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What Matters With Disability Income Insurance
Quality matters with disability income insurance even more than it does with life insurance.
Claiming on life insurance is a once and done thing. Disability claims are more enduring. You can avoid many problems by choosing the right policy from the right carrier.
Nature of the contract
The idea is if by reason of accident or sickness one is unable to continue to earn, they will receive an amount from an insurer. Usually monthly. Immediately we must know what they mean by accident, sickness, unable to continue, how they decide the amount, and for how long they will pay.
Definitions matter.
Definitions matter more than for life insurance. Being dead is reasonably objective. Disability not so much.
Accident and sickness look easy, but no. Sometimes accidents are reasonably foreseeable and claims may be denied. Should diving off a high bridge be covered? Back injuries are often difficult too. Sickness is not so easy either. Mental will be difficult. Poorly defined diseases like chronic fatique syndrome are not so easy. Some diseases are hard to diagnose. Lyme disease being one. You should pay attention to the contract, not the sales presentation. All companies will provide a sample contract.
What does disabled mean.
Intuitively unable to work, but that isn’t quite enough. There are three layers of detail.
- Unable to perform all of the significant duties of your “own” occupation. Some occupations have a clear set of duties. Thoracic surgeon is different from, orthodontist and each is definable. Executive duties are not definable. If you cannot perform the duties because of illness or injury you get paid, regardless of what else you may be doing.
- Unable to perform the duties of your regular occupation. More vague but there will be a clear distinction between executive, or doctor, or accountant, and clerk. You cannot be working at something else though.
- Unable to perform the duties of any occupation. Just what it says. If you could not be an executive, but good be a shipping clerk, end of claim.
Many policies are regular occupation for two years, any occupation after. Notice car insurance, creditor insurance, many group policies, some association plans.
As the definition favours the insurer more, the price comes down.
When does disability start?
Look for “qualifying period” Some policies require that you be totally disabled to begin. Like with a stroke. On the other hand there are disabilities thata rise over time. Like arthritis or hepatitus “C” You must know if you would be paid as your ability to earn deteriorates to total disability or not. Some policies kick in at 20% of previous income lost and becomes total at 80% lost. They pay proportionally.
Proportional is different from partial. You should know how.
Start times are optional. 0 days after disability, 30, 60, 90, 180, even longer. they are appreciably more expensive as they shrink from 90. If you are an employee and eligible for Employment Insurance you may need to start at 121. Keep in mind the check comes at the end of the month so a 90 day start means a check after 120 days.
How long does it pay?
Again optional. Until you cannot meet the definition for disabled or for some predetermined time limit. 5 years 10 years or to age 65 are common. There may be a “return to work” period, usually 2 months, where you get some of the monthly amount after going back.
How much can I get?
Maximum coverage depends on what other coverages you may have now and on your current income. The maximum will be a percentage of your income. It is usually something close to the after tax amount on your current income. It will be reduced by any coverages you have in place. Group coverages are tricky because their definitions tend to be less valuable yet still reduce the smount available dollar for dollar. Car insurance doesn’t reduce the maximum.
If you have a lot of passive income like interest and rent, they will take that into account too. The idea is the coverage should not be an incentive to stay disabled.
Rate Categories
There are usually 5 different rate bands. As the likelihood of being injured at work goes up, your rating goes down. In the same way if a relatively minor injury keeps you from working, your rating goes down. A long haul truck driver is a B because they might get injured at work and because they might be off for a while with a back injury. A psychiatrist is 4A.
Sometimes work stability and high earnings will allow you to upgrade. You should ask.
Other
When does underwriting happen? At issue or at claim. Be very careful with policies that have an exclusion for pre-existing conditions. They do not require that you even know about them when you start. They may not be related to your illness or injury. Claims will be denied if present.
Cost of living increases. Usually available. It adjusts what is paid after the claim starts. Not before.
Future earnings protection. A non-medical ability to get more coverage because earnings have increased
Return of premium. After some period, if there is no claim you get back some of the premiums. 50% every seven years is possible. If you have taken maximum coverage, it might be good for you. If less, why would you not get more coverage with the premium money?
Continuing oversight
During a claim, you can expect the insurer will want medical information every year or so. Don’t be surprised. Claims management is an important part of the ability to charge fair premiums.
Takeaway
Disability insurance is a complex policy. It is far more than the dollar benefit amount. Many policies have high numbers but weak definitions. You should know.
Disability insurance is one case where cheap can be expensive. The policy has at least a dozen factors that matter. If you get a lower price, something will be missing. If you don’t know what it is you may be disappointed when it matters. Price is not the only variable that you should care about.
I help business owners, and professionals understand and manage risk and other financial issues. To help them achieve their goals, I use tax efficiencies and design advantages to acquire more efficient income and larger, more liquid estates.
Please be in touch if I can help you. don@moneyfyi.com 705-927-4770
moneyFYI 
I am amazed at the detail and quality you put in this article.