While most Canadians are concerned about their life insurance coverage, many ignore the need for disability insurance, not realizing that becoming disabled could result in a much greater burden to your family than death!

If you become fully disabled, not only do you lose the ability to earn income, but your family must still provide for your continuing care. Did you know that in one year:

• 1 in 106 people die;
• 1 in 88 homes catch fire;
• 1 in 70 motor vehicles is involved in an accident causing disability, injury or death; and
• 1 in 8 people become disabled.
  
  

We all like to think we will be one of the other seven.

The chance of your being disabled for more than 90 days at some point in your lifetime is much higher than you think (see table at the end of this article).

Disability Insurance (DI) replaces earned income if you are unable to work due to an accident or sickness. The purpose is to ensure that your finances are not in jeopardy when faced with disability.

If your only DI coverage is through a group insurance policy, you should review its definition of disability. You may be surprised at how limited your coverage really is. If it is too restrictive to fill your needs, you may want to replace or supplement your group coverage with an individual Disability Insurance policy.

The quality of privately owned DI policies available in Canada varies greatly. One of your primary considerations should be the policy's definition of disability. A top quality policy will cover you if you cannot work at your "regular occupation", even if you are working at another job. The least expensive policies will cover you only if you cannot do "any job".

This coverage pays a flat amount each month, and most often you will not be able to replace your income completely. Insurance companies limit the coverage to between 50% and 70% of after tax income, because the insured should have an incentive to go back to work, once recovered. Also, most policies take into account benefits received from government and other programs. If you bought insurance in excess of the maximum allowed and you become disabled, you will only receive the maximum insurable amount.

The insurance company examines your occupation, income, and other sources of insurance when determining whether it will cover you and what your premium will be. When it determines your rate, the insurance company places you in a rating class with people who have similar characteristics such as age, occupation, medical condition, and income.

Most privately owned policies are sold on a "non-cancelable" or a "guaranteed renewable" basis. Non-cancelable means that after you take a medical exam and the insurer issues the policy, the insurer cannot cancel the coverage or raise your premiums. If you buy a policy on a guaranteed renewable basis, the insurer cannot cancel the coverage as long as you pay premiums, but it can raise rates. However, the insurer cannot raise rates on an individual basis. Rather, it will raise rates if you are part of an insured group that has experienced a very high number of claims.

Generally, you can buy individual disability policies that will cover you for two years, five years, or until you turn age 65. Most individual policies also have features that allow benefits to keep pace with inflation or gradual salary increases, such as a cost of living adjustment (COLA), which adds a percentage to your coverage each year.

Though disability insurance can be costly, it is an essential part of any prudent financial plan. Everybody should have some kind of disability insurance protection, since you're much more likely to become disabled than you are to die, you can make a coherent argument that you need disability insurance more than you need life insurance."

The American Society of Chartered Life Underwriters has determined that a 30 year old male has a 52% chance of becoming disabled for 90 days or more. The average duration of this disability is 4.7 years. If that was you, how would you provide for your family?

From Savings?
If you saved 5% of your income each year, 6 months of disability could wipe out 10 years of savings.

From a bank loan?
Who is going to lend money to a disabled person? You will be lucky not to have existing loans called.

Will your spouse fill the income gap?
You are asking your spouse to take on extra family duties, increase his or her workload and take care of a disabled spouse all at the same time - this would be a very heavy responsibility indeed!

Liquidate assets?
Imagine selling the house while your spouse is recovering.

Disability insurance makes sense, at least until you are independently wealthy.

It Could Happen To You!

What are your chances of becoming disabled for a period of more than 90 days before you reach the age of 65? And if your disability did last 90 days, what would the average length of your disability be? The following table shows your chances of being disabled more than 90 days, and the average duration of your disability if it does indeed exceed 90 days.