How Does Disability Insurance Work?
First, it’s important to recognize that not all disability contracts are the same. This can make shopping for disability insurance extremely difficult as these policies can be heavily customized to suit your needs. This is why it’s very important to work with a broker who specializes in disability insurance to help you navigate the market.
It can be hard to know if the broker we are working with are experts in this field, and it helps to have some background knowledge yourself going in. This is one of the main reasons why I agreed to write these articles, to help create awareness and make sure that Canadians are properly informed on what their choices are.
Through out this guide, you will learn everything you need to know about disability insurance contracts. Here is just a small list of variations that we will discuss throughout this guide.
Non-Cancellable vs Guaranteed Renewable
Own Occupation, Regular Occupation, Reasonable Occupation & Any Occupation
Elimination Period & Waiting Period
Total Disability, Partial Disability & Residual Disability
Exclusions & Limitations
Return of Premium
What’s important to understand is that disability insurance is a contract between you and the insurance company. The better the contract, the better the coverage. This means you need to be careful when selecting your coverage, because saving a few dollars could put you at significant risk of not being covered the way you may hope.
The contract is a promise to pay, as long as if you meet the requirements within the policy. The requirements of the policy are determined by the type of coverage and “riders” one elected to take (a rider is an additional detail or condition added to a standard contract).
The most important part of a disability policy is the definition of disability, which will dictate what would need to happen for you to be eligible to claim. There are many variations of wording for this definition, so please read carefully. With disability insurance, there isn’t a list of injuries or illnesses, rather the definition will allude to any injury or illness that prevents you from working. Some contracts will pay out if you can’t work in your own occupation where other contracts will only payout if you can not work in any occupation. That is a big difference in the policy wording, as many potential disabilities may leave you unable to do your own job – however, you would be fully capable of working in a different – potentially lower-paying or less satisfying – occupation.
All disability policies will pay out a monthly benefit if you meet the definition of disability and after you satisfy a certain waiting period (otherwise known as the elimination period). The policy will pay out until you no longer meet the definition of disability, or until you reach the end of the benefit period (most commonly age 65). A good disability policy would protect your lifetime earning potential and will provide you with a paycheque as long as if you cannot work. In fact, the best plans don’t require you to be off work completely, and would pay out a portion of the monthly benefit if an injury/illness caused a reduction to your hours, duties or income.
The monthly benefit is based on the amount you agreed to purchase at time of application. The insurance company will not allow you to buy more coverage than your income allows. This means there is a maximum amount of coverage you would be able to qualify for at time of application. This prevents someone from receiving more income during a time of claim compared to what they will make if they return to work. A well-structured policy will allow you the option to increase coverage in the future, as your income increases, without any medical underwriting. This is very important if you feel your income will increase significantly over time or if you are purchasing a much lower amount of coverage than your income allows.
When it comes to disability insurance, the coverage itself isn’t affected if you needed to claim. It’s not like auto insurance, where you may experience a rate increase or cancellation of coverage due to claims history. With disability insurance contracts, you can claim knowing that it will not cause any adverse effects to your contract. In fact, if you recovered from a disability and it reoccurred, you could potentially go right back on claim with out needing to satisfy the waiting period again.
A Few Important Tips:
Health Buys Insurance
Too often, we don’t think about how a disability could impact our finances until we experience a change in health. You should know that it is extremely difficult to purchase income protection for pre-existing medical conditions. This means that the best time to purchase coverage is when you are healthy. If you wait until after a health concern, it would likely be too late to get the coverage you needed.
And unlike life insurance, you are your own dependent and beneficiary, so there is no point in waiting for a certain life stage to get coverage – it’s important to not procrastinate and look into disability insurance early in your life.
Importance of Full Disclosure
It is extremely important that you provide full disclosure at time of application. If a broker tells you that it’s ok lie on the application, it’s time to find a new broker. One of the most common examples of this would be around the smoking question on the application. By answering this question incorrectly, you are jeopardizing your coverage. Deliberately stating that you do not smoke (when you do) on an application can be viewed as fraud as you are lying on an application to obtain a better rate. Do you really want to put yourself in a position where a claim may not pay out since you decided not to be truthful at time of application?
What happens if you feel that the application didn’t ask about a pre-existing medical condition? My advice would be to still disclose it to the broker to ensure that you did not misunderstand any of the questions.
Policy Illustration vs Policy Contract
When you are looking to purchase coverage, your broker should provide you with an illustration of the coverage you are hoping to obtain. However, the illustration itself shouldn’t be what you rely on to remember the coverage you have. This is because disability contracts are often offered on a modified basis, when the insurer feels that the client is an additional risk. This means that they may increase the cost of coverage or add exclusions on to the policy to reduce their risk. Other times, a company may come back and offer you a different product if you didn’t qualify for the one you initially applied for.
In our upcoming articles, we will go through the different features that disability insurance contracts can have. But the most important point to remember is that an unfortunate accident, medical condition, or mental health deterioration can leave anyone disabled and unable to work full-time at their current job. And your income is the goose that lays the golden eggs, so it is important to protect through insurance. The best time to purchase disability insurance is when you are healthy, so don’t procrastinate.