What Is Disability Insurance?

When it comes to insurance, Canadians simply do not have a good enough understanding of what their needs and options are. Insurance can be both confusing and boring, meaning that you likely have not invested the time to research what coverage makes the most sense for you and your family, or what risks you remain exposed to. While it’s highly likely that you have heard of life insurance, you may not have heard about disability insurance.

I am sure that you realize how important your income is, but have you taken the time to think about how your life would change if you no longer received a paycheque? The purpose of this guide is to help you better understand how you can use disability insurance to protect your income in the event of an injury or illness.

So, what is disability insurance? It is an insurance contract designed to replace a loss of income in the event of an injury or illness. A more suitable name may be income protection or paycheque protection.

While many may think of a disability as a freak accident that caused you to never work again, it is quite the opposite. The most common form of claims are mental health issues such as depression and anxiety. This is closely followed by musculoskeletal issues such as back and neck pain. Many times, these types of disabilities do not prevent you from working altogether, however they may cause you to work part time or at a reduced income. A good income protection plan will pay out while you are still working in these modified roles, to top your income back up.

Your Ability to Earn Income is Likely Your Most Important Asset

Ask yourself, how important is your income to you and your family? If you still depend on your income, you may find that your ability to work is likely the most valuable asset you have.

Based on your annual income, here is how much you could earn cumulatively over your lifetime (by the time you are 65 years old).

*Assuming a 2.5% increase in income each year.

We all know the story about The Goose that Laid the Golden Eggs. The story is about a poor farmer and his wife who had no money for food or clothes. After several days of starvation, the farmer decided to go hunting for food. He came across a goose, who was too small to satisfy his appetite. He brought that goose home and to their surprise, it laid a golden egg. He took that golden egg and sold it for clothes and food. The next day, that same goose laid another golden egg, which in return they used for more food. That goose continued to lay golden eggs every day until the farmer and his wife got greedy and decided to kill the goose, thinking it was full of golden eggs. After they cut open the goose, they learned that they made a mistake as there were no golden eggs inside. The farmer and his wife returned to poverty.

When it comes to insurance, the golden eggs represent your house, your car and other valuable assets you may own. Most of these which you already insure. The goose represents your earning power, which is the financial means to provide for yourself and your family. What’s more important to insure, the goose or the golden egg? I agree, it’s the goose and I sincerely encourage you to invest the time to ensure that your income is adequately protected. The risk of disability is very real, and the financial impact can be devastating.

What happens if you suffer an injury or illness that prevents you from working or earning the same level of income that you currently are accustomed to? It’s this paycheque that allows you to pay for the necessities such as a roof over your head, food on your table and shoes on your feet. It’s also this paycheque that allows you to go out for dinners, enjoy your hobbies and take vacations. For many of us, it’s this paycheque that affords us the lifestyles we live, and we couldn’t imagine having this source of income eliminated from our lives.

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Understanding Critical Illness Insurance

By Glenn Cooke

Introduction

Critical Illness insurance seems pretty straightforward – if you get a critical illness, you get paid a flat benefit. Unfortunately when it comes time to claim, consumers often find that they weren’t covered for what they though they were.

There’s also a number of important policy attribures that don’t get discussed that can lead to misunderstandings as to what’s covered and what’s not. In particular there’s a simple sales phrase used to sell critical illness which is “If you get cancer, you get paid a benefit. If you don’t, you get all your premiums back’, something that’s not nearly as ‘true’ as a consumer might initially believe.

In the following pages we’re going to take a more fact-based approach to critical illness insurance in Canada. This will give you a better foundation for your purchase of critical illness insurance.

We’ll do so by breaking the problem down into two steps:

1. How Much Critical Illness Insurance
2. Best Type of Critical Illness Insurance

Following these two steps, in order, will ensure that we’ve purchased the best insurance coverage available.

It will also help in background understanding if you’ve read our Understanding Life insurance ebook prior to going through this one.

Catastrophic Financial Loss

Critical Illness insurance is often sold based on emotion. The fear is that we get cancer or have a heart attack. The payoff is a cheque. This connection is why critical illness insurance is called ‘cancer insurance’ or ‘the cancer lottery’ in the insurance industry. While using fear to self insurance works like crazy, it can lead to incorrect insurance coverage. Ask yourself, if you get cancer, why do you need $100,000? If you don’t have an immediate answer to this, you likely are leaning too much towards an emotional purchase instead of an insurance purchase.

To avoid this, we’re going to introduce a concept I call Catastrophic Financial Loss. We’re going to use this phrase to ‘test’ our insurance purchases. If we fail this test, it indicates we are not looking at the right thing.

1. Catastrophic – if we are using insurance to cover a financial loss, the amount of the loss should be huge enough to be life altering – or catastrophic. By contrast, consumer warranties on electronic items are not really insurance. A $500 phone loss shouldn’t be catastrophic for most of us. A $100,000 loss on the other hand is absolutely a catastrophic loss.
2. Financial – for insurance to make sense, a loss must be financial. This is opposed to emotional. Take for example the sales phrase I mentioned above – “If you get cancer, you get paid a benefit. If you don’t, you get all your premiums back”. Getting your premiums back – is that a strictly financial decision? Or more of an emotional one? In most cases, it’s an emotional decision. If that’s your motivation, be cautious and evaluate.
3. Loss – Mathematically, lotteries and insurance work the same way. A large group of people pool their money. A random event occurs (your numbers come up, or you get cancer) and the recipient of the event receives a payout from the pool. The difference between a lottery and insurance is in the intent – a lottery increases wealth. Insurance means you suffer a loss and the insurance puts you back to where you were; it preserves wealth. Lets say you’re looking at critical illness insurance to pay for out of country medical costs (a common sales approach). Is that a loss? Turns out that it’s not – if you don’t have the money for out of country medical costs, then critical illness is creating this wealth and this is now a lottery. That doesn’t mean you shouldn’t purchase critical illness, it does mean you should pause and evaluate your assumptions.

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