What should I look for in a disability policy?

Mar 24, 2022

There are many features of a disability insurance policy and they are all important. However, not every disability policy is the same and not every policy has the same features. Whether you are looking for disability insurance for a small business or disability insurance for the self-employed in Calgary, here’s what you need to look for in a disability policy.

The cost of disability insurance in Calgary

There are several factors that determine the premium for a disability policy, some of them being:

  • Coverage Amount – The higher the amount you would like to receive, the more it will cost.
  • Benefit Period – The higher the duration of time you receive a benefit while you are disabled lowers the payments.
  • Waiting Period – Your premiums will be less expensive if you are willing to wait longer to receive payments.
  • Age – Disability insurance increases in cost as you get older.
  • Health – Your costs will be lower the healthier you are.
  • Occupation – If you have a dangerous job, your premiums can be higher.

Questions to ask yourself

Below are some of the most common features of a disability insurance policy and some questions to ask when you are shopping for coverage.

How long can you wait before disability benefits start?

This will determine the “elimination period”, which is the number of months you would wait after becoming disabled for the policy to payout. A typical elimination period is 90 days, but you can choose shorter or longer periods (30, 60, 90, 120 days). The longer the elimination period, the lower the insurance price.

Integration – You can receive disability benefits from more than one source, but these plans are usually coordinated to make sure that all the benefits you receive are not greater than your normal income. For example, if your before disability income is $8,000/month and you are eligible for $6,000 of disability benefits and you also qualify for EI of $2,500/month, you will most likely not receive EI and the full $6,000 from your insurance policy.

How long would you want the benefits to last?

This is called the benefit period and is the maximum amount of time that disability benefits are payable when the insured becomes disabled. The benefit period can range on average from 5 years to age 65. The longer the benefit period, the higher the premium.

How is disability defined?

What it means to be disabled can be different things depending on the type of policy you get. It does not mean what a layperson may think it means. It doesn’t mean being unable to do anything. It doesn’t mean that you must be paralyzed to qualify – whether from total to partial and from any occupation to your own occupation.  

What disability is defined as in terms of work and an insurance policy is that, even if you are able to do some of the tasks of your job, you can still be ‘totally disabled’ and qualify for long-term disability. Moreover, you could even be able to work part-time and qualify.

How long you can be off of your current employment duties is one of the ways that disability is defined:

  • Own occupation – Provides a total disability benefit if you are unable to practice your chosen profession due directly to injury or sickness, even if you begin working again in a new career (in a different field). I.e:  You can work in a different field and still receive your disability benefits.
  •  Regular Occupation – Unable to perform the important duties of one’s regular occupation and not gainfully employed in another occupation.
  •  Any Occupation – Unable to perform the essential duties of any occupation for which one is reasonably fitted by education, training, or experience

In addition to this, you can be covered for the extent of the disability:

  • Total – As the result of an illness or accident that prevents one from performing the duties of their before-disability job duties. This definition normally stays in place for the first 24 months then it will need to meet the own, regular, or any occupation definition stated on your policy, to keep receiving benefits.
  •  Partial – If the insured is considered partially disabled – in other words, is unable to perform one or more of the important duties of his or her occupation or can perform all the important duties but not on a full-time basis, a percentage of the maximum benefit is payable.
  •  Residual – A sickness or injury may not be severe enough to keep the insured totally disabled but may result in a loss of earnings. This benefit pays a proportionate benefit if the loss of earnings resulting from a disability is within a specific range, typically between 20% and 80%.

Optional riders & benefits for disability insurance

Many long-term disability insurance policies include optional features called riders that you can add to enhance your coverage. Riders help customize a policy to fit your needs and preferences. Keep in mind that riders typically add to the cost of your policy.

COLA (Cost of Living Adjustments)

While on a disability claim and receiving the payout, COLA provides an automatic increase in the benefit paid to keep up with adjustments in the cost of living. For someone who experiences a long-term disability claim, the COLA rider may be critical to their financial security to reduce the impact of inflation. The disability benefit is increased (annually or semi-annually) by a fixed percentage or by the Consumer Price Index.

Return of Premium

With the Return of Premium benefit, you can get back a portion of premiums paid (usually 50%) if no claims have been made or if the policy is cancelled (varies by insurer).

Future Insurability

This is one that may be particularly important to younger policyholders (typically, those under 40). It guarantees you the right to purchase additional amounts of disability insurance at specified dates in the future without the need to provide evidence of good health or even if you are no longer in good health and uninsurable. This option has many names depending on the insurer, such as “guaranteed insurability option”, “guaranteed purchase option”, or “additional increase”.

Automatic Benefits Increase Rider

This rider stipulates that the monthly benefit amount will be adjusted automatically every year (provided you are not disabled) to account for pay raises or increased income you are likely to receive after you purchase a disability policy. The rider provides annual increases for a certain term. 

During this time, you will not be required to provide any proof that your income has gone up. However, if the rider is renewable and you want to renew it, you may have to show evidence that your income has increased at that time, although the increased benefits you already have cannot be taken away from you. 

In most cases, there is a corresponding increase in premium, so most companies allow you to decide whether you want to accept the higher benefit level and premium each year as it is offered.

One last point to think about …

When does the insurance company underwrite your financial situation? While you may initially qualify for a certain limit, what if your income drops afterwards? Some insurers do the underwriting at the time of the application so it is irrelevant if your income decreases, while others underwrite at the time you make a claim looking at your last year’s income or best 3 of your last 5 years – or some variation like this.

There are many complex parts and important considerations when it comes to disability insurance for a small business or disability insurance for a self-employed person in Calgary. The influx of information can feel overwhelming – we are here to help. 

If you have questions, book a free no-strings-attached consultation with us. 

About the author

  • Pam is the founder and “boss lady” of Savanti Insurance Agency and Savanti Investment Team (attached to PEAK Securities Inc.). She has over 15 years where she specializes in planning, investments, risk management, and tax-effective strategies for clients’ personal and/or corporate financial needs.

    Coquet Pamela

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Although this article was written with the utmost care and based on sources deemed reliable, there is no guarantee of its accuracy or applicability to all specific cases. This article is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. All content and information are of a general nature and does not address the circumstances of any particular individual or entity. Many of the issues discussed will vary by province. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. The opinions expressed in this article do not necessarily reflect those of Peak Securities inc.