Disability insurance is designed to provide you with a monthly income benefit if you become disabled and can’t work due to accident or sickness. Disability insurance should be an integral part of every financial plan considering that 1 in 3 Canadians will be disabled for more than 90 days. Many individuals tend to overlook disability insurance as they believe, “it won’t happen to me”. Disability insurance and life insurance go hand-in-hand.
Applying for Disability Insurance
When applying for disability insurance, the insurance company takes in account your morbidity risk which is the risk that you would become disabled during the policy year.
Occupational Schedule List
When applying for disability insurance, your premiums would vary depending on your occupation and the class that your occupation falls in. When applying for disability insurance, be aware of how your occupation might affect your premiums. Each insurance company has their own classes and qualifications but the general trend is as follows:
- Class 4A – Class 4A tends to be the lowest risk classes. It includes professionals who are well educated and have higher levels of income such as doctors, lawyers, actuaries, architects, accountants, etc.
- Class 3A – Class 3A includes occupations that require no physical effort such as business executives, senior management, etc.
- Class 2A – This class includes occupations that require certain skilled clerical or technical work such as court reporters, surveyors, office workers, etc.
- Class A – Class A includes workers who specialize in a certain skill with physical duties such as hair stylists and electricians.
- Class B – Class B tends to be the highest risk and covers the most hazardous work such as carpenters, mechanics, roofers, etc. Each company approaches this class differently.
- Class X – This class is for uninsurable individuals.
Total Disability
When applying for disability insurance, the policy holder can choose how they wish to be covered and conditions that their policy will pay out benefits.
Own Occupation – These type of policies provide coverage if the insured individual is unable to perform duties of their specific occupation such as a heart surgeon. The surgeon may develop tremors which would categorize him as totally disabled as he wouldn’t be able to continue performing heart surgeries. However, he could be a professor.
Regular Occupation – This definition goes hand in hand with “own occupation”. Coverage will be provided if the conditions of own occupation are met. The insured is unable to work in any gainful occupation. Benefits might stop if the policy holder finds a job that would meet their experience, training or education.
Any Occupation – This policy would fall under total disability and would provide benefit if the individual insured is unable to work in any occupation that they are suited for based on experience, education and training. Benefits will stop if the insured can do any job.
Partial Disability
Partial Disability is based on time and defined as any type of disability which the insured is unable to perform at full physical capacity. This could be due to a job injury or illness.
Reduced benefit would be paid if:
- the insured cannot perform one or more duties of their job
- the insured is unable to perform their job at least half of the normal time required. For example, an individual is supposed to work 37.5 hours a week but due to injury, they work only 15 hours.
When applying for disability insurance, remember that, the monthly benefit amount is a percentage of the full benefit such as 50 for the first 36 months and reduced amount thereafter.
Residual Disability
Residual disability is based on income and is defined as the inability to perform your required job duties, thus resulting a loss of income. Insurance companies will pay benefits if:
- The policy holder has loss of earnings of at least 20%. If the insured has a loss of 80% of their income, the insurance would pay 100% of the benefits.
Partial and Residual Disability
Partial and Residual disability are interchangeable and insurers typically allow you to switch from partial to residual at least once. Partial Disability is based on time meaning that you’re working less and Residual Disability is based on income, meaning you’re earning less.
Elimination Period When Applying for Disability Insurance
Elimination period is an insurance feature that refers to the time period that must pass before the insured can start receiving payments. The policy holder must be disabled for a certain period of time before they start receiving payments. The elimination period was set up in order to discourage frivolous claims.
- The elimination period is typically 30, 60, 90, 365, or 720 days. The average is 90 days or 3 months.
Keep in mind when applying for disability insurance that the longer the elimination period, the lower the premiums as the insured bears most of the risk.
Benefit Period When Applying for Disability Insurance
The benefit period is the period in which the insured is eligible to receive monthly disability benefit. The monthly income benefit tends to replace between 60% and 85% of your regular income.
- The benefit period varies but most common are 2 year, 5 year and to age 65.
At age 65, the disability benefit usually stops but there are exceptions and certain contracts which provide benefits to age 70 or for lifetime if the disability occurred before age 65. Insurance company would also typically provide payments until age 66 if the insured individual is disabled at age 64.
Benefit Maximum
Insurance companies have a maximum benefit that they would pay out. This is typically 66.66% of an individuals pre-disability, before tax, income.
Type of Disability Policies
Non-Guaranteed – With non-guaranteed policies, premiums are not fixed and can change in relation to how many claims your line of occupation files for. The more claims for a specific occupation class, the higher the premiums. When submitting, a claim the insurance company would ask for proof of income. The monthly benefit can be reduced if there was a change of occupation since purchasing the policy.
Non-Cancellable – With non-cancellable policies, the premiums are fixed and won’t be increased by the insurance company. When submitting your claim, there needs to be no proof of income provided. These type of disability policies are not integrated with other sources of income such as EI, CPP, individual plans, etc.
Group Disability Insurance
Group Disability Insurance is common with companies who have signed up for disability insurance to cover a group of people. These type of policies tend to replace the regular income of group participants if they become disabled due to sickness or injury. If it’s a short term disability, the benefit is usually equal to 100% of the employee’s regular pre-disability salary. This benefit would be taxable to the employee
Employee Premiums – When applying for disability insurance, it’s recommended that employees pay 100% of long term disability premiums as any benefits that the employee were to receive under the plan, will be tax free. If the employer pays the premium, the employer would report a taxable benefit to the employee.
If the member is receiving disability benefits under the CPP, the group disability insurance policy would also reduce the policy benefit that the individual would receive under the plan. For more information and guidance on how to proceed applying for disability insurance, contact your insurance advisor.
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