a lump-sum payment if you develop an eligible condition.
Do you need disability insurance?
Middle-aged people are, statistically, much more likely to become disabled than they are to die prematurely, so most people with any kind of financial commitments do need disability coverage. Many employees have disability coverage through their employers as part of a group benefits plan. But individuals can purchase individual disability insurance, choosing a policy that suits them.
Applying for individual coverage is similar to applying for life insurance: you will most likely have to answer a questionnaire featuring medical, financial and lifestyle questions and you may have to undergo a medical exam and some tests.
How much coverage do you need?
To understand how much disability coverage you need, you must take into account your normal ongoing lifestyle expenses and family responsibilities, as well as any other income you might have, such as investment income and savings earmarked for healthcare. If you have group coverage, make sure you are aware of what your benefits will be so that you know whether or not you should purchase additional coverage. If your income is in the higher range, your group coverage alone is unlikely to cover your lifestyle expenses.
Group benefit disability coverage
Group benefits may include both short-term and long-term disability insurance. Short-term policies generally provide you with benefits for up to about six months. Long-term policies offer coverage that kicks in after any short-term coverage, including Employment Insurance sickness benefits and sick leave, runs out. Policies vary, but often long-term plans pay benefits for up to two years if you are unable to do your regular job (termed your “own occupation”) but will continue beyond that only if you are unable to do any job at all (“any occupation”). If you can work, you will not receive benefits. Some plans will pay benefits up to a certain age as long as you remain disabled.
Individual disability policies
You can purchase individual disability insurance as a standalone plan or to supplement the disability coverage you have through a group benefits plan. Individual policies are comprehensive, portable plans that allow you to enhance the definition of disability (to cover your own occupation), benefit periods, waiting periods and monthly payments.
Disability insurance usually has a waiting period before benefits begin, ranging from one to four months. The shorter the waiting period, the higher your premiums will be.
Individual policies may offer a return of premiums rider, with which you get back all or a portion of the premiums you have paid if you did not make a claim or made only small claims. Other available features may include partial benefits for partial disability, return-to-work assistance, accidental death and dismemberment coverage and emergency care coverage.
You can select non-cancellable coverage, which remains in force at the same cost as long as you continue to pay the premiums, or guaranteed renewable coverage, which renews annually but premiums for your coverage category may go up over time.
Taxation
If you have individual disability insurance, the premiums you pay are not tax deductible, but benefits received are not considered taxable income. If you choose to have your premiums returned, the returned funds are also not taxable. If your employer provides disability insurance, any benefits you receive will be taxable as income.
Work with your insurance professional to determine how much coverage you need and to find the policy that’s best for you in terms of fit with your family and financial situation and in terms of meshing with other coverage you may have, such as through workers’ compensation or group benefits. Read all policy documents carefully – definitions, requirements and the types of coverage vary among insurance companies and policies.
