People buy Disability Insurance to replace employment income that has stopped as a result of an illness or injury. Disability Insurance replaces a portion of monthly income, and can be paid on a tax-free basis.
Payments continue, until recovery occurs, as decided by the insurance company, or the policy completes, or death occurs.
The amount you pay to buy Disability Insurance is called the “Premium”. This amount will vary, depending upon:
- The amount of insurance you purchased;
- The definition of Disability;
- Own Occupation
- Any Occupation
- Your Job Classification;
- Your Annual Income;
- Extent of Coverage;
- Duration of Coverage;
- The company you buy insurance from; and
- Your age, gender, physical condition, and smoking status.
Hatch & Muir are Chartered Life Underwriters and Certified Financial Planners We can provide you with advice and help you choose the right disability insurance contract.
Key issues to consider when purchasing Disability Insurance
Most disability policies will only cover up to 60% of gross income. The 60% maximum approximates net income allowing for a 40% average tax rate. Since the benefits are received tax free if the premiums are paid out of after-tax income, the 60% approximates the amount of earnings at risk. The following are the key issues you should consider:
- The definition of disability;
- The elimination period (waiting period)
- The available monthly benefit:
- The maximum benefit period; and
- The renewal provisions.
These elements affect not only the coverage provided by a disability income policy, but also its cost. If cost of coverage s a significant concern, there may be trade-offs because every feature has a cost.