Disability Insurance

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The single most valuable resource most people have particularly in their prime years of productivity, is an ability to earn income that generally grows until we retire. We call this lifetime earning potential.
As we move through life, our goal is to use this income to build financial security so we can support the lifestyle we have today, and our plans for the future.
What happens if, through illness or injury, that ability is taken from us?
Risk of disability can strike without any warnings and consequences can be devastating, emotionally and financially also can create some ugly challenges for you and your family. A disability – whether it’s sudden or because of a degenerative condition – can stop you of your ability to work and earn income for months or even years.

Disability insurance is in essence “income replacement” insurance. It is purchased as protection against the chance (risk) of losing earned income while disabled and not being able to meet expenses.

The amount of insurance you qualify for depends entirely on how much income you earn, the benefit is usually capped at 70% of gross earnings. Ask yourself – could you pay your bills if you were unable to work because of illness or accident?

According to Statistics Canada, Participation and Activity Limitation Survey, 2006, Over 1.6 million Canadians of working age are disabled. The cause for disability isn’t just physical injury. Among office workers, absences for nervous disorders – including stress-triggered conditions – have become the leading cause of disability in Canada today .

Most people recognize the need for life insurance, but many do not understand the need for disability insurance. The fact is, when you are disabled because of an illness or injury, your income stops – but your bills don’t. A disability can last for months or even years.

It pays you a monthly benefit:

  • To replace your income
  • When you are not able to work
  • Due to an illness or accident

Disability plans pay tax-free benefits while others are taxable. You can receive disability benefits from more than one source, but these plans are usually coordinated to make sure that all the benefits you receive are not greater than your eligible annual income limit.

If you were suddenly faced with a disability

  • Would your high level of earnings continue?
  • Could you maintain your lifestyle?
  • Could you continue to meet debt obligations?
  • What would be the long-term impact if you need to liquidate some of your assets?

What Matters Most

Your lifetime earnings are probably greater than the combined value of your other assets. Therefore, the most valuable asset from a financial point of view is your earning power! Your lifestyle and plans for the future depend on revenue you generate with your specific skills, knowledge and expertise. The following chart shows how much you would earn over the rest of your working lifetime (to age 65), depending on your income and current age.

Age $50,000 $70,000 $90,000 $120,000 $150,000 $200,000
30 $2,746,410 $3,844,975 $4,943,539 $6,591,385 $8,239,231 $10,985,641
35 $2,195,135 $3,073,189 $3,951,243 $5,268,324 $6,585,405 $8,780,541
40 $1,707,888 $2,391,043 $3,074,199 $4,098,932 $5,123,665 $6,831,553
45 $1,277,233 $1,788,126 $2,299,019 $3,065,359 $3,831,699 $5,108,932
50 $896,596 $1,255,235 $1,613,873 $2,151,831 $2,689,789 $3,586,385

This chart shows how much you could earn over their lifetime, assuming a 2.5 per cent increase every year and total potential earnings to age 65. If we look at the example of a 40-year-old prospective client and assume he is currently earning $120,000 per year, we can see that by age 65 he will have earned almost $4.1 million.  So we’re talking about protecting a potential income of $4.1 million.

Number of factors determine the cost of an individual disability income policy. They include

AGE: Younger persons pay less per year for a policy than those who are older and, therefore, more likely to become disabled.

BENEFIT AMOUNT: Policies that replace a larger percentage of salary are more expensive. A policy that replaces 70% of salary costs more than one that replaces 50% of the same salary. Similarly, policies that replace a larger salary are more expensive than policies that replace smaller salary.

BENEFIT PERIOD: The shorter the benefit period, the less expensive the policy. For example, a policy with a two-year benefit period costs less than a policy that pays benefits to age 65.

CURRENT HEALTH STATUS: Your health status determines not only whether you are eligible for insurance, but, also if you are, whether you are eligible for standard rates or rates that are higher. A policy may also exclude from coverage any health conditions that exist before the policy is issued.

DEFINITION OF DISABILITY: A policy that pays benefits if you are unable to perform the duties of your own occupation is more expensive than a policy that pays benefits if you are unable to perform the duties of any occupation for which you are reasonably qualified. The insurance company is less likely to have to pay benefits in the latter case.

DISCOUNTS: Many companies offer discounts for policies issued at the same time on more than one person, and when an employer (or association) collects the premiums for individual policies from employees and pays the insurer.

EXTENT OF DISABILITY: A policy that pays benefits only if the policyholder is totally and permanently disabled costs less than a policy that also pays benefits for a partial or temporary disability.

GENDER: Women usually pay more than men for an individual policy because typical claim costs are higher for women. Under a group policy, however, men and women usually pay the same rate.

OPTIONAL BENEFITS: For an extra premium, some policies offer additional benefits, such as cost-of-living increases or the option to purchase higher benefits in the future.

SMOKER/TOBACCO USE: Most companies either give a discount to non-tobacco users or add a surcharge to the premium for tobacco use.

TYPE OF JOB: Expect to pay more for a policy that covers a high-risk occupation

Disability insurance certainly enables you to maintain the life style you and your family deserve. A prolonged loss of income causes major financial loss if no disability insurance in force.


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