disability insurance

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GPF Services & Planning Corporation

 

 
 

Long Term Disability
The question to be answered when an individual is wondering if he or she needs Long Term Disability insurance is as follows:
 “Can you afford to retire today, and never work again for the rest of your life, and still maintain the same lifestyle?”

If the answer is “Yes” then the individual does not need Long Term Disability insurance.

If the answer is “No,” I have to work to maintain my standard of living; then the individual needs Long Term Disability insurance.

The following diagram shows three of the main non-medical variables which determine the cost of a disability policy:

 disability insurance
How a Long Term Disability (LTD) policy works. 

1.     Working along the bottom line of the above diagram, when a policy is first issued, a waiting period is established. This is the period of time that must pass from when a person becomes disabled until the insurance company starts to pay money. Think of it as a deductible. The longer the waiting period, the lower the premium: the shorter the waiting period, the higher the premium. Most people choose periods of 90 days. It depends on how long someone thinks they could hold out if their income stopped. 

2.     Going up the left-hand side, no great mystery – the larger the amount of money to be paid each month, the higher the premium.  The lower the benefit, the lower the premium. 

3.     Working across the top line. Benefits can be paid for periods of two, five, ten years or until age 65. That means that someone who takes a two-year policy out in 2003, and is disabled in 2008, would be paid for two years until 2010. At the end of two years, the benefits would stop.  The policy would then expire unless he or she was able to go back to work. 

What the diagram is designed to show is that somewhere in the maze, we can find a package that will keep someone out of the ditch financially if they become sick or hurt, and not bend their wallet all out of shape paying premiums.   

disability insurance
COST =  Premium
BENEFIT = Benefit level
VERBIAGE = Waiting and Benefit periods
Definition of Disability
Exclusions
Non-Cancelable and Guaranteed Renewable

 

There are three major factors that go into making a Long Term Disability policy.  The insurance company will let you pick any two of the factors, and then it will fill in the third.

For example, you might say, “I want to pay one dollar per year, and I want a benefit of $10,000 per month.”  The insurance company might well respond: “Sure, we can do that, but you have to be standing on top of the North Pole, and be hit by a herd of wild elephants.”  You might respond:  “Well, I don’t want to spend my time hanging around the North Pole, and besides I don’t think there are too many herds of wild elephants up there anyway.  Can we talk about getting this changed?”  They would respond: “Sure, but we are also going to talk about changing the premium and benefit as well.”

 

Definition of disability 
The most important part of a disability policy is the definition of disability.  There are three definitions of disability: Own occupation, Regular occupation, and Any occupation.  Own occupation means that if someone is disabled, and cannot work because of illness or injury, that the insurance company will pay them an income.  Even if the person took a job at Chapters Bookstore, in order to get out of the house, and away from the boredom, they will continue to pay the full amount.  This policy is generally only available to professionals.  The decision to work would be a voluntary decision of the individual.  Regular occupation means that if someone is disabled, and cannot work because of illness or injury, that the insurance company will pay them an income.  In this case, if the individual were to take the job at Chapters Bookstore, the insurance company would subtract the amount they were earning at Chapters from the benefit they were paying.  Again, the decision to work would be a voluntary decision of the individual.

Any occupation means exactly that.  If an individual were capable of doing any occupation, he or she would not be considered disabled, and no payments would be made.  This is not a definition to have.  We do not sell policies with an ANY occupation definition.

 

Exclusions 
Exclusions are those times when an insurance company will not pay a disability income.  With individual LTD policies such as we are discussing here, there are three general exclusions: war, normal pregnancy, and incarceration. 

If someone were to go to Iraq, or Afghanistan, or Kosovo, or Chechnya,  or East Timor, or any other place that is a war zone, and get hurt, they would be on their own.  The company would not pay.  Don’t go to these places.  They are not attractive tourist places anyway. 

Normal pregnancy is not a disability.  It is simply an altered state of health.  Complications of pregnancy such as fibers in the womb, or excess retention of water in the legs are covered. 

Incarceration: if you go to jail do not collect $200, or any other money.  It’s not a good place to go, so don’t go there.

 

Non-Cancelable and Guaranteed Renewable 
Non-cancelable, the individual can cancel the policy any time he or she wants to simply by writing a letter to the insurance company.  But the insurance company, once it has issued the contact, cannot:

  • increase the premium;

  • decrease the benefits;

  • insert any adverse clauses into the contract;

  • or cancel the policy.  

These are tough policies to get.  They ask a lot of questions about the person’s  health, and want to see three years of income tax and financial  statements as proof of income.  Guaranteed renewable mans that the premium stays the same all the way through to age 65, even if the individual has two or three or more claims. 

These are the basic features of an LTD policy.  One can then add extra features, called riders, to enhance the policy.  The riders available are as follows:

Additional Insurance Rider.  This rider allows the individual to increase the basic monthly benefit at some time in the future, without asking any questions about health, hobbies, or occupation.  The only question asked is what is the current income?  Does it justify the increased benefit? 

Cost of Living Rider.  This rider comes into play when someone is on claim.  If the claim lasts more than a year, The benefit will be increased by an amount equivalent to the rate of inflation as measured by Statistics Canada, up to a maximum of 5 % per year. 

Own Occupation Rider.  This rider modifies the terms of the policy to permit the individual to work, while disabled from his own occupation, and still collect the full benefit. 

Pension guard.  This rider deposits an amount of money into a separate account for the individual’s retirement.  He or she cannot get his or her hot little hands on the money until age 60 at the earliest, but there is some money going aside for retirement.   

Residual / Partial Riders.  Some policies only pay a partial disability benefit for a 12 month period.  This rider extends the rider so that the benefit will extend to age 65.  This is important because most disabilities, 85 % are partial.  Only about 15 % of all disabilities are total. 

Return of premium.  This rider will return 50 % or more of the premium paid every eight years, if there have been no claims. 

Cancer Heart Attack Stroke Rider.  This rider allows a Cancer Heart Attack Stroke rider to be added to the basic policy.  If someone is diagnosed with or suffers one of these events, a lump sum of money is paid, thirty days after the event.  This is in addition to any money that may be payable because of disability.

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