I’ve been gathering information on disability insurance and critical illness insurance for a self-employed client in Ontario. It’s frustrating that this information isn’t more widely available online. I wondered if it was because each policy is just so unique to the individual, but I thought there must be a standard formula by age, gender, and amount of coverage needed.

For example, let’s take a 48-year-old woman (non-smoker) who is self-employed and looking for disability coverage to replace $3,000/month income until age 65. How much would she have to pay each month to get a disability policy?

Related: 5 myths about insurance

I reached out to Canada Life, a leading insurance provider in Canada, to get answers. Here’s what they had to say:

Is there an industry standard formula for choosing what to quote for disability income insurance?

While it is possible to apply a standard formula for a quote, it would only tell part of the story.

Across the insurance industry, disability illness insurance quotes factor in the following relatively standard considerations, each of which affects the price (or ‘premium’):

  • The amount of income to be replaced
  • How ‘total disability’ is to be defined
  • How quickly after a claim does the replacement income need to “kick in”
  • How long benefits will be paid; and
  • Whether or not there will be added coverage for partial disability

Given that the answers to each question will be highly personalized, the standard estimate may not reflect the final premium for the coverage best-suited to the applicant’s unique needs.

What are the pros and cons of disability illness insurance and critical illness insurance?

Disability insurance and critical illness insurance meet very different needs, and are used in response to different conditions. Disability insurance typically provides a monthly benefit to help replace the income from your employment should you become sick or hurt and unable to work, while critical illness provides a one-time lump sum payment if the individual is diagnosed with one of approximately 24 defined illnesses, the most common being cancer, heart attacks and stroke.

Related: 9 money myths that experts wish you’d stop believing

Disability insurance is designed to help you to meet your monthly living expenses while you focus on rehabilitation and return to work. Critical illness can be used to cover extraordinary costs associated with your illness like childcare, transportation or prescription medications, or to help family members travel to visit you while you are receiving treatment or recuperating.

Please provide estimates for case study: 48-year old woman (non-smoker) who is self-employed and looking for disability coverage to replace $3,000 / month income until age 65.

Estimate #1A – disability insurance: A Canada Life disability income policy for a female age 48, non-smoker with $3,000 of monthly benefit, a 90-day start with benefits payable to age 65, a “regular occupation” definition of total disability and partial disability benefits would cost $194.30 per month if her primary duties are generally office/administrative.

Estimate #1B – disability insurance: If her duties or occupation is more physical her premium would be $220.52 per month.

Related: Long-term care insurance – To buy or not to buy?

Estimate #2 – critical illness insurance: If the same 48-year-old female, non-smoker, purchased $100,000 of critical illness insurance it would cost $133.02 per month for basic coverage. As with disability insurance, there are additional benefits that can be added that would increase the premium.

Final thoughts

Unlike mortgages and other products that are transparent and comparable online, the insurance industry is still shrouded in mystery. Because quotes and coverage can vary widely from insurer-to-insurer, it’s important to shop around to not only find the best deal but to ensure that the coverage is adequate and there aren’t any “gotcha” clauses that might trip you up down the road.

If you’re looking for disability coverage outside of your workplace plan, or because you’re self-employed, I highly encourage you to call several insurance providers and compare policies. Then call an insurance broker and see what type of plans they come up with. The key is to shop around and not settle on the first policy that comes across your desk.

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6 Comments

  1. JMEDY on September 7, 2015 at 10:28 am

    My husband and I are self employed and in our early 60’s. We cancelled our disability insurance about 10 years ago. Firstly, our yearly rates were spiralling out of control. Secondly and most importantly, I asked our broker how the payouts would be if you became disabled. This is something we could not get clearly defined by our broker. After considerable research I discovered that your disability insurer is the last to pay out. There are several parties who may be involved in payments to the injured party. WSIB, Canada Pension disability and your insurance company. If you are injured, you must go to the other insurers involved to make a claim. So WSIB and Canada Pension disability would kick in first. Your insurance company only makes up the balance – and there is usually a cap that you can only collect up to approx 75% of your previous income from all parties combined. So in our case, we were paying very high rates for a possibility of only 20-30% of our previous income. It is very, very true that insurance companies are very secretive. Ask lots of questions as to how you will be paid out, how much and in what order. And get it in writing. My broker wouldn’t do this – so we cancelled our policies.

    • LifeInsuranceCanada.com on September 8, 2015 at 4:41 pm

      “My broker wouldn’t do this – so we cancelled our policies.”

      No broker in his right mind would put anything in writing beyond the policy. And insurance companies won’t allow it, because it could potentially extend or modify the policy.

      The answer to every question you have is always ‘in the policy’. Read and understand the policy. You can have it dumbed down verbally by a broker, but if you start seeking complex answers then the only answer you should ever receive is ‘what does the policy say – that’s your answer’.

      Disability insurance isn’t secretive. It is somewhat complex, but not so much that an average consumer can’t read the policy and figure it out.

      Your comments about payouts may be true in your specifics, but I’d advise other readers that what you posted isn’t true in general.

      At a minimum, you’re suggesting 75% of your income would be paid out. That’s potentially misleading. In a typical disability policy, that payout would not be taxed. So you’re taking home 75% of your previous ‘gross’ income. What are you taking home right now? Probably about 75% of your gross income. Your benefits don’t drop that much on a properly structured disability policy. Certainly not 25%.

      And of course most policies have an all sources maximum. If they didn’t, you’d end up making more on disability than working – and claims would never end. And again, we’re back to a cycle of too high claims meaning the insurance becomes unaffordable.

      Disability insurance is expensive – the companies need this type of claim mitigation in order for it to make any sense at all. Disability insurance isn’t a product that the insurance companies are running all the way to the bank on – the premiums you’re paying in are going to claims.

  2. May on September 7, 2015 at 4:26 pm

    And that’s if you can get coverage at all. I am self-employed and tried to get coverage back in 2011. Despite being in good health & working in an office all day, I was denied disability coverage & the CI premium was mind-boggling. At that point, I threw in the towel.

  3. LifeInsuranceCanada.com on September 8, 2015 at 9:09 am

    I’m going to wash your mouth out with soap if you keep using the words ‘disability insurance’ and ‘critical illness insurance’ in the same sentence :). They are NOT the same thing, not used for the same thing, and shouldn’t be compared or contrasted in most instances. It’s a common misconception amongst consumers to comingle the two. Doing so is dangerous.

    Here’s part of your confusion; you said:
    “Critical illness can be used to cover extraordinary costs associated with your illness like childcare, transportation or prescription medications, or to help family members travel to visit you while you are receiving treatment or recuperating.”

    I caution readers to determine if those costs you’re talking about are in fact ‘extraordinary’ in the sense of being catastrophic. Childcare? Prescription medications? They are certainly not catastrophic in the same league as losing your paycheque for 20 years.

    And even if you determine that these things are catastrophic losses that should be insured, I would suggest careful consideration as to whether critical illness insurance is the correct way to cover this. For example, I personally have Manulife’s Catastrophic coverage for our family’s medical. It pays $0 on anything less than $4000/year – and 100% of everything over that. I think we pay about $50/month for a family of four. I believe Sun Life has a similiar product.

    In summary, just be a bit suspicious of critical illness insurance – do some hard thinking before buying. Make sure you’re insuring loss, not playing the cancer lotter.

    In terms of comparing and investigating critical illness insurance, check out my site, the section on critical illness. I’ve got contract wording and comparisons, premium comparisons, and a spreadsheet of what’s covered by the various policies. Oh, and a PDF that shows you how to figure out how much you need.

    Disability insurance is another matter entirely. Far too many consumers are underinsured and undereducated on this. If you don’t understand your coverage, you should investigate (try reading the policy) before it comes time for a claim.

    The reason disability insurance isn’t easily compared online is because it’s tough to compare products. Disability insurance is all in the policy wording. I’ve read many contracts and IMO there’s only three I would recommend – Manulife, RBC, and GWL/Canada Life. Top notch contracts, and all three comparable in terms of pricing. If you want to do an online comparison beyond that, you really should be comparing contracts primarily – and what consumer’s going to sit still and read all that? If you are prepared to actually investigate this stuff, sample disability contracts are readily available online through most of the carriers. Start reading :).

    • Echo on September 8, 2015 at 9:57 am

      Hi Glenn, thanks for your comments, although I’m not the one who’s confused. That’s a direct quote from Canada Life. If that’s how the industry is portraying critical illness to the public, then how the hell do consumers stand a chance?

      • LifeInsuranceCanada.com on September 8, 2015 at 1:33 pm

        I dunno, bloggers start asking the tough questions and publish them for their readers? 🙂

        Here’s the baseline for all insurance purchases. “Catastrophic Financial Loss”. If you fail any one of those three, you need to be wary.

        1) Catastrophic. If it’s not catastrophic, don’t insure. That’s why you don’t put warranties on your iphone. $500 loss is not catastrophic.
        2) Financial. You should be able to calculate, predetermine, and value the loss. Otherwise it’s emotional.
        3) Loss. Based on a random event, you need to lose financially. If there’s no loss it’s a lottery not insurance.

        This works for car insurance, life insurance, disability, house, etc. Run critical illness insurance through those tests and you may find it fails all three. Which means further investigation is warranted. Or at least an evaluation of your motivations.

        There’s a variety of concerns here, but perhaps the biggest one is that consumers purchase CI at the expense of disability insurance. Now that’s potentially catastrophic.

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