Welcome to the second and final post in our series on insurance. Last month we covered life insurance and now we will explore disability insurance and critical illness insurance. All three types of insurance should be considered when putting together a plan to protect your finances.
Disability Insurance
Disability insurance pays a monthly amount if you are unable to work due to illness or accident. It is meant to replace employment income while you are unable to work. It pays between 60 – 85% of your gross income, depending on the policy.
DO I need Disability Insurance?
- If you have debts or loved ones who depend on your ability to earn an income, then you need to consider disability insurance.
- Many people will have disability insurance coverage as part of their employment benefits. Be sure to review any policy provided through your employment.
- An emergency fund which can be used to cover short-term disability would struggle to cover a long-term disability. Insurance should be considered for protection from long-term disability.
Disability Insurance Options
There are many different options within disability insurance, below are a few important considerations.
- Any occupation coverage – Pays out benefits when you are not able to work in any occupation that you’re reasonably qualified for based on your experience and education.
- This means that even if you suffered an injury where you couldn’t work your current job you would not necessarily receive a payout. Instead, the insurance company would look to see if there are other jobs you could perform with your injury. If there are such jobs, they may deny payment.
- An insurer cannot say that an architect who is injured could instead work at a fast-food restaurant and therefore is not covered. They must compare to jobs that fall within your education, training, and experience.
- Any occupation coverage tends to be cheaper as there is a higher chance of a claim not being paid.
- Own occupation coverage – Pays out benefits when you are unable to work in your own occupation. If you cannot perform a substantial part of your own occupation, then you will receive your disability insurance payments. This type of coverage is especially important for professionals and high-paid positions such as lawyers, doctors and accountants who could not replicate their earnings in other careers.
- Own occupation is more expensive than any occupation coverage due to the higher chance the insurance company will have to pay if you become disabled. This type of coverage is not offered to all types of jobs.
- Cost of living rider – Increases your payout annually by adjusting it for inflation. An important consideration as a payout that seems adequate now, will not be adequate in 25 years.
- Future purchase option – Gives the option to increase insurance coverage annually as income increases in exchange for paying a higher premium. Additional medical underwriting is not required when increasing your coverage. Should be considered by professionals or those with large, expected increases in annual income.
Critical Illness Insurance
Critical Illness Insurance pays out a lump sum if you contract a covered illness (such as cancer, stroke and heart disease) and survive the waiting period. This type of insurance is meant to cover added costs due to the illness or to replace lost income if you or your partner need to take time off of work.
Do I need Critical Illness Insurance?
- With the advances in the medical industry there is a growing chance that those who contract these serious illnesses will survive. This is certainly a positive, but it can lead to added costs that critical illness insurance can help cover.
- However, in Canada the majority of health-care related expenses would not come out of your pocket. If you had to miss time at work this would be covered by your disability insurance. This means critical illness insurance should be considered after you make sure you have adequate life and disability insurance in place.
- It is a good idea to consider critical illness insurance for someone who is not covered by disability insurance such as a stay-at-home parent who doesn’t have any income to replace.
- Keep in mind only certain illnesses are covered and each company has slightly different covered illnesses and have different definitions of those illnesses. This is important to review with your specific policy.
If you have questions about disability insurance, critical illness insurance or any other financial planning topic please reach out to our office. We would be happy to assist you.
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