Disability Insurance

A better name is Income Replacement Insurance but many say “Disability Insurance” or “Long Term Disability (LTD) Insurance”. Either way, the monthly tax-free benefits help replace your income if you are unable to work due to an illness or injury.

The top five causes of disabilities, according to RBC Insurance, are:

1. Mental disorders (31%): depressive disorders, substance abuse, Alzheimer’s disease and other dementia
2. Cancers (16%): lung, colon, breast, …
3. Cardiovascular diseases (12%): diseases of the heart
4. Injuries (8%): traffic accidents, falls, …
5. Musculoskeletal diseases (5%): arthritis

If a disability has lasted for 90 days, on average, it will continue for two to four years. However, the disability could last forever.

Fortunately, benefits can continue to age 65. That could be decades away and provide millions of dollars of benefits. That’s a reason to get insurance with a generous definition of disability and benefits continuing for as long as possible. 

This RBC calculator estimates your risk of disability and the income which could be lost. Manulife has a simpler What’s Your Risk calculator, which also shows your risk of getting a critical illness or dying before 65. The Council for Disability Awareness has a Personal Disability Quotient calculator.

Spoiler: Your risk of disability during your working years is much higher than your risk of death or getting a critical illness. 

Disability coverage from your employer usually has limitations to save your employer money and reduce the insurance company’s risk. Get a copy of your employee benefits booklet and review the section for Long Term Disability. You will likely find:

• A dollar cap on benefits, which hurts high-income earners

• A stricter definition of disability after 24 months makes receiving benefits more difficult

• Many exclusions, say for mental disorders

• Loss of benefits if you leave the company voluntarily or involuntarily

If you add suitable personal disability insurance, you own the contract. Your premiums are guaranteed. There are options to receive benefits if you can’t do your own job, even if you do another job. If you leave your employer: 

• Your coverage continues
• You may be eligible for a one-time increase in your coverage to replace what you lost from your prior employer
• Your coverage can increase as your income does

You may be offered disability insurance from a professional association or another group to which you belong. Before buying or renewing, understand what you’re getting (and giving up).

Here are questions to ask:

1. Are the premiums guaranteed to never increase?
2. Can the benefits and definitions be changed?

3. Can the plan be terminated by your association?

4. Do you lose your coverage if you stop paying membership fees?

5. Does the insurer compete in the personal disability market?

6. Does the coverage continue if you work beyond age 65?

You’ll likely find that personal disability insurance has stronger definitions, fully guaranteed premiums and more flexibility. Plus, you own the contract.

Your eligibility depends on:

1. What you do: your job duties (not your title) determines your occupational class (4A is best)

2. How much you earn: determines the maximum monthly benefit permitted

3. How healthy you are: determines possible ratings, exclusions and rejections (declines)

There are other criteria.