In Part I of our Disability Insurance 101 series we explore what Disability Insurance is.
Most people understand what life insurance is: In the event of death of the life insured on the policy, a tax-free death benefit will be paid out to the beneficiary. However, when it comes to living benefits, particularly disability insurance most individuals aren’t quite so sure.
What am I protecting?
Believe it or not, your greatest asset is your ability to generate income. Protecting that asset in the event you become disabled and are not able to pay your expenses is the role of disability insurance. Whether it is sudden or the result of a degenerative illness, a disability has the potential of robbing you of your ability to earn a living.
The reality is that as a result of an illness your income may stop. What won’t stop are your mounting bills. Consider the fact that 1 in 3 people will be disabled for a minimum of 90-days before the age of 65.
If you do not possess the means via benefits or other sources of money to draw upon while your disabled for an extended period of time, then you definitely should be considering disability insurance. By owning an individually owned disability insurance policy, in exchange for the premium you pay you’ll be provided with a monthly benefit to replace the income you lost as a result of your inability to work due to disability.
What’s more is that you’ve probably set aside funds in your RRSP or pension every month so that when it’s time to retire you’ll have investments that will generate enough income for you to keep the lights on and travel. A disability can throw a wrench in those plans if you had to stop working before your planned retirement age. If that happened, who would pay those bills?
Check out this video from personal finance commentator Preet Banerjee as he explains the importance of Disability Insurance.
What’s the real risk?
Disability is a very real risk. According to the Commissioners Individual Disability Table, if you filled a room with 1,000 people all aged 40, nearly half of them will suffer a long-term disability before the age of 65.1
While it’s true that provincial health plans may assist in dealing with your drug costs and hospital fees, they won’t pay your mortgage, hydro, telephone bills or fund your children’s education.
How much of my income would be protected?
Disability insurance is calculated as a percentage of your current salary. Typical coverage will cover about 2/3 of your earned income. So if you earned $6000 a month, your individually owned DI policy may cover you for $3960 of monthly income. In addition, while your monthly salary is subject to tax, your $3960 benefit is received tax free (given you are the one paying the premiums)
In our next article we’ll explore how much disability insurance you need.
In the meantime, should you have any questions about this article, don’t hesitate to contact one of our living benefits specialists at living benefits@lilandinsurance.com
1 According to the 1985 Commissioner’s Individual Disability Table A.