|
Disability Insurance
What is
disability insurance?
Most people consider
buying home, car and life insurance an absolute must, but disability
insurance is often overlooked. This could be a costly mistake.
Home and car insurance
protect your assets. Disability insurance protects your ability
to maintain these assets and acquire new ones.
Consider this: According
to the Society of Actuaries in the United States, a 25-year-old
has a 58 per cent chance of being disabled for longer than 90 days.
For disabilities of duration longer than 90 days, the average downtime
is 1.2 years.
Being sidelined for
that amount of time can have a devastating affect on your personal
finances.
Do you need
disability insurance?
As is the case with
life insurance, the government does not require you to purchase
disability insurance. However, most people rely upon their income
to pay bills, support their families and maintain their standard
of living. Disability insurance is really income insurance. If you
were injured or ill and unable to work, who would pay your bills?
Here is how to tell
if you need disability insurance:
* Count your savings.
Can you afford to be out of work for a year without selling
any assets or borrowing money?
* Do you have a
group disability insurance plan?
* Some workplaces
offer group disability insurance to its employees. Are you covered?
* If so, what does
this plan cover and what are its limitations?
* Are you employed?
You can't buy disability insurance unless you have an income
that could be jeopardized by a disability.
It's also important
to know if you are in a profession that is eligible for disability
insurance. According to Canada Life disability insurance specialist
Chris Lyne, insurance companies believe there are some professions
that are too dangerous to cover. These can include loggers, taxicab
drivers, professional athletes, musicians and anyone in the explosives
industry.
What will disability insurance
cover?
Depending on the policy,
disability insurance will cover about 75 per cent of your after-tax
income until the age of 65 in the event you are disabled for more
than 90 days and unable to return to work.
Insurance companies
don't pay out your full income because your expenses will be generally
lower than when you are working. However, if you do need to make
a claim on your policy, the money you are paid is tax-free.
It is important to
read the policy carefully to determine what types of disabilities
are covered and the exact nature of the coverage. Do this before
you start paying premiums.
It is pointless to
over-insure yourself. No matter what type of policy you hold, you
can't claim more than the income you would receive before you became
disabled. You cannot purchase a policy that will cover you for $10,000
a month if you earn only $5,000.
Types
of disability insurance
There are three basic
types of disability insurance offered by most insurance companies:
* A conditionally
renewable policy. This provides coverage for someone in a fixed
profession. If this person changes jobs, depending on the risk
associated with the new profession, the policy could be discontinued
or the premiums may change.
* A guaranteed
renewable policy. Your coverage can never be cancelled but the
premiums can go up, depending on the new job.
* A non-cancellable
policy. Your coverage can't be cancelled nor will the premiums
go up.
How much will coverage cost?
The cost of coverage
and the kind of contract available is determined almost entirely
by the occupation of the person seeking coverage, says Lyne.
Premiums will be lowest
for those in an occupation with a low risk factor. Lawyers, doctors
and people who work in an office will pay the lowest rates and be
eligible for the best contracts. Rates will be highest for butchers,
bricklayers and people in the construction industry.
One way to lower your
premiums is to extend the waiting period before benefits start.
A waiting period longer than the typical 90 days will usually result
in lower premiums.
|
Do
you need it