Disability insurance
Disability insurance
Disability cover replaces part of your income while illness or injury prevents you working. For most people their income is the asset everything else depends on, and it is the one most rarely insured.
Worth knowing: The definition of disability is what matters.
Own occupation, or any occupation
This single clause decides what the policy is worth. An 'own occupation' definition pays when you cannot do the job you were trained for. An 'any occupation' definition pays only when you cannot do any work you are reasonably suited to by education, training or experience.
For a surgeon who can no longer operate but could teach, the difference between those two definitions is the difference between a claim and no claim. Some policies use one definition for an initial period and the stricter one afterwards.
What the public system pays
EI sickness benefits provide up to 26 weeks at 55% of earnings, to a maximum of $729 a week. That is a floor for a temporary illness, and it is capped regardless of what you earn.
It is also time-limited, which is the gap private cover is generally bought to address: an illness lasting years rather than months.
Waiting period and benefit period
The waiting period is how long you must be disabled before payments begin, commonly between 30 and 120 days. A longer wait lowers the premium and raises how much savings you need to bridge it.
The benefit period is how long payments continue: a set number of years, or to age 65. Both choices move the price considerably, and both are decisions about which risk you are actually insuring.
Group cover, and what it leaves
Workplace disability cover is common and genuinely valuable. It also tends to be capped, to use the stricter definition after a period, to be taxable when the employer pays the premium, and to end with the job.
Personal cover is usually considered for the gap rather than as a replacement, which is why the first step is normally reading the group booklet rather than buying anything.
Questions people ask
Are benefits taxable?
Generally, benefits from a personally owned policy paid with after-tax premiums are received tax-free, while benefits from employer-paid group cover are usually taxable. Who pays the premium is what decides it.
Can I insure all of my income?
No. Insurers limit cover to a proportion of earnings, partly so that being on claim is never financially better than working. The self-employed are assessed on income that can be documented.
What if I can work part-time?
Many policies include partial or residual benefits covering a reduced income while you work less than before. Whether that exists, and how it is calculated, is set out in the contract.