A few weeks ago, during the fourth quarter of the NFL Playoff Wildcard game between the Washington Redskins and Seattle Seahawks, a hush fell over 80,000+ fans when they watched their hometown hero, Pro Bowl quarterback Robert Griffin III go down. The replays were painful to watch; the injury was worse – another tear in the lateral collateral ligament (LCL) and on this particular play, a torn anterior cruciate ligament (ACL).
Reading the sports pages about these incredible athletes every week, who seem to bounce back from serious injuries more often than not, I’m confident this star player will come back to the game and make millions of dollars next season. However, what if he couldn’t come back? What if rehab doesn’t go as planned this summer? If RGIII can no longer play again, what will his compensation be to replace his lost human capital?
This last question, the one about insuring our human capital, is probably one we should ask ourselves now and again.
Not being a pro about disability insurance, I had an opportunity to chat with LSM Insurance recently who provided me some more information on this subject.
My Own Advisor – What is Disability Insurance?
Disability Insurance (DI) covers an insured’s monthly income in the event he/she cannot perform the duties of their occupation due to injury and/or illness. Loss of income do due disability is actually the biggest risk, more than death or critical illness. According to the Canadian Life and Health Insurance Association (CHLIA) 1 in 3 people, on average, will be disabled for more than 90 days at least once before they reach age 65.
My Own Advisor – What should we look for in a policy?
Let’s cover a few definitions.
Any Occupation is the least favourable and means the policy will only pay out if the insured is unable to perform the duties of Any Occupation for which they are suited or skilled. For example, if an engineer hurts his hands and cannot work in his job but is skilled to work in another occupation that doesn’t require the constant use of his hands, the insurance carrier will expect him to work in that occupation.
Regular or Own Occupation definitions are much safer than Any Occupation. These policies will pay out if the insured cannot perform the duties of their current occupation, regardless of their other skills. With the Regular Occupation definition, the insured cannot be working elsewhere but the Own occupation definition the insured can maintain another career and still receive the monthly benefit.
Another key feature to look out for is the renewability feature in the policy. A Non-cancellable policy is the best type because the insurance carrier cannot increase the policyholders rate for any reason. Even if the insured switched to a more risky occupation, the rates are set from the beginning. A Guaranteed Renewable policy is a less favourable because the insurance carrier can increase the rates in the future based on a class wide basis. Lastly in a Commercial policy contract the insurance carrier can refuse to continue coverage or increase the rate on the policy anniversary due to previous claims on the policy.
My Own Advisor – How much coverage is enough?
The most an insurance company will cover is 60-85% of regular income to deter people from staying on disability. Premium costs are usually a factor so it is a good idea to make sure to coordinate their individual disability insurance policy with any group short or long-term plans they may be a part of and with government related programs such as CPP/QPP, EI and Workers Comp. Some other factors people should consider when calculating their needs are their lifestyle, family obligations, debts and financial stability.
The monthly benefit amount is set at the time of application therefore it is important to consider potential increases in income and the rise of the costs of living. Applicants can add riders, or options to the insurance policy to help solve these issues. A Cost of Living Adjustment (COLA) rider will automatically increase the monthly benefit if a claim goes on for longer than a year. The applicant selects the percentage increase up to the Consumer Price Index (CPI). Basically its purpose is to hedge the monthly benefit against inflation.
A Future Income Option (FIO) allows the policyholder to obtain more coverage if their income increases in the future. The insured would not have to provide new medical evidence but the insurance carrier would request some proof of income to justify the increase in coverage.
The new rates would be based on the applicants’ attained age.
My Own Advisor – Wouldn’t my employer-paid disability insurance be enough?
Group disability insurance plans will usually offer 3 layers of protection. Sick Days are usually covered up to a few weeks maximum and then Short-Term Disability (STD) will cover a percentage of the insured’s income up to 52 weeks typically. Long-Term Disability (LTD) will finally kick in once the STD benefit period is complete. Many group DI plans will offer tiers of coverage and usually the highest tier will offer the maximum allowed. If the amount of coverage offered is lower than the 60-85% range it is probably a good idea to purchase a small individual DI plan to compensate for the shortfall in coverage.
As the stakes in pro sports become higher over time, I wouldn’t be surprised to read about more athletes taking out disability insurance in the event they have a catastrophic career-ending injury. Some elite athletes have actually been doing this for years. You can read more about the Exceptional Student – Athlete Disability Insurance Program here.
Us common-folk don’t work in the millionaire-world of RGIII, we never will. That said we still have our human capital to protect so disability insurance might be something to consider. Thanks to the team at LSM Insurance for providing some more information about this subject.
What are your thoughts on disability insurance?
My opinion is that anyone who is reliant on an earned income to live off of should look into having some disability insurance. I’m working towards financial independence and building up a portfolio of dividend stocks where I can eventually live off of that dividend income. However I’m still a long ways from reaching that point and in the mean time if anything happened to me where I was unable to work in the future I would be in quite a heap of trouble. I live in the US and have disability insurance through my employer as well as the possibility of collecting social security if something were to happen.
Being insured to protect your assets and well being is never a bad thing. Only being over insured is good. That is why it is important to do your research and not waste money on unneeded insurance or more insurance than you really need.
Well said Dan.
As you may well know, I’m also on that journey – financial independence by primarily building up a portfolio of dividend stocks where I can eventually live off of that dividend income; about $30 K worth per year.
I was unable to work in my near future, it would be tough to realize my goal.
I’m a bit surprised that the article doesn’t mention duration of benefits – probably the most important feature of a DI policy.
Good point. Payment obligations can vary, and I needed to stop my questions to LSM at some point to get the article posted 🙂
Any idea what percentage of your readers are self-employed? You may want to do a poll on this.
Generally people who work for a company which has Short and long term disability plans generally don’t understand the cracks or fine print.
However, self-employed know they have no safety net. They still can get overhead disability coverage and have their corporation pay for it.
No idea. Generally people who have DI at work, don’t know their policy, which is why it’s important to read the fine print. I suspect some folks could use extra DI, others, maybe they need nothing at all.
@My Own Advisor
My guess is the previous generations had family memebers to look after the person who was disablied. Question should be, do you have family members who could fill in drive you around to Doctors offices and make up the lost income?
Most people have a hard time saving 10%-15% of their income. How about a 40% paycut to your income if you have disability covereage.
The post is great! Very similar to the one I wrote for Million Dollar Journey a few years ago
In our case, we do, but others might not be as lucky.
Your post on MDJ was a good one!
I don’t have disability insurance, nor have I looked much into it. Sometimes I wonder though, how did everyone else make it before all these disability insurances came along? Well they still lived.
I recall previous generations did just fine but at the same time, times have changed and the cost of living is definitely higher.
You’re right, they lived, but families lived a lot closer to each other back in the day and more folks stayed at home; so there was less risk I suspect.
If you have disability insurance through your employer, make sure your employer is not self-insuring, or you could end up like unfortunate Nortel Employees, who no longer have disability payments, because Nortel went bankrupt!
Very interesting write up. I have disability insurance through my employer but never really bothered to delve that deeply into understanding it. Partly because of all the other more pressing things I had to learn about when I started my new job. But it’s certainly something that I should revisit and see if I’m getting enough coverage.