What If You Suddenly Lost Your Income due to Sickness/Injury
The purpose of key person disability insurance is to provide the income so that you can maintain your life style until you are cleared to return to work. It transfers the financial risk associated with a serious disability from you to an insurance company. Recent industry statistics from Manulife show the following cumulative risk of suffering a period of disability lasting at least 90 days¹
Disability age 40
Disability age 50
Disability age 60
¹The risk of disability depends on your age, sex, and occupational factors, however, once disability does occur, chances are it will last several years. The average length of a disability lasting over 90 days is about 3 years (Source: Canada Life).
This chart provides a breakdown of the reasons for disability claims when compared against the leading risk of musculoskeletal disability. It is based on policy count of active claims of individual disability insurance products. It is interesting to note 30% were from mental disorders and nervous system issues.
“Somatic Conditions” includes chronic pain, chronic fatigue and fibromyalgia
“Circulatory System” includes coronary artery disease, heart attack, stroke and congestive heart failure
“Miscellaneous” includes digestive disorders, infectious disease, allergies, and respiratory conditions
“Nervous System” includes Multiple Sclerosis, Parkinson’s and Alzheimer’s
“Mental Disorders” includes major depression, bi-polar disorder
“Musculoskeletal” includes degenerative disc disease, arthritis, soft tissue damage to the back and joints
Provincial Workers’ Compensation Board would cover only about 8% of these claims and critical illness insurance would have paid a claim on between 16% and 26% of the claims that were paid through the disability insurance. It is possible for properly protected people to have a claim on both policies for the same period of disability.
|Occupation||Date Disabled||Nature of Disability||Age When Disabled||Total Paid to Date|
|Machine Operator||1989||Shoulder injury||42||$233,800|
|Doctor||1989||Chronic pain, depression||34||$1,458,884|
|Bricklayer||2001||Carpal tunnel syndrome||48||$97,610|
|Business Owner||2002||Car accident||43||$121,320|
|Dentist||2003||Herniated cervical disc||55||$634,088|
Statistics used provided by Manulife Financial, December 2008
Key Person Disability Insurance Basics
We highly recommend that you seek the expert advice of a licensed disability insurance agent before considering a policy as policy terms and options can vary greatly from policy to policy. We have access to key person disability insurance products from top rated insurance companies in Canada. If you are an independent contractor or self-employed tradesman or professional and do not have disability insurance coverage, what is protecting your income?
The business could use the money from the insurance payouts for the following purposes:
- Hiring and training a new employee with the same skillset
- Paying off debts and managing creditors
- Improving lenders’ opinion about your firm
A serious injury or illness that keeps you from working for an extended period of time can be financially devastating when you consider that:
- Your current income will cease
- Your future income will cease
- Yet your business and/or personal expenses may continue
Disability insurance policies help protect you and your family by protecting your income in the event of a disabling injury or illness.
There are two types of disability policies available
1. Short Term Disability Plans
– This disability policy provides protection for a brief period, generally up to 120 days when Employment Insurance might not be available. This is only available as part of a group insurance or employee benefits plan, and not as an individual product.
2. Long Term Disability Plans
– Available either as a standalone solution or part of a group plan, Long Term Disability (LTD) comes in a few flavours. The focus here will be for standalone plans. LTD plans offer the several design criteria. To learn more about “Long term disability plans”, please select the tab above to get more detailed information.
Long Term Disability Plans – Available either as a standalone solution or part of a group plan, Long Term Disability (LTD) comes in a few flavours. The focus here will be for standalone plans. LTD plans offer the following design criteria:
- Elimination period – which is the number of days before the disability benefit will start to be paid for. For most plans the elimination period will be 30, 60, 90, 180 or 730 days, with the highest cost for the shortest elimination period, e.g. 30 days. There are a few plans where the elimination period can be as short as 1 day, before the benefit begins. It is important to understand that the first check will arrive approx. 15 days after the first month of eligibility. For example, if you are disabled on Feb. 1, and have a 90 day elimination period (the most popular), you have to be disabled for at least more than 90 days to receive a benefit. So in this example, if you are still disabled on May 1, the benefit period starts, then on June 1, the first benefit cheque will be issued, which you will likely receive by June 15th, or approx. 4.5 months after your initial start of disability.
- Benefit period – this is the duration they will pay a claim once the claim has been approved. Options are 2, 3, 5, 10 or to age 65, with to age 65 the most popular.
- Injury only, or injury and sickness – the best plans will pay a benefit whether you are disabled from an injury, or a sickness, e.g. heart attack, however some people may not qualify for sickness due to a preexisting condition. For this scenario, there are injury only plans also available from a few providers.
- On the job vs. 24 hour – some plans allow you to save money by choosing to only protect your being injured while not at work, the rationale being while on the job, you would be covered by Workers Compensation (WCB). The problem with this is WCB is notorious for either delaying payment, or just not paying at all, so a 24 hour plan is definitely recommended, as the best plan.
There is a lot more to long term key person disability insurance than is covered here, and you will definitely want to speak with one of our expert advisors to understand the many nuances of disability insurance.
Disability plans replace between 54-70 % of the policyholder’s gross taxable income, tax free, in the event that the policyholder becomes disabled. Some Canadian disability policies differ on how they define eligibility.
Eligibility for disability insurance plans may be defined as
- A policyholder who is no longer able to perform the substantial duties of their occupation due to injury or illness, often referred to as “Regular Occupation”.
- Or a policyholder that is unable to perform job duties in any line of work due to injury or illness for which their education, experience and training would qualify them to do, often referred to as “Any Occupation”.
- A policyholder who is no longer able to perform the particular duties of their occupation, e.g. a surgeon who ruins their hands due to injury or illness, often referred to as “Own Occupation”, available to professionals such as doctors, certain engineers, Lawyers, etc.
There are also many aspects of Canadian disability plans to consider when deciding on a policy
- Have you been an independent contractor or self-employed for long or are you just starting out?
- Will you accept a 30 day wait period before payment starts (or a 60 day or 90 day)? This can dramatically affect your disability insurance premiums. You need to ask yourself, can I survive for 4.5 months before I receive my first benefit cheque (typical for a 90 day elimination period)?
- How will you be paid if you can still do a part of your job?
- Do you need an added rider on your disability insurance policy to cover business expenses, including loans and lease payments, RRSP Contributions?
- Should you consider adding the option to have all your disability insurance premiums returned, less any claims?
- What if your long term employment plans change; will coverage continue if you change jobs or occupations in the future?
- Some key person disability insurance policies do an income test at time of claim and if your income does not support the benefit, it is reduced accordingly while others guarantee to pay out what you purchased as they do the income test when you purchase the policy.
Get Key Person Disability Insurance If You Are the Business Owner
Disability insurance policies differ significantly in what is covered, how long they will pay, and how they define your income on which they do pay. There are too many considerations to provide meaningful instant quotes. Let one of our professionals work through how much of a monthly benefit you need and then help you select the policy that would work best for you and still be within your budget.
Ask yourself, would you rather have a job that pays $60,000 per annum (or whatever you do earn) but nothing if you were disabled and could not work or one that paid between $57,000 and $58,000 (96% to 98% of your current income) but if you were disabled it would pay you a tax free monthly income to age 65. If you do not have key person disability insurance through your employment you need to seriously consider this whether you are single and particularly if you are married with children.
Be sure to get expert advice when comparing disability insurance plans in Canada. Take a moment and complete the Health Insurance Quotes form and one of our professionals will contact you, usually the same day, if not, the following business day to provide you with your free and accurate quotes.