The Financial Advisor Guide to Disability Insurance

Self-Study Course # 8

DISABILITY INSURANCE

INTRODUCTION

If a family were to lose its income due to the death or disability of the principal earners, it would face financial hardship. While no one can put a monetary value on human life, one can put a value on his or her earning ability. Life insurance and disability insurance pay benefits to replace lost earnings due to death or disability. The premiums for this insurance are based upon statistics for the age, health, and occupation of the insured, as well as the amount of benefits to be paid. While both life and disability insurance are available through groups, such as employer plans, individuals can buy policies tailored to their specific needs.

Life insurance is so versatile that many individuals use it for advanced financial planning purposes, such as retirement planning and savings, as well as for death benefits.

Special forms of insurance are available to cover almost any other financial risk or loss.

For example, there is unemployment insurance or Employment Insurance as we know it, investment insurance, and Accidental death & dismemberment insurance (for loss of a body part). Some fashion models are even insured against loss of income due to loss of their good looks. Premiums for such insurance are also based upon the likelihood of an event occurring and the amount of benefits to be paid.

Sometimes having the wrong insurance can be worse than having no insurance.

When a disability leaves your client or prospect unable to work for an extended length of time, they lose the ability to earn an income- the one thing that they have always relied on to provide for themselves and their loved ones.

Meanwhile, their living expenses continue-in fact, they're likely to increase for a number of reasons.

For example, they could need help around the house or have higher medical expenses. That’s where disability income insurance (DI) comes in. It's designed to help them maintain their standard of living when they cannot work. If they don't have much in the way of assets for a financial cushion, they need enough to cover costs and supplement any income until they can go back to work.

Disability income insurance is needed by just about everyone who earns a living. Surprisingly, single people often need it more than married couples because they don't have a spouse's income to fall back on if they are injured or become too sick to work. On the other hand, most married people have a hard time imagining what it would be like to live on one salary when they barely get by on two. And unfortunately, disability strikes more often than you may think.

Most family providers have life insurance to provide for their families if they die early. Yet many of those same people don’t have adequate protection to keep money coming in if they are ill or injured.

THE REALITY OF DISABILITY INSURANCE

Could you continue to pay your bills if you were unable to work for any length of time because of illness or injury? If you were to become disabled, do you know how much money would be coming in each month and from what sources?

Some people can rely on disability benefits from their employers and/or the government. But, for a great many people, income stops when work stops. Individual disability income insurance is designed to replace income when illness or injury stands in the way of earning a living.

This course explains the various sources of disability income, what disability income insurance is, and what it covers. It includes a worksheet you can use to evaluate personal sources of disability income.

With this information, you’ll be able to determine whether your clients and prospects need individual disability incomeinsurance and, if so, what features will be the most important to them.

The goose that laid the golden egg

Before we get right into the course, let’s look at disability from another perspective.

Remember the fable about the goose that laid the golden eggs? The story was about a dilemma – which option to choose: the goose or the golden eggs. Disability sales can be looked at in the same way.

Most often people insure their “golden eggs” (cars, homes and other valuable assets) before they insure “the goose” – their income. The fact is that their earning power is the most valuable asset of all. Without it, your prospects and clients wouldn’t be able to buy, let alone insure, the simplest of possessions.

Uncovering the need for disability insurance is this easy. By referring to this time-tested fable, you can be well on your way to providing a prospect or client with valuable disability protection.

WHAT’S IN IT FOR YOU, YOUR CLIENT’S AND YOUR PROSPECTS?

In today’s tough economic times, it is more important than ever to be able to offer your clients and prospects a complete portfolio of products and services. Your clients need a solid foundation. And disability income products are one of the major bricks in that foundation.

Below are six solid reasons why disability insurance should be a part of your day-to-day sales activity.

SIX REASONS TO MARKET DISABILITY INSURANCE

Disability Sales:

  1. Are integral parts of complete financial planning and comprehensive risk evaluation
  2. Will help ward off unnecessary competition
  3. Are important because everyone needs to protect his or her income
  4. Provide a benefit that prospects and clients can see themselves needing
  5. Increase your commissions and persistency
  6. Offer you satisfaction and emotional rewards by ensuring that clients and prospects become aware of the impact a breadwinner’s disability can have

Finding out who’s a candidate for disability insurance is as simple as looking down your list of qualified life insurance prospects. Disability can be both a great door opener and add-on sale.

Don’t Overlook Your Female Clients and Prospects

As we have previously discussed, many people don't have adequate (or any, in some cases) disability insurance and this applies to females as well as males.

Working women are experiencing serious disabilities at an increasing rate and much faster than working men. In fact, the rate of disability among working women has grown almost twice as fast as among working males during the past decade (more than 60 percent compared to 32 percent respectively).

And although a recent survey conducted by the Council for Disability Awareness (CDA) revealed the majority of working women are more aware than men of the threat that disability poses to them, women remain less likely to take the necessary steps to financially prepare themselves in the event a disability strikes.

According to the survey, nearly half of female workers expressed concern that they might suffer a disability of three months or longer. However, only 38 percent of those women surveyed indicated they had discussed how they would financially manage the onset of an income-limiting disability.

By failing to financially prepare for an income-limiting disability, working women risk serious financial repercussions down the road, especially as accountability for personal financial security continues to shift away from social programs and employers and toward the individual worker.

It should also be noted thatdisabilities seemed to increase with age in Canada. The fact that females live, on average, five years longer than men virtually guarantees a substantially higher rate of disability.

This situation underscores the critical need to inform working women about the steps they can take to protect their finances in case a disability occurs.

SO WHAT EXACTLY IS DISABILITY INCOME (DI) INSURANCE?

Disability income insurance provides your clients and prospects with income should they become sick or injured and unable to work. It helps protect against family financial catastrophe by giving them an income to meet daily expenses.

Disability income insurance comes in two major forms

  1. A variety of employer-paid and government sponsored programs, generallycost-free to the recipient, covering certain categories of workers.
  2. Private policies (paid for by individuals) that protect income whenthere are no applicable employer or government programs or when those programsdo not adequately meet income needs.

As with all insurance, disability income insurance operates on the principle that many people pool small sums of money to benefit those who need help. The beneficiaries are people who become disabled and who need adequate replacement income.

HOW LIKELY IS A DISABILITY?

There is a tendency to think that it always happens to the other person – and that it will never happen to me. You run into this scenario with life sales, too. And, you already know this couldn’t be further from the truth.

An individual’s chance of becoming disabled for three months or longer before age 65 is sobering. For example, from a group of four people age 45, there’s a 94% chance that one will suffer a disability before age 65!

And it is possible that this disability will be long term. And once a disability reaches long-term status – once they’ve been disabled for 90 days or more – it could very well last several years. To put it another way, let’s compare the likelihood of a disability against the chances of dying during the same period. Once again, you have a natural “hook” between the sale of life insurance and the sale of disability insurance.

Odds of long-term disability vs. death
Age 27 / 2.7 to 1
Age 37 / 3.3 to 1
Age 42 / 3.5 to 1
Age 47 / 2.8 to 1
Age 52 / 2.2 to 1

The following chart points out that becoming disabled prior to age 65 is a very real possibility for a large percentage of workers.

Lives Disabled in One Year and Length of Disability
Per 100,000 Active Lives Exposed
Age
Disability Begins / Length of Disability
1 Month / 3 Months / 1 Year / 2 Years / 5 Years / 10 Years
22 / 3923 / 664 / 75 / 51 / 27 / 16
27 / 3877 / 657 / 74 / 52 / 29 / 19
32 / 4372 / 778 / 91 / 65 / 39 / 26
37 / 5029 / 981 / 119 / 87 / 55 / 38
42 / 6918 / 1257 / 172 / 129 / 85 / 60
47 / 6918 / 1676 / 283 / 219 / 149 / 105
52 / 8158 / 2239 / 463 / 372 / 260 / 178
57 / 9816 / 3110 / 842 / 707 / 501 / 328
62 / 1737 / 4427 / 1491 / 1286 / 910 / 558

Report of the industry Advisory Committee for individual Health Insurance Policies

HOW MUCH DISABILITY INCOME WILL YOUR CLIENTS NEED?

Add up all the benefits that they are entitled to under the public and private programs discussed later in the course, along with the monthly income they could count on from other sources such as any savings. If the total approaches their required income after taxes, one can assume that, should total disability strike, they would be able to pay their day-to-day bills while recuperating.

Your clients and prospects must remember that eligibility for any Government disabilitybenefits is contingent upon their disability being expected to last for at certain amount of time, perhaps even leading to their death.

If the total from employer benefits, any Government Benefits, and other programs along with their own resources will not be close to their pre-disability, after-tax income and will not be adequate to support their family, then they will want to consider buying additional disability income insurance to make up the difference.

Remember as well that, the amount of long-term disability benefits they may receive through any employer’s group plan or any personal insurance benefits may be reduced by the amount of Government benefits that could be paid to them.

SO HAVE YOUR CLIENTS ASKED THEMSELVES THIS SIMPLE QUESTION:

Do I Really Need Long Term Disability Insurance?

Despite the grim news in the preceding paragraphs, your clients and prospects may not need to buy any disability insurance! It depends on:

  • If they have enough money saved and invested already that their family could live off ofwith no more additional income. In other words, if they are financially independent.
  • If the other spouse makes enough money to support the whole family. Although it’s totally conceivable that both spouses in a marriage could end up disabled (e.g. a joint accident). So even this may not exclude them from the need for other disability insurance income.

Remember the spouse could also lose their job at some point, or could have to quit work totake care of the disabled spouse, orthe couple could divorce.

  • The other case when they may not need disability insurance is if their employer provides appropriate disability insurance coverage. Many families need to check with their employer to know for sure. But be careful and ask lots of questions as many policies covered by employers will only cover their disability if it is caused by something related to their job. We know this is the case with Workman’s Compensation Insurance (called different names in different provinces). And there may be lifetime limits to how much money that they can get and this may not be enough depending on the disability.

DETERMINING YOUR CLIENTS DISABILITY INSURANCE NEED

So you have established that they have the need for more disability coverage!

Here are questions that they will have about the policies and programs that you offer:

  • How is disability defined? Inability to perform their own job? Inability to perform any job?
  • Does the policy cover accidents? Illness?
  • What is an adequate level of benefits, in relation to their present and future obligations?The maximum benefit will replace what percentage of income?
  • Are benefits available for total disability? For partial disability? For residual disability? Only after total disability?
  • How long of a waiting period should they select to fit their circumstances until benefits begin?
  • How long do they want to receive disability income should it become necessary?
  • What related benefits, such as partial or residual disability, are available?
  • Is the policy non-cancellable, guaranteed renewable, or conditionally renewable?
  • How much coverage are they eligible for at their present salary?
  • Are full benefits paid, whether or not they are able to work for loss of sight? Speech? Hearing? Use of limbs?
  • How long must they be disabled before premiums are waived?
  • Is there an option to buy additional coverage, without evidence of medical insurability, at a later date?
  • Does the policy offer an inflation adjustment feature: If so, what is the rate of inflation? Is there a maximum?

SOURCES OF DISABILITY INCOME

A)Public Sector Disability Plans

  • Canada Pension Plan (CPP) Disability Benefits
  • Employment Insurance Disability Benefits (E.I.)
  • Workers Compensation Benefits

B)Corporate Sector Disability Plans

  • Weekly Indemnity (Short Term Disability)
  • Long Term Disability Plans
  • Grouped Disability Policies
C)Personal Sector Disability Policies
  • Commercial (Yearly Renewable Disability Policies)
  • Guaranteed Renewable Policies
  • Guaranteed Renewable and Non-Cancellable
  • Association Disability Policies
A)OVERVIEW OF PUBLIC SECTOR PLANS
1 (A)Canada Pension Plan Disability Benefits

Who is eligible?

For the payment of a disability pension to a survivor or for payment of benefits for a childof a disabled pensioner, a contributor must have contributed for:

  • 2 out of the last 3 years of the contributory period or
  • 5 out of the last 10 years of the contributory period
  • Have not received a CPP / QPP retirement pension benefit for longer than 12 months

For those individuals who have contributed 10 years or more and are under age 65 theymust not have received the retirement benefit of longer than 12 months.

A disabled survivor who is eligible for both a survivor’s pension and a disability pension can receive an amount equal to the maximum retirement pension plus the higher of the two flat-rate components of the survivor’s and disability pensions.

The disability for a child of a contributor who becomes disabled will be the same as for orphans, but the qualifying period is the same as for the disability pension itself and the benefit commences with the disability pension and ceases with the disability pension or when a child is no longer a dependant.

Orphan’s benefits are payable to the surviving spouse or guardian if the orphan is under age 18 and are payable directly to the orphan from age 18.

In cases where both parents are contributors and they die or become disabled, a dependent child can receive two benefits.

Definition of CPP / QPP Disability

The disability pension is payable to a contributor who satisfies the definition of “disabled.” Generally, it means physical or mental impairment that is both severe and prolonged.

Severe means the inability to pursue any substantially gainful employment, while prolonged means that the disability is likely to be of indefinite duration or is likely to result in death.

Under the QPP, the definition is modified in the case of a contributor age 60 or older. He or she will be deemed to be disabled if unable to pursue, on a permanent basis, his or her current occupation.

Remarriage does not revoke a surviving spouse’s pension. If the second spouse dies, the calculation of the pension may be based on the higher of the pensions that would have been payable to the now-deceased contributors.

This definition is so restrictive, that usually CPP / QPP benefits will not be taken into account in planning for an unforeseen disability. If you are qualified to receive CPP /QPP disability benefits, the chances are that you won’t be receiving them for long… they will eventually become survivor’s benefits.

Benefits

The monthly disability pension is a flat-rate component (subject to review) plus an earnings-related component equal to 75% of the calculated retirement pension. It will be payable to age 65 (unless the disability pensioner dies or recovers) when it will be replaced by the retirement pension.

A spouse already disabled at the contributor’s death is entitled to the full survivor’s pension at any age under age 65. If the disabled spouse recovers before attaining age 45 the pension will be reduced by 1/120th for each month he or she is under age 45.