We buy insurance to protect a lot of things: life, liability, health, vehicle, and home are only a few. But, what will you do if you get sick, or can’t work for an extended period?
Disability insurance will replace your lost income from injury or an illness that lasts longer than 90-days, so it should be part of every one’s financial plan.
Although most people don’t think bad things will happen to them, they do. So a good rule of thumb is to plan for the worst and hope for the best. This way you will be prepared and won’t suffer financial ruin in the event something does happen.
The following 6 tips when buying disability insurance will make sure you cover all aspects.
1. Learn and Understand Disability Insurance Terminology
Disability insurance is different than other insurances such as life insurance; because what qualifies as a claim is more complicated. Basically, there are three different definitions used in disability contracts that directly impacts your ability to collect your benefits.
Any Occupation: This means that you’re not able to work at any type of occupation. So if you’re an electrician and you can’t work doing that anymore because of your disability but you can still work as a construction worker; you won’t qualify.
Regular Occupation: This kind of total disability means that you can’t work at your current occupation because of injury or illness.
Own Occupation: This kind of disability is the gold standard and has the highest premium, but is worth it; because total disability is defined as not being able to work at your “own occupation” and it doesn’t matter if you can work at any other job.
2. Know the Benefit Limits on the Monthly Income You Will be Covered for
Every benefit is topped out a specific amount, and your benefit amount is a percentage of your earnings before your disability. As well, the benefits covered for long term disability (LTD) have the following components:
- They’re payable after the qualifying period (a waiting or elimination period) is over. During the time in between you usually get benefits under short term disability (STD), employment insurance, or a salary continuance plan.
- Disability is directly associated with your ability to perform your own job, or any other job.
- Depending on the type of insurance, benefits will end in two years, five years, or when you turn 65.
The short-term disability qualifying period is usually seven days for illness and the first day following hospitalization or after an accident.
For the purposes of disability insurance, your monthly benefits are tied to how much you made before your disability. As well, the benefits have a different tax status – gross (pre-tax amount) or net (after tax amount).
Taxability: The taxability depends on who pays the premium. If your employer pays the benefit it is taxable, but if you pay the premium the tax is free.
Gross Earnings: Regular earnings – and depending on your type of benefit plan, includes overtime, bonuses, and commissions. If they are included in your benefit, your insurance carrier usually takes an average of your earnings over two-years to decide your benefit amount.
Maximum Benefit Amount: There are two types of maximums – non-evidence and overall. Non-evidence is the amount of benefits an insurance company will pay without having medical information about good health when you enrolled. The overall maximum is the amount of money the insurance carrier is willing to insure you for.
3. Choose a Waiting Period That Works With What you Need
Depending on the type of insurance you buy, your waiting period is different. The most common is a 90-day waiting period. So you won’t receive benefits until after you are disabled for 90 days. There are also longer periods than 90 days as well as shorter. But, the shorter the waiting period, is the more expensive the policy is.
4. Know the Difference Between Partial Disability and Residual Disability
Partial Disability Benefits: Are paid to the person who is insured, and according to their policy, is considered partially disable. For example if you’re injury is only to one part of your body. You are eligible for a flat percentage – usually up to a maximum of 50%.
Residual Disability Insurance Benefits: Is less common, and covers you if you experience a minimum of a 20 per cent loss of earnings. The monthly amount is based on a percentage of your lost income.
5. Know the Difference Between Injury-Only and Injury and Illness Disability
Injury only disability insurance only covers disability from injuries, and the premiums are usually on the less expensive side. On the other hand, Injury and Illness disability is a more comprehensive policy and usually costs more – because it covers an injury and a disability related to an illness. The best policy for your situation depends a lot on your occupation.
6. Consider Adding a Cost-of-Living Adjustment Rider to Your Disability
As a rule, disability insurance does not take into consideration the cost of living. A Cost of Living Adjustment (COLA) rider helps to ensure that your benefits keep up with inflation while you’re disabled. The amount of the adjustment depends on which rider you choose.
About the Author: Chantal Marr is President of LSM Insurance, a leading Canadian life and health insurance brokerage, where she is in charge of product development. She has a B.A. from Laval University and Bachelor of Education from the University of Western Ontario. Chantal is a member of the Independent Financial Brokers of Canada, which gives her the flexibility to deal with all major insurance companies.
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