Disability Insurance (DI)

Disability insurance helps replace your monthly income if

1. you are unable to work (perform essential duties of your own regular occupation) due to an accident or sickness
2. you are getting medical treatment
3. incident occurs or becomes known while the contract is in force
   • excludes pre-existing conditions

"Disability" is defined in the insurance contract (a contract of adhesion), and definitions vary among insurers. You must be working full time to qualify.

Coverage offsets the loss of your earned income (e.g., salary/wages, commissions, net research grants)

• excludes amounts you'll likely to continue despite the disability (royalties, alimony, net business income)
• especially useful for the self-employed

Coverage may also be available from government disability income plans.

Taxation

• individual DI: premiums are not tax deductible, so the benefits are tax-free income

• group DI: if the employer pays the premium, the benefit is taxable to the employee

Definition of Total Disability

To qualify for benefits

1. your disability occurred while the policy was in force
2. you are unable to perform essential duties of your regular occupation
3. you are under the care of a doctor

There are three definitions of "total disability"

1. any occupation (worst)
   • benefit payable if you are unable to work at any job → easy for insurer to deny claims
   • cannot earn any other income
2. regular occupation
   • benefit payable if you are unable to preform the essential duties of your regular occupation
   • benefit may be reduced or eliminated if you are able to work at another occupation
3. own occupation (best)
   • benefit payable even if you are working in another occupation provided you are unable to perform essential duties of your own regular or previous occupation
   • only available to the top occupational classes (e.g., surgeon may be able to teach)
   • so can get benefit and other income

Factors Affecting the Premium

Premiums are affected by

• age: e.g., 18 to 60
• gender: females are more likely to get disabled and to stay disabled for longer → higher premiums
• smoking: worse for smokers
• occupational class: how income earned
  • highest (best): professionals
  • lowest (worst): unskilled laborers
• the definition of disability
• the length of the waiting period before benefits are payable
• the length of the benefit period during which benefits are payable
• the amount of the benefit
  • e.g., 60%-70% of pretax earned income (may be limited to 50% if high income)

Occupational Classes

There are five occupational classes. If your occupation cannot be classified, you won't be insurable.

Benefit Amount

• replace a percentage of lost earned income
• designed to prevent malingering (i.e., to provide a financial incentive to return to work)
  • e.g., replace 60%-70% of earned income, which is approximately 100% of net income after tax
  • high income earners may be limited to 50% of earned income
• paid in arrears
• benefit can be a lump sum after the waiting period if
  • you are permanently and totally disabled, and
  • you can never return to your own occupation

The monthly benefit = earned income x income replacement ratio / 12

[another source]
For self-employed (and perhaps if total disability)

• eligible income: net business income (gross income less expenses) + other ongoing passive income (e.g., investment income, rental income)
• then multiply by benefit ratio, and adjust for any caps to get the benefit

Waiting Period (or Elimination Period)

• period during which no claims are paid (e.g., 2 weeks to 2 years)
  • like a deductible: eliminates claims for minor accidents or short term sickness
• disabilities may be covered from day 1
• shorter → higher premium

Qualification Period

• the period between total disability and residual (or partial) benefits
• rare in contracts for the top occupational class

Benefit Period

• how long the disability income is payable (e.g., 2 years, 5 years, to age 65)
• Short Term Disability (STD): 0-2 years (also called "weekly indemnity")
• Long Term Disability (LTD): 5⁺ years, to age 65
  • starts after benefits from Short Term Disability or government plans end
• longer → higher premium

Limitations and Exclusions

• pre-existing conditions may
  • be excluded from coverage
  • have longer elimination periods
  • have shorter benefit periods
• must be written into the policy contract
• common exclusions: war, criminal offenses, self-inflicted injuries, military service, extended foreign travel or residency

Types of Insurance

There are five main types of disability insurance

1. noncancellable and guaranteed renewable (best protection)
2. guaranteed renewable
3. conditionally renewable
4. optionally renewable
5. cancellable (worst protection)

Noncancellable and Guaranteed Renewable

• offers you the most protection (e.g., to age 65) → the highest premium
• insurer cannot
  • cancel the policy contract
  • increase the premiums
  • add restrictive riders
  • reduce benefits
• at age 65 (say), you can convert to guaranteed renewable if you are still working full-time

Guaranteed Renewable

• you can renew (e.g., to age 65) on the same terms and conditions
• the insurer can increase premiums for a class if morbidity claims are higher than expected

Conditionally Renewable

• you can renew the contract (e.g., to age 65) unless certain conditions occur
  • e.g., retirement, change to lower occupational class

Optionally Renewable

• the insurer decides whether to renew the coverage

Cancellable

• also called a commercial policy
• provides the least protection
• at renewal, on a class basis, the insurer can
  • cancel coverage
  • increase premiums
  • reduce benefits
  • add restrictions

Types of Disabilities

• 0% - 19%: totally disabled
• 20% - 80%: partial disability
• 81% - 100%: not disabled

Residual Disability (proportional definition)

• if you return to work part-time while recovering, you can receive a benefit proportional to your remaining disability
• helps if not fully recovered and unable to work full-time
• if earning 20% to 80% of previous disability salary
• % Benefit = (predisability income – income while disabled) / predisability income
  • income while disabled, e.g., working 20% of the time → 20% of normal income
• Benefit = (% Benefit) x normal disability benefit

Another view: Benefit = % of income lost x normal benefit

• e.g., lose 55% → get 55% of normal benefit

Partial Disability

• pays percentage of total disability benefit for a maximum number of months
• able to work x% → get benefit of (100% - x%) of benefit
  • e.g., able to work 40% → received 60% of benefit

Presumptive Disability

• for loss of limbs, sight, hearing or speech
• full benefit payable until the end of benefit period, regardless of ability to work

Recurring Disability

• if disability recurs within a specified period (e.g., 6 months), treated as continuation of original disability
  • no new elimination period
• benefits considered continuation of original claim (don’t start afresh)

Making A Claim

Time Limits

From the date the claim arises, the claimant has

• 30 days to notify the insurer of the claim in writing
• 90 days to provide proof of the claim

Claimant's Statement

The claimant's statement contains

• date the disability started
• cause and nature of the disability
• treatment
• name of the doctor

The doctor provides an Attending Physician's Statement showing details of the disability and the estimated duration. (Does the claimant pay for the APS?)

Other Resources

• CRA Child Disability Benefit (How To) (Canadian Personal Finance Blog, Jan 2013)