Most Canadians don’t protect themselves against the loss of their earning power. This year, one in eight working Canadians will become disabled for more than three months and half of these individuals will be disabled for more than three years. Usually when one is asked “what is their most valuable asset?” The responses are their homes, cars or investment portfolios. Usually, most people don’t think of what allows them to buy and maintain these material things and pay for food, utilities, the mortgage and other living expenses. The answer is simple; it is our ability to earn an income. Our personal income allows us to repay debts, accumulate wealth and develop a lifestyle for our families and ourselves. Unless we are independently wealthy and we do not need to work, disability insurance is an essential part of risk management while implementing a comprehensive financial plan for ourselves.
Consider this: a 35-year-old dentist earning $120,000 today; who plans to work to age 65, using the historical average rate of inflation of four percent for the 20th Century, this dentist will earn $5.7 million over the next 30 years.
It is important to realize that disability insurance policies are contracts and there are critical aspects of these policies that we need to be aware of before purchasing one. A disability insurance policy is a contract between the insured (you) and an insurance company. The monthly income benefits that you buy will only be paid to you based upon the definitions and wording in your contract.
The most important definition in the disability contract is the “definition” of disability. This definition is the heart of your plan. As the insured, you need to be able to simply understand this definition. In Canadian law the use of the term “reasonable person” is often referred to. If as a reasonable person (you) cannot easily understand the definition of disability and how/when your disability income will be paid out, then you should not purchase that plan or deal with your current insurance agent. If the definition appears unclear, be aware that an insurance company at the time of claim has the power to define what constitutes a disability through its own interpretation.
The three important definitions of “disability:” Things we need to know!
Own-occupation
“Own-Occupation” is the most clearly defined definition and the most expensive to buy. It is usually sold as a Rider (addition) to the regular coverage of a disability policy. Owning a policy with the own-occupation definition pays you an income when you are disabled and not able to perform the duties of your chosen occupation. You would be eligible to collect full disability benefits for example when you are no longer able to work as a dentist, even if you decided to work in another occupation such as a cashier at a fast food restaurant, earning less, the same or more money than you did when you were a practicing dentist.
Regular occupation
The ‘regular occupation’ is the most common definition found in privately purchased disability policies today in Canada. You will be paid a benefit when you can no longer work in your chosen profession because of disability or sickness and do not have employment at all. If you chose to work in another profession the definition of your occupation then changes to that of your new work situation. So if you are a dentist and can no longer do that type of work but chose to be employed as a cashier at a fast food restaurant, the definition of your regular occupation changes to that of cashier and the insurance policy will no longer pay you a disability income.
Any occupation
This definition is found in most groups and employer sponsored disability policies and is the most misunderstood. This definition gives the insurance company the most leeway to interpret what constitutes a disability and to determine what the insured can or cannot do to earn a living. With the ‘Any Occupation’ definition you will only receive a disability income from an insurance company provided you could not work at all in a job that you are “reasonably suited to do by your education, training or experience.” So if you were a dentist and can no longer perform this type of work, the insurance company will have the power to make the determination if you are qualified to be a cashier at a fast food restaurant. Even if you chose not to be a cashier, just by being determined to be qualified, the insurance company can legal deny you your disability income.
Other important things to consider!
Benefit term
Many people have a difficult time deciding how long the benefit period they should buy. The average length of disability is about three years and your options for a disability policy benefit period ranges from two years, five years, or to age 65. If you are a young professional and do not have considerable financial assets, a benefit period to age 65 is highly recommended.
Consumer Price Indexing (CPI)
It is very important to consider purchasing a Consumer Price Indexing rider/coverage when buying a disability policy. An inflation rate of four percent per year, translates to mean that $1 today will have the buying power of $0.50 within 18 years. A cost-of-living adjustment rider is designed to help you keep pace with inflation after your disability has lasted for more than a year.
Future insurability
This optional rider is designed to protect your future income. This rider is a must for young professionals. It offers the ability to increase your disability coverage, regardless of your health, as your income rises. With the earlier example of our 35-year-old dentist earning $120,000 today, if his income only increased with inflation he would have an annual income of $177,000 ten years from now. By purchasing this option with his original disability policy this dentist would be able to buy additional coverage without any additional medical underwriting requirements. In essence, if he was diagnosed with a heart condition, as long as he had future insurability on his policy he could buy more coverage and have no fear of being declined by the insurance company.
In essence, most Canadians need to seriously consider purchasing their own disability insurance to protect their current income and to maintain their lifestyle. It is estimated by Advocis (formerly the Canadian Association of Insurance and Financial Advisors) that there are over 50,000 financial advisors in Canada and only three percent of this group specializes in the area of disability coverage. The best approach is to find one of these professionals and work with them to insure your financial future.
A person’s ability to earn during their working career is by far their greatest asset and the largest contributor to their long-term financial success. Likewise, a significant disability or sickness is the greatest guarantee to start out on the road to poverty.
Peter J. Merrick is President of Merrick Wealth Management Inc., a boutique firm specializing in fee Financial Planning and Executive Benefit Planning.
