November 26, 2011

INCOME REPLACEMENT: A GUIDE TO DISABILITY INSURANCE

disabled unfinished creation
In this week’s Globe and Mail, Preet Banerjee investigates the financial aid available to the disabled. I’m quoted. The interview took place via Bluetooth while I was driving to the sold-out Toastmasters conference. (There, Jonathan Holowka and I showed ways to turbocharge clubs with social media.)

Disability is a dreary subject and you avoid buying insurance, but the topic is popular this week. Advisor.ca, has articles to help salespeople clear the sales hurdle and pitch disability coverage. There is even a script for them to use on you. If you start getting contacted in the near future, maybe that’s why.

This post gives you more insider thoughts about disability insurance, which is sometimes given the glitzier name of income replacement insurance.

Statistics

There are many eye-popping statistics about the high risk of disability and how long income can be lost. You can watch a no-longer-embeddable video from PPI Solutions.

You probably know people who are disabled at least partially.

Differences

Death is something an actuary can calculate fairly easily and accurately. Predicting who will become disabled is not so easy. It is a calculation based on chance.
— New York Times, April 2011
Life insurance pays a fixed amount upon death. Critical illness insurance pays a fixed amount upon diagnosis of a covered illness. Within reason, you decide how much coverage you want.

Disability insurance is different. It only replaces a portion of your lost income. If you were able to replace your full income and get indexed benefits, where is the financial incentive to return to work? If the economy is bad and layoffs are pending, getting disabled may look like an exit strategy.

To counter abuse, insurers have ongoing checks to make sure you still qualify. With life and critical illness insurance, you're only checked at the time of the claim.

Disability has subjective elements. Insurers have leeway in deciding who qualifies for benefits. There are three key ways to getting your claim paid.

Nortel

You can't rely on disability protection from your employer even if you pay the premiums. We already looked at the two types of coverage you may have but can't own.

Nortel is a sad example. Instead of getting real insurance, the company decided to insure employees themselves. Since Nortel is bankrupt, their promises mean nothing. The disabled lost their benefits. If real insurance were used, then benefits would have continued. If the insurer failed, Assuris protection would step in.

In British Columbia, the government is not paying legislated benefits to thousands of disabled people.

If you can't rely on an employer or government, can you rely on yourself? If you don't have your own DI coverage, you are your own insurer. Since you cannot tell if you're going to become disabled or for how long, self-insuring can prove very costly unless you're independently wealthy.

Problem

Statistics Canada reports that 1 in 7 Canadians are disabled. The rates increase with age. Not only is disability common during your working years, the benefits could be paid until age 65 and might even be indexed. While the protection is worthwhile, it's pricey. It has to be. That’s why some people buy critical illness insurance instead. That's valuable coverage but hardly a substitute.

The perceived problem is that you can spend lots of hard-earned money on insurance and never get a long term disability. Isn't that better than having a claim? You had peace of mind and your health.

Links

Disability
Salespeople
Nortel

Podcast 145 (hmm)


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PS Relying on your employer for your pension is also risky. Defined benefit plans are becoming rare in the private sector and we're living longer than ever.

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