Why You Should Protect Your Earnings With Disability Insurance

Bill had barely passed his 28th birthday when he was severely injured in a debilitating accident.  After recuperating from operations on his back and eyes he was still left with spinal damage, partial paralysis in one leg and partial blindness in one eye.

He found it difficult to walk, stand, or sit for extended periods of time.  Needless to say, this made it challenging to secure any type of long-term employment at a time when he had a young family.

Disability Insurance

Many wage earners are diligent in purchasing life insurance to protect their families in the event of their early death, but many do not consider disability insurance.

Related: Understanding Disability Insurance

The fact is that people under 50 are more likely to become disabled than die – almost 35% will suffer a long term illness or disability lasting longer than 3 months.

People don’t buy disability insurance for a number of reasons, mainly because it can be quite expensive and they believe they have sufficient coverage through their workplace or government benefits – but do they?

Workers Compensation

Workers compensation covers only work related injuries.  It’s most often associated with industrial accidents but also covers other workplaces – the retail worker who falls off a ladder, or the office worker who puts out her back moving the photo copier to get at a paper jam.

It pays 90% of lost income and covers health costs associated with the injury until you’re no longer disabled, or your condition becomes stable.

Related: No Medical Exam Life Insurance

For those with a permanent injury, payments will be recalculated and either paid monthly or a one-time lump sum may be offered.

Employers’ Group Benefits

Employers can opt out of WCB if they offer disability insurance to their employees.  Very few people actually know how and what their group disability insurance covers.  Many don’t look beyond their short-term paid sick leave when they have the flu.

The coverage may be limited.  You may receive up to 70% of your regular salary – other monetary perks and bonuses are not included.

Related: Time To Revisit Your Employer Sponsored Pension Plan

One of the main concerns is the definition of disability.  Generally an employee will be covered for up to two years if unable to perform their own occupation, but if there is the ability to perform an alternate job in the company they will no longer be eligible for benefits.

Canada Pension Plan

The CPP disability benefit is available to people who have made enough contributions to the CPP and whose disability prevents them from working at any job on a regular basis.  The disability must be long lasting.

You may earn up to $5,000 (in 2012) and participate in a trial work period for up to three months and still receive benefits. The trial allows you time to test your ability to work on a regular basis.

Related: How To Determine Your CPP Benefits

Private Disability Insurance

Private disability insurance plans can be tailored to your requirements.  The more benefits and broader the terms, the higher the premiums.  It’s worthwhile to calculate the exact level of protection that you need and where you are able to cut some of the costs.

Some terms to look at are the waiting (or elimination) period before you start receiving payments, own occupation or any occupation, cost of living adjustments, length of term (can be up to 65 years of age but shorter terms are more affordable, with 5 years being common).

Final Thoughts

Your earning potential is your most valuable asset and you need to protect it.  Accidents and illness can happen at any time.

How devastating it would be for boomers, who have worked hard all their life, to lose everything because they were not properly covered?

Related: Why Baby Boomers Aren’t Prepared For Retirement

Parents, especially if single, need a back-up plan to protect their earnings.  Contract workers and the self-employed need to ensure their future income.

Keep in mind that you can’t piggy-back payments.  They have a maximum total regardless of how many sources you use.  Most programs will expect you to eventually take on some type of employment if you are able to perform the work – hopefully it will be better than a cashier at McDonald’s.

The above story is true.  The name has been changed, but it is my husband.

I urge you to investigate all your sources of replacement income and be prepared.  We definitely were not.

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  1. Money Beagle on October 10, 2012 at 6:57 am

    This is something we definitely look at every year when we pick out out benefits. I don’t have enough in place to make up 100% of our income, but we still max it out and could scrape by with what we would get if something were to occur.

  2. Canadianbudgetbinder on October 10, 2012 at 7:59 am

    Very good points. We both have life insurance and short term/long term disability at work but not critical illness or disability insurance. Although WSIB is there to protect you in case of a work accident I also urge Canadians to think about their livelihood and finances ahead of time and not when something happens. Great post B&E. MR.CBB

  3. James on October 11, 2012 at 2:30 pm

    Disability insurance is also something Americans consider as well. While there is worker’s comp and disability payments available from the government, they are hardly enough. Also, something to consider; if you are injured or fall ill this usually means doctors and bills, lots of bills. So not only do you lose a good portion of your income, your expenses often increase greatly. Disability insurance can be a good way to offset the added expenses.

  4. Joe on October 11, 2012 at 3:59 pm

    I always knew disability insurance was absolutely essential. I’m very glad to have a generous package through my employer; if I didn’t, then I’d pay the (likely obscene) price to get it privately.

    I used to not understand the difference between disability and critical illness insurance — I thought that both were equally important, but that’s not the case. Disability is essential. Critical illness, by and large, doesn’t actually insure against a loss. Critical Illness fills an emotional void (or perhaps acts as a weird lottery): “If I get cancer, I’ll get $100,000! hooray!” But what you really need to replace is income if you become unable to work for ANY illness/accident reason. That’s why everybody needs disability insurance. The book that helped me understand the difference was “The Beginner’s Guide to Saving and Investing for Canadians”, specifically Glenn Cooke’s chapter.

  5. LifeInsuranceCanada.com on October 13, 2012 at 8:44 am

    Some further comments on the ‘private’ option mentioned in the article.
    – the own occupation rider and the elimination period are gravy items and I’d suggest aren’t really insurance related. If you’re disabled for 25 years, a 60 day vs. 90 day wait period won’t make much difference. Realistically, 90 day elimination/wait periods tend to be the pricing sweet spot. Much shorter and it gets expensive fast. Much longer and there’s not much in the way of savings. The first 90 days, you should have an emergency fund.
    – indexing/inflation/cost of living riders are essential as well as the ‘duration of benefits’ to age 65 mentioned. You want the insurance to look after you if you’re ‘disabled forever’, and duration and indexing are vital for long term disabilities.

    As the article (and one of the comments) note, individual/private plans are perceived as expensive. When I quote this stuff, nobody’s happy. The reason it’s expensive though, is that claims are high – which should tell you something. In the end however, if you can get group coverage through work then you absolutely should take as much of that as you can before investigating private/individual coverage. Workplace coverage is far cheaper than what’s available individually.

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