Disability Insurance
The Financial Impact of Becoming Disabled
If you are healthy, you may never have thought about the financial impact of becoming disabled.
For some, the thought of having no income will keep us up at night. It’s actually terrifying to think about what changes we would need to make in our lives if our income suddenly came to a halt. Go ahead, take a minute, and think about this. Think about your payday, where you just had your paycheque deposited into your bank account. Think about how you use that money to pay your bills, buy your groceries and afford your hobbies. Now imagine that you didn’t receive that paycheque, not just for that one pay period, but for the next 12 months. Where are you going to find that money to pay your bills and maintain your lifestyle? It’s not easy to think about, however it’s important to understand how valuable your earning power is.
Here is a good illustration of the importance of coverage, even if one didn’t suffer from a lifelong disability. Let’s take a look at a situation where a 35-year-old would have been able to claim $5,000 per month for 12 months. This would have been $60,000 in benefits paid out tax-free if they had disability insurance. Where would the money come from without insurance?
- Loan or Line of Credit: Sure, you could borrow money if you have access to a line of credit. However, how long will it take you to pay off that line of credit once you recover? The interest payment alone on the $60,000 at 5% would be $250 per month. Once you factor in paying down principal, it’s going to cost you $636 per month over the next 10 years to pay off that $60,000 loan. The other risk to this is that the bank may not lend you money if you are not working.
- Refinance Home: You could take $60,000 out of your home’s equity. There may be penalties to break your mortgage along with the fact that rates may be higher when you’re hit by this injury than they were you secured your last mortgage. In addition, it may be difficult to qualify if you don’t have an income coming in. With that said, a $60,000 mortgage would cost $300 per month for 25 years based on today’s interest rates.
- Investments: If you took money out of your RRSP, you would need to factor in the taxation. If it was the main source of income for the year, you would need to withdraw at least $80,000 from your RRSP to net $60,000. Think about how long it took to save that money, and that could all be wiped out in 12 months, long before your planned retirement.
As you can see, a disability can really throw a financial plan off track. The above example illustrated a disability only lasting one year. What happens if that disability lasted 5 years or even a lifetime?
I should mention that it’s extremely difficult to protect your income from pre-existing conditions. Exclusions are quite common on disability insurance contracts, and the insurance company will typically exclude any medical condition that you are seriously concerned about. For example, if you hurt your back and that triggered you to start looking into your disability insurance options, it’s likely going to be too late to have your back covered. It’s imperative that you consider obtain such coverage while healthy – It’s your health that buys the coverage.
I am a firm believer that you should insure the things you can not replace. I can’t think of anything more important than your income. After all, we have all heard the saying that money does not grow on trees. If you depend on an income – you need to consider protecting that earning power.