So, you have put a term life insurance plan in place — congratulations! Term life insurance provides financial protection to your family during the years they are most likely to need it, and it is the most affordable way to protect them after you are gone.
However, great as term life insurance is, it does not cover everything.
What is life insurance?
Life insurance is a contract between you and the insurer. When you die, the insurer pays a death benefit amount to a person or people selected by you. In exchange, you make premium payments over the length of your life insurance policy.
Life insurance does not offer financial protection should you experience illness or injury resulting in long-term disability. It pays out the death benefit amount only when the insured passes away. Having said that, some life insurance policies let you add riders — added extras that provide flexibility or benefits. For instance, if you add the disability income rider, your life insurance policy will pay you income if you were to experience illness or injury resulting in disability.
What is disability insurance?
Disability insurance protects your most valuable asset — your ability to earn a paycheck. It replaces part or all of your monthly income if you were to experience illness or injury resulting in disability.
Life and disability insurance are vastly different types of policies. Life insurance offers financial protection to your loved ones after you are gone. The payout is triggered by your death and goes to your beneficiaries.
By contrast, disability insurance protects your income if you cannot work. It makes payment only as long as the policyholder is alive but cannot work due to illness or injury resulting in disability.
Policyholders can add riders to their life insurance policy to protect their income to some degree against disability. However, these riders do not offer the same level of protection that disability insurance provides. Nor do they offer the same level of customization.
Does life insurance cover disabilities?
No, it does not. Life insurance does not have built-in clauses for disability. This means they do not automatically provide income protection if you are unable to earn a living because of illness or injury resulting in disability. All the same, there are riders that you can add to your policy to make things easier if you were to experience illness or injury resulting in disability.
Getting disability coverage through life insurance
When it comes to protecting your income against injuries or illnesses, disability insurance wins hands down. But if you cannot afford to buy a separate policy, at least consider adding a disability rider to your existing life insurance policy.
Life insurance riders let you tweak your coverage to suit your unique needs, often at a small added cost. There are three riders that may prove helpful if you were to experience illness or injury resulting in disability.
- Disability income rider: Provides a supplementary income benefit — usually paid monthly — in the event of illness or injury resulting in Generally, this benefit is set as a percentage of the policy’s face value. For instance, if you have a one-million-dollar policy and the disability income benefit is 1%, you will receive $1,000 a month.
- Waiver of premium rider: If you meet the eligibility criteria of total disability, you can maintain your coverage without having to pay premiums. The definition of disability may vary wildly from one insurer to the next, so make sure you compare policies before you sign up.
- Accelerated death benefit rider: This allows you to use a portion of the death benefit amount if you get diagnosed with a terminal illness.
Why do I need disability coverage?
The risk of a severe injury or illness is greater than you may think. One in six Canadians will experience a disability lasting three months or more before they turn 50.
Would you be able to sustain yourself without exhausting your savings if you were to experience illness or injury resulting in disability and could not earn a living for a few months or more? If no, disability coverage could make sense for you.
You probably need disability coverage if:
- You cannot sustain yourself without a paycheck
- You are the sole or primary earner for your family
- You are self-employed
- You do not have disability coverage through your job
- You are paying off debt
- You work in a high-risk field
You may think disability insurance is only for people with dangerous jobs, but that is not the case. Nearly 9 in 10 long-term disabilities result from illness —not accident. Which means you may be susceptible to illness regardless of the nature of your work.
There are some occasions, however, when it does not make sense to buy disability insurance. You might not need disability coverage if:
- You can afford to self-insure the risk of not being able to earn a living
- Your spouse is a high earner and both of you can live comfortably on one income
- Your Canada Pension Plan disability benefits are sufficient
- You are with the Canadian military and your military benefits provide adequate disability coverage
Alternatives to life insurance with disability coverage
There are several alternatives to life insurance with disability coverage.
Short-term disability insurance can help you fill income gaps if you are temporarily prevented from earning a living. It pays a percentage of your income if you are temporarily affected by illness or injury — usually 60% to 80% of your pre-disability salary.
Short-term disability can include conditions such as:
- A short-term illness
- Pregnancy or pregnancy complications
- Recovery after surgery
- Back disorders
- Joint disorders
- Digestive disorders
- Non-work-related injuries
Some life and disability insurance companies exclude certain conditions, like mental illnesses. Therefore, carefully read the terms before signing up. Most short-term policies provide income protection for a few months, but some may offer benefits for up to two years.
Long-term disability provides income replacement to workers who cannot work because of a prolonged illness or injury resulting in disability.
A disability can prevent you from earning a living. While some people can pay bills and put food on the table without earning a paycheck for a few months, few can get by without working altogether for an extended period.
This is where long-term disability insurance can come in. These policies provide a monthly benefit amount for longer periods. Benefits can last anywhere from 24 months to retirement age, depending on your policy. Long-term disability coverage usually costs around 1-3% of your salary, and the benefit amount is usually about 60% of your after-tax salary.
Long-term disability can include conditions such as:
- Nervous system disorders
- Musculoskeletal disorders
- Mental health problems
- Injuries due to an accident
Canada Pension Plan Disability (CPPD) Benefits
CPPD provides partial income replacement to certain Canada Pension Plan contributors. You can qualify for this monthly benefit if:
- You are under age 65
- Your contributions meet certain requirements
- Your disability is severe enough to stop you from working
- Your disability is expected to last a long time or result in death
To find out more about the CPPD benefit program, visit the Government of Canada website.
Depending on territorial or provincial rules, your employers may have to provide medical and wage benefits if you get injured or become ill at work.
Are disability benefits taxable?
Whether disability benefits are taxable or not depends on the source of the disability income. Disability benefits from an individual disability policy are usually not taxable. The same goes for income from a worker’s compensation plan. However, payouts from a CPPD program are taxable.
Your disability insurance provider will inform you if the payout is taxable. If it is, it will automatically withhold it if for you. Contact your insurance carrier to find out if you will have to pay taxes on your benefits.
How much coverage do I need?
You should have enough coverage to live off comfortably if you were to lose your paycheck due to disability. Most financial experts recommend your disability coverage should be big enough to replace 60-70% of your pre-disability salary.
That said, how much coverage you would need, depends on your situation. Here is a simple formula to help you make an educated guess:
(Current monthly expenses + loan repayments) – (reductions in spending + income from sources) = Minimum disability coverage
Start by finding out how much you currently spend in a month. Make a list of all your monthly expenses and do not forget to factor in “miscellaneous” expenses. Finally, add your loan repayments to the tally.
Reductions in Spending
When you will not be working, you will likely require less money than what you need currently. Some of the reductions in expenses you may want to factor in are:
- Commuting expenses
- Workday lunches
In addition to these, you may also be able to reduce your housing costs considerably. Many professionals prefer living in high-income neighbourhoods because they are close to their work addresses. When they do not have to live near to their workplace, they can opt to move to a cheaper neighbourhood.
Income from other sources
Finally, determine if income from other sources can help make up some of the income shortfalls and, by extension, reduce the amount of disability coverage you require. For instance, perhaps your spouse could return to work if you happen to lose your job should you experience illness or injury resulting in disability.
Another question that people frequently ask is — where can I buy disability insurance?
Here are the different options available:
- Many employers offer employer-sponsored coverage. Generally, the employer pays some or all of the cost of premiums.
- Purchase disability insurance through work. Rather than offering employer-paid disability coverage, some employers offer it as a voluntary benefit, allowing you to buy a policy at a group rate.
- Purchase an individual disability insurance policy. Grab quotes from various companies offering life and disability insurance in Canada to get the best price.
If you rely on your paycheck to pay your monthly living expenses, make loan repayments, and save money for your family’s future, you need disability insurance. However, remember that disability coverage is great only if you have enough of it, so take a moment to understand your needs. At Dundas Life, we can help you find the right amount of disability coverage at the best price.