Mark Seed | Editor of My Own Advisor Blog


Mark Seed
Editor, My Own Advisor Blog

1. What type of disability insurance do you own?
Through my employer, I am fortunate to be covered for the following:

• Basic life insurance
• Long-term disability coverage
• Business accident travel insurance

I hope I never use any of these benefits through work. I recall my disability insurance is 67% employer-paid and 33% employee-paid and is paid after sick leave benefits (of a few weeks) expire. The benefit payment is very generous, I believe: around 67% of monthly pre-disability earnings.

2. What factors did you consider when determining the coverage amount?
My employer negotiates the contracts with insurance carriers, including the coverage and rules governing disability insurance and other benefits. If I was to look for disability coverage myself, I would be looking for coverage of 50% or more of my pre-disability earnings. This is because your human capital is your greatest asset in life and you should try to protect it as much as possible.

3. Do you think people underestimate the importance of disability insurance, and if so, why?
Absolutely. I don’t have the stats handy (I’m sure LSM does), but I don’t think people realize how likely it is adults during their working career may incur a disability. By the term “disabled,” I mean unable to work for an extended time due to an accident or illness. I wouldn’t be surprised if these rates are at least 1 in 10 for adults between the ages 25 and 65. I’ve read that disability insurance is often labelled as the “forgotten insurance” and I would agree with that. Everyone gravitates to life insurance first (and for good reasons) but protection from a sudden, unexpected loss of your human capital is equally, if not more, important. Life insurance is for others. Disability insurance is for you and those that depend on you to earn a living.

4. What are some limitations or exclusions people should watch out for?
I would want to understand the maximum benefit limits, including time-periods associated with those benefits. Also, for self-employed individuals, I would want to find out if I could obtain a policy that goes beyond income replacement; could coverage be customized to cover some business costs? What about benefits for the disabilities of key employees or partners?

Here are some other questions to consider:

  • When do benefits begin?
  • Is there a waiting period for benefits?
  • Are there any pre-existing medical conditions that would prevent benefits?
  • Are benefits indexed to inflation?
  • Are benefits taxable or tax-free?
  • Can the policy be cancelled by the insurer? Can the policy be renewed?
  • What is your risk tolerance? (This changes with age.)
  • What are the long-term income needs (in the event of a disability)?

These questions are probably just the “tip of the iceberg” and folks should likely ask these questions and many more.

5. If you had to choose between critical illness and disability insurance, which one would you choose and why?
Tough question! The way I see it, disability insurance is designed to provide long-term income replacement due to an unforeseen accident or illness. This means, for the most part, you shouldn’t have to worry about replacing your income for a few years if you’re injured or sick. Critical illness is designed to provide income replacement for a serious illness. If you get taken out of the workforce due to contracting a serious illness, the lump-sum payment (from critical illness insurance benefits) could be used to bridge the gap between work and when disability benefit kick in. However, this is where I feel an adequate amount of emergency funds come in, bridging this gap. If I had to choose, I would say disability insurance trumps critical illness insurance. The two plans can (and do) work in tandem but I think most working Canadians need disability insurance paired with the appropriate amount of life insurance.

Mark Seed runs My Own Advisor, a personal finance and investing blog dedicated to chronicling his saving and investing journey to financial freedom. You can subscribe to his blog and join over 1,000 other readers to My Own Advisor here. You can join over 2,100 My Own Advisor followers on Twitter @myownadvisor. You can also Like My Own Advisor on Facebook here.

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