Disability insurance: Preparing for the worst

If you had a crippling accident or were diagnosed with a critical illness tomorrow, would your family be able to cope?



From the December/January 2012 issue of the magazine.


janet_freedman_322Ten years ago, Janet Freedman was rushing out the door of her home for work. Her arms loaded with tax returns, she missed a step on the stairs on her front porch and fell, hitting her head on the concrete. When her neighbours found her, she was barely conscious, with her head trapped between her own front steps and those of the house next door.

Paralyzed, with a partially severed spinal cord, it took more than six months of hospitalization and two years of intensive physiotherapy for Freedman to resume her life. She was unable to work and had no one to support her. “Thank goodness I had a good private disability insurance plan,” says Freedman, a certified financial planner and author of Hit by an Iceberg: Coping with Disability in Mid-Career. “Those payments allowed me to concentrate on my rehabilitation and to live my life without worrying about where the money was coming from for daily living expenses. That made a big difference to me and my recovery.”

While many of us understand the importance of life insurance, the truth is that insurance against an accident or disease that prevents you from working is arguably even more important. A typical 30-year-old has a four times greater chance of becoming disabled than he does of dying before age 65. A full one in six Canadians will be disabled for three months or more before the age of 50.

There are two main options: long-term disability (LTD) and critical illness (CI) policies. Both pay you money in case of an illness or disability, but they do it different ways. Disability insurance provides a monthly income if you’re unable to work due to a serious injury or illness, while critical illness insurance pays out a tax-free lump sum payment following the diagnosis of one of several illnesses covered by your policy. So which one is right for you?

Regular pay if you can’t work

If you work for a large company, you likely already have some kind of long-term disability insurance. Typically, such a plan will pay you a set portion of your monthly income if you are unable to work. Payments end when you start working again, reach age 65, or die. Coverage differs greatly from one employer to another, and if you’re self-employed or you work for a smaller company, you may have no coverage at all.

Such disability plans will either cover you for “any occupation” or “own occupation.” The latter is much better, because under this definition, total disability means the inability to work at your regular job. With “any occupation,” total disability means the ability to perform the duties of any job. That means that if you become disabled, but you could perform a less demanding job, you may not get the benefit. Often plans offer “own occupation” coverage for the first two years of the benefit period and then switch to “any occupation” after that.

To figure out whether you have enough coverage, contact your company’s HR department—if there is one—or your office manager. If you have coverage, ask them to walk you through your group benefits. If you find that your company plan covers at least 60% of your pay in the event of an accident or illness that prevents you from working, you likely have enough coverage. If you don’t have kids and your mortgage is paid off, you likely could get by on a policy that pays 40% to 50% or your salary. “Basically, you want enough coverage to meet your living expenses—meaning mortgage payments, taxes, hydro, food and transportation costs,” says Lorne Marr, an independent insurance broker and founder of LSM Insurance Services in Markham, Ont.

When evaluating your plan, keep in mind that many disability plans include a cap on benefits. For instance, your plan may cover 60% of your gross income, but only up to $2,500 a month. That means if you’re earning more than $50,000 a year, you may not have enough coverage. If you made $130,000 annually, you would only get the $2,500 a month maximum, which amounts to only 23% of your pay.

If you earn a high income, you may want to consider a private disability plan to supplement your group benefits. To give you a quick idea of the cost involved, a private “own occupation” disability policy for a 40-year-old male white-collar non-smoker that pays $3,000 a month until age 65 (90-day waiting period) would cost about $140 a month. The same policy for “any occupation” would cost about $75 a month.

When calculating your coverage, keep in mind that payments from private disability insurance are tax-free, while the payout from most corporate plans is taxable.

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A single payout if you get sick

A second option is critical illness (CI) insurance. You can buy a critical illness policy through an independent insurance broker and it will pay out a lump-sum benefit if you are diagnosed with one of the illnesses specified in the policy. The benefit is tax-free and receiving this benefit doesn’t affect the amount of disability benefits you may also be receiving. When you collect, there are no requirements as to how the money is spent.

The idea of receiving a lump-sum payment of perhaps hundreds of thousands of dollars to help pay for top-notch medical treatment if you are diagnosed with cancer or another critical illness sounds like a smart idea, but unfortunately critical illness insurance is costly and the situations it covers are limited. Typical premiums for a $200,000 policy for a 40-year-old non-smoker add up to $2,000 a year for a 10-year term. More problematic is the fact that the policies are not standardized and problems often arise when payouts have to be made. For instance, some policies will cover only five illnesses, while more comprehensive ones cover up to 25. Such policies can also have stringent requirements regarding survival periods that have to be met after the disability is sustained before a payout is made. If your illness doesn’t meet the requirements exactly, the policy may not pay out a dime.

For instance, if you have a $100,000 critical illness policy, it may specify that no payment will be made if you have a benign melanoma. The same goes for some of the less serious cancers, such as stage one or stage two prostate cancers. “Read the fine print in the policy carefully,” says Barbara Garbens, a certified financial planner in Toronto. “The list of illnesses it covers will be a lot shorter than the exclusions. So it can be a bit of a mug’s game.”

Which type should you get?

If you don’t already have long-term disability insurance and you’re choosing between the two types of coverage, disability insurance is the clear winner. That’s because it will kick in to help you pay the bills in the event of any illness or accident that prevents you from working, while critical illness insurance only helps if you happen to encounter one of the specific illnesses covered by your plan. As well, collecting critical illness insurance often involves more paperwork and delays.

Stanley Morris’s experience with critical illness insurance clearly shows the difference. Last year at age 59, Morris (not his real name) was diagnosed with a brain tumour. Before his diagnosis, he was an active skier, cyclist and entrepreneur. Six years earlier, while reviewing his benefits, Morris had purchased both private disability insurance coverage as well as a critical illness policy.

When he was diagnosed with the tumour, his disability insurance started paying benefits right away, but because of severe headaches, he was unable to file the critical illness insurance documents quickly. After a couple of months, a close friend stepped in to help him with the paperwork and eventually, his claim was filed. But unfortunately, Morris died before he could collect a penny.

Still, there is one situation where critical illness makes sense, and that’s if you help to support your family, but you can’t get disability insurance because you have no earned income. For instance, a 35-year-old spouse who stays home with three small kids and doesn’t work may be a good candidate for a comprehensive critical illness policy (although even then, only for a brief period of time, say 10 years while the children are young). “A family’s lifestyle would change drastically if the stay-at-home spouse was critically ill,” says Rona Birenbaum, a certified financial planner in Toronto. “Paying people to replace the duties he or she performs is expensive. The coverage may not be perfect but it may helpful in these cases.”

32 comments on “Disability insurance: Preparing for the worst

  1. Pingback: Guide to insurance | MoneySense

  2. "Typical premiums for a $200,000 policy for a 40-year-old non-smoker add up to $2,000 a year for a 10-year term. "

    Sorry those numbers are way off. I sell Critical illness insurance and own it as well.

    40 year male term 10 is $964 per year.

    40 year male permanent to age 100 is $2856 (all premiums returned at death or lump sum payout)

    Lets say you can earn 6% guaranteed. After 25 years one would only have $164,932 (which capital gains taxes would have to be paid)

    What is the odds of one dying or getting a heart attack or stroke before 65? How about after 65? I think about 100%.

    I invite the reporter to contact me on this.




  3. Social security eligibility is a scheme running in U.S.A by the federal government, for retired, survivors and disabled person. Many factors are counted for eligibility like age, kind and intensity of disability, duration of illness.


  4. Thank you for making the effort and spreading this information with all of us.


    • Lilac,There are life insurance poiielcs that are Guaranteed Issue. The insurance company does not ask any questions about your health. These poiielcs are expensive but they do provide a benefit if you were to die thus enabling you to provide for your children.Take a hard look at your budget and your spending. Save Save Save then Save some more and thus you will accumulate a nice nest egg.You NEED to go talk to several professional insurance agent and lawyer about your situation. The insurance agent can work with you to provide the protection and the lawyer can provide the NECESSARY documents that will protect you, your children and your assets in the event that a disability or death occurs.Talk to as many professionals as you need to until you find one with whom you feel comfortable then tell him/her everything.Good Luck


  5. As someone who has specialized in Disability Insurance for over 40 years I have a couple of comments:
    (1) Group Insurance NEVER sells "own occupation" – the wording is "regular occupation" as there is a further requirement which your article does not mention – that the client NOT be working in any other occupation. Also you should point out that jurisprudence in Canada says that (after the regular occupation period) any job paying at least 50% of what the client was previously earning will be considered "reasonable" – unless the actual policy has a more generous requirement.


    • Agreed. I wanted to point that out as well. Reg Occ is what I have with my Blue Cross policy. This is still a very strong definition when it comes to disability. I am unable to qualify for a true Own Occ. As long as I can't do the job that I was trained for, I will get my monthly disability benefit. If I can't do my job, I can't see myself doing anything else while I am recovering. On top of that, for only $17.00/month, I get 100% of ALL premiums and fees that I paid back at age 65 (minus any disability claims)… great benefit! WIsh I had that option on all my other insurance! :)


      • I reviewed a blue cross policy recently and it was cheap…for a reason! There were a lot of exclusions that made it basically full of holes. Did not cover herniated disk. Covered accident and illness, but not injury. Did not cover you if accident was on account of a criminal activity. Sounds reasonable, but what if you are in a car accident and you were speeding 10KMs over the limit? That is a criminal activity so the potential is that you would not get paid. Lots of other items as well.


    • Tim this is a really good point Also you should point out that jurisprudence in Canada says that (after the regular occupation period) any job paying at least 50% of what the client was previously earning will be considered “reasonable” – unless the actual policy has a more generous requirement.” You certainly know your living benefits


      • As someone who has been licensed for over 40 years i can tell you outright i strongly believe in having both of those policies.However the amount of paperwork for my ci claims were nothing compared to getting the insurance companies to pay disability claims..Now watch any t.v. station or listen to any radio station,they are full of advertisements for law firms willing to help you when your disability claim has been declined..Right across the country,every city,has law firms dedicated to assisting those people obtain their benefits.I have one client who had a heart attack while driving his car and crashed it ..I was able to give him his 400,000$ Critical Illness cheque after day 53 but it took 11 months to obtain his first months disability cheque even though he had a 60 day wait and coverage until age 65. Then in month 13 he had to see doctors again to re qualify medically for the on going benefit. We will not even speak of the camera surveillance that was used..After lots of physio he was back to work in month 29…But that $400,000 helped him to pay for the lawyers to win his disability claim.


  6. Further, there is no requirement that the job be available – or that you can get hired (and remember – when faced with the choice of hiring someone healthy or someone coming back from 2 years of disability, they can ALWAYS find a reason to choose the healthy one) Job not available where you live? Move! Remember that price is only part of the issue to be considered. You must understand the rules of the game – and know that (generally) the more "expensive" the plan, the more liberal the rules. Arrive at your balance point – but understand your options. Our two most important assets are our health and our ability to earn an income.


  7. (2) Remember that BY FAR the biggest weakness of Group Insurance is NOT the terminology of the plan. It is your ability to count on your job and the benefits it provides. If I offer you a job guaranteeing you 25% more than you have ever earned in your life – doing the job you most love to do – close to home – with your best friends as your fellow employees – MIGHT YOU ACCEPT IT? What happens if it offers no benefits (and remember that both Canada and the US are very expensive economies – facing competition from India and China. We need to reduce our costs to be competitive and one of those costs is employee benefits. Why are so many companies hiring under contract? No benefits and lower costs. OK – I will STILL accept that job. What if you are an insulin dependent diabetic – or have other health issues and cannot qualify for Disability Insurance? Buy a TINY plan now – and include the Guaranteed Insurability feature and you have purchased the flexibility you need and deserve


  8. I thought I'd revisit this story and point of some more points missed or omitted. Regarding Critical illness insurance.

    For instance, if you have a $100,000 critical illness policy, it may specify that no payment will be made if you have a benign melanoma. The same goes for some of the less serious cancers, such as stage one or stage two prostate cancers. “Read the fine print in the policy carefully,” says Barbara Garbens, a certified financial planner in Toronto.

    Stage T1 indicates that the prostate cancer is small and confined to the prostate gland. The cancerous cells are too small to show up on a diagnostic imaging test and the tumor is nonpalpable.

    Many Personally owned policies in fact cover this as an early Detection benefit.

    Another example not talked about is the link with many policies to (this is included in the fee of the coverage)


    "To provide access to the best medical information available, additional resources and the uniquely educative interaction with top specialists that may not otherwise be available."

    How important is a second opinion when some is diagnosed with any type of Cancer as one example?


    Brian Poncelet, CFP


  9. Preparing for the worst in regards to your body can be a perplexing thing to do outside of getting disability insurance. My friend is preparing by searching for physiotherapy in Toronto to make sure his physiotherapy needs can be met whenever the time comes. He is also looking for a service to help him manage and improve his physical well-being. Thanks for the post!


  10. Well at least we are prepared for what is to be happen…and for instance may not be perfect but it may helpful in these cases.


  11. I did enjoy reading articles on this site. They are very useful and informative to the readers…


  12. Always interesting to read about the different approaches to health care in different countries. was amazed to see your comment on the fact that a 30 year old has four times the chance of becoming disabled as opposed to dying before the age of 65.

    The Health Service we have in the UK is expensive from a monetary point of view but it enables all citizens access to full health care.

    I'll keep in touch with posts here.


  13. It's so worth to read all article like this specially relating to health care. Its really need for us to understand the significance of life insurance. Of-course, when choosing life insurance, use the Internet resources to educate yourself about life insurance basics, find a broker you trust, etc.


  14. Pingback: If you had a crippling accident or were diagnosed with a critical illness tomorrow, would your family be able to cope? | Eric Lidemark

  15. Indeed, many of us should understand the importance of life insurance. As we grow older and get married, build families and start businesses, we come to realize more that life insurance is a basic part of having a seem financial plan. Tree Services


  16. Pingback: If you had a crippling accident or were diagnosed with a critical illness tomorrow, would your family be able to cope? | John Ong

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  19. Pingback: If you had a crippling accident or were diagnosed with a critical illness tomorrow, would your family be able to cope? | Aeronn Zlotnik | ZLC FINANCIAL GROUP

  20. Great article Julie. A couple of points to consider 1) The definition of disability insurance is crucial many plan start off with a regular occupation definition and switch to any occupation after two years 2) Some occupations have a hard time getting disability insurance – we did a survey a short while back – so Critical Illness insurance may be their only option.


  21. always criticalinsurance isvery good for every person


  22. very good policy


  23. I recall researching this several years ago. critical illness, if memory serves, originated overseas. i recall that the experience in Britain was that about 25% of those that claimed actually collected. if the policies available in Canada are like those I mentioned elsewhere then you’re better off spending it on something else. read the fine print and understand everything. and that won’t be easy. these contracts are hard to understand.
    better to get disability insurance to as much as you can afford since the statistics are there — you’ll likely be disabled before you die.


  24. I am presently working in one of the best companies in the world, which deducts LTD from my pay check bi weekly. After working for one year I developed arthritis on my knees, which forbids me from doing a particular job as required as I have also cut my hours due to the pain. If I get fired do I still get LTD and if so till when. The job comes under any job category which I am prepared to do but can’t give my 100% as required by the company.


  25. Why do disability insurance cost so much, you would be better taking lets say $500.00 or $1,000.00 a year and putting in a TFSA, a policy is usually for ten year term at exo


  26. This is a very informative article.
    As an advisor, I would point out that asking one’s HR department to review the group disability plan isn’t a good idea. This should be done by a financial professional who can help the client understand exactly what would happen in the event of a disability and therefore assist with identifying any need or opportunity to enhance the coverage. I find that 95% of people I meet haven’t read their group disability benefits or if they have, don’t understand at all what the plan actually does and more importantly, doesn’t do.


  27. I am surprised that your article sways readers away from purchasing CI. I am a planner, BUT also had CI when at the age 33, was diagnosed with an inoperable cancer. Cancer is cancer. These policies pay. I had a substantial amount and it still was not enough to recover my career to this date! It costs to be financially responsible. That should be the message when speaking to Living Benefits’ products.


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