Disability Insurance: How to Find the Right Plan

Over 3.6 million Canadians have a disability (that's one in eight or roughly 13% of the population) and it only increases with age. Add to that the fact that disability costs the Canadian economy about $60 billion annually.

But with disability insurance you'll be covered if you should happen to become one of those 3.6 million. Disability insurance replaces a person's income in the event they are disabled due to an injury or illness. Some plans exclusively offer "Injury Only" benefits.

The insured's disability benefit is influenced by the insured's income: the more they earn, the higher the benefit and hence the higher the premium. The insured also chooses their elimination period, which could be zero days, 15 days, 30 days, 60 days, 90 days, or longer.

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Neil Paton, president and CEO
of The Edge Benefits,
guides you through finding
the right disability plan.

Usually the rule is: the shorter the elimination period, the higher the premium.The benefit period determines how long the insured will receive their money. This could be two years, five years, or until age 65 or 70, depending on the insurance company. Obviously, the longer the benefit period, the higher the premium.

"One of the greatest risks we all face is the ability to protect our income from an illness or injury," says Neil Paton, president of The Edge Benefits, an insurance provider specializing in disability and living benefits insurance for self-employed and small business owners.

In fact, Paton contends that the disability risk is generally shown to be two to three times more likely than the risk of premature death over your working career, and yet disability insurance is often overlooked by advisors and clients alike.

"When you think about advisors, who are the engine of providing comprehensive insurance advice to clients, unfortunately they often overlook this risk, and that's not good, but the reason this happens is due to the challenge that the insurance industry in general has in making disability insurance products simple, easy to understand, and straightforward to acquire," says Paton.

As a result, while some insurance brokers do take the time to learn what it takes to effectively promote disability insurance, Paton tells us many simply don’t. "I would estimate that the percentage of licensed brokers currently discussing living benefits insurance with their clients is less than 15%," he continues.

From a client point of view, whether it’s overlooked often depends on your circumstances. "If you happen to be part of a large company that provides benefits to its employees," says Paton, "then, you’d likely be fortunate enough to have some disability coverage (LTD) provided through your group plan. However, if you're not so fortunate, and you’re out on your own, you might be out of luck."

This is where his company, The Edge Benefits, can step in. They specialize in providing a complete suite of benefits for those generally not eligible for traditional group benefits, like small business owners,self-employed, and contract workers.

"There's also a bit of the ‘Superman Syndrome’ that tends to happen out there with many people," says Paton. "Young people especially often think, 'What could possibly happen to me? I'm invincible, and all of those accidents and illnesses I hear about are not going to happen to me,' which causes clients to dismiss the need for considering disability insurance offhand."

Generally, disability insurance plans are classified based on occupational classifications, which causes a distinct difference between how white collar and blue collar professions are assessed.

"Any disability policy is based on the likelihood of a disability, so what insurance companies try and do is understand and identify what those risks are and price their products accordingly," says Paton. "The traditional products out there are generally designed for the white and grey collar market. They offer clients who have good health and consistent earnings the best of the best. However, the problem is, as you move across the scale to more blue collar occupations, companies often struggle to maintain similar levels of premiums and benefits with these other occupations. So what tends to happen is they say, 'It’s difficult to offer this and that. These risks are inherently more likely to cause a disability.' So they limit the benefits available and increase the premiums on a per unit basis as they move from white collar across to blue because depending on what risks you're covering, and many of them are quite different."

The example Paton gives is if you happen to swing from hydro poles for a living, you are probably assessed at substantially greater risk than someone who sits behind a desk all day, but he also points out that it's often not that black and white with all disabilities.

"If you think of injuries, it's a little clearer, but when you start to look at the illness component of a potential disability, it becomes a little grey because often the things that cause illnesses usually aren't directly related to an occupation. In general terms for most risks blended together, as you move to more hazardous occupations where disabilities can be more likely, then there are fewer benefits available and usually, on a per unit basis, cost a little bit more as you move into more higher-risk occupations."

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If you are a person with a higher-risk occupation, not only should you expect to pay a higher premiums, but Paton says you may also want to ask about the coverage that you're actually buying.

"One of the things our product does that is different than most other products in the marketplace is that we intentionally exclude certain conditions, such as mental and nervous disorders for example. The reason we do that is that these conditions are often extremely subjective and difficult disorders to quantify and price for, and as a result can add substantial costs and underwriting complexity to the buying process. So, as a result, with the removal of these benefits, we are able to provide coverage that is based solely on injuries and illnesses that are more objective and quantifiable, and as a result, we’re able to offer more affordable coverage and offer it to more people who might apply. We also find that with most of our clients being self-employed, this is not generally something that these folks are looking for.

"Another thing we do is we build in defined policy limitations for certain covered conditions. We generally establish a period of time that is reasonable for the covered condition, but if the condition extends beyond that length of time, then it transitions to becoming the client's responsibility. These are some of the ways we de-risk our product to maintain a more quantifiable level of coverage, which means we can substantially contain costs, making it more attractive for people to buy. Also, for most of our products, we offer them on a guaranteed-to-issue basis, so we're not excluding people from being eligible for coverage."

There are about 15 to 20 companies in the individual disability insurance market and Paton estimates that fewer than 10 or so sell unconventional and non-traditional plans the way The Edge Benefits does. He has a number of recommendations when it comes to finding the right disability plan for your needs.

"I would recommend you look carefully at the quality of the coverage you are looking to buy (definition of disability is a critical factor), and once you have found a quality plan, then work on building coverage (waiting period, benefit period, and benefit type, and benefit amount) that supports what you're looking to accomplish out of an income protection plan. For example, it’s not a requirement that you take injury and illness coverage together," says Paton.

"We take them apart and say, 'Let's look at the injury risk first,' which is generally very affordable and, depending on your age, can cover off a substantial portion of the disability risks. This you may want to tackle this first, and then you can consider adding some illness coverage, but you don't necessarily have to add it at the exact same time elimination period, benefit period, or benefit amount. You can really do whatever you feel is appropriate based on your needs at the time. This is where an independent advisor can help. Ideally they would have software at their fingertips that can help you build a quality plan from the ground up based on your specific, individual needs."

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