Insurance that replaces part of your income
By Maurício Dreher
Disability Insurance (DI) is an insurance that replaces part of your income, paid to you weekly or monthly, when you can’t work because of sickness or injury. The policy defines how much you will be paid (Benefit), how soon you will be paid after you are disabled, when you’ll start to receive the deposits (EP – Elimination Period), and how long they will last (BP – Benefit Period).
There are many kinds of disability contracts. Some plans are available from your employer through their group plan and some are offered by private insurers. However, injuries or sickness as a result of your employment, may also be covered by worker’s compensation.
The financial risks to your business and family are very significant if you suffer a serious accident, injury or illness that prevents you from working for an extended period. Not only does your current income stop, future income may also stop and, in most cases, many of your business and personal expenses continue.
Disability insurance is designed to protect your income. Be careful though, as there are policies available for a high amount of coverage and with high premiums. However, the insurance company does an income test at time of claim by looking at what your actual income is, and only a percentage of your income will be paid out, regardless of the premium you were paying.
Also, consider whether you want to wait 30, 60, or 90 days before payments start. The premium for a policy that starts paying the benefit after 30 days is higher than the cost of a policy that waits 90 days until the benefit starts.
The best disability insurance agent may not be the same person who offered and sold you your life insurance policy. Ask about characteristics such as: when the coverage starts, and how the policy will be treated if you change your job. A DI policy may also have residual or partial disability benefits when you return to work.
For corporations, you should know that there are some disability insurance policies that cover business expenses. Some also allow you to add a rider that will continue to make contributions to your RRSP if you are disabled, which can be critical to your retirement and long-term financial picture.
Disability insurance is a specialty and you need to talk to someone with expertise. Talk to your CFP – Certified Financial Planner, and request to insert the disability insurance discussion in your next meeting.