Disability Insurance: What to choose?

This article was generously provided by Marie-Josée Riffon, Business Development Consultant, Financial Horizons Group, Quebec Region.


Did you know you will earn millions of dollars throughout your working life?


For example, a 30-year-old earning $50,000 per year has a potential cumulative income of $2,746,410 at age 65, assuming an annual wage increase of 2.5%. Your cumulative career income will be much greater than the value of any other property you own!

That is why disability insurance – designed to protect an income – should be one of the first requirements to consider when meeting with a client.


Criteria worth considering

Monthly benefit

In order to shelter a client’s lifestyle as much as possible, it is recommended that you select the maximum monthly benefit based on their income. The amount will be calculated by the insurance company on the basis of pre-tax net income. In the case of incorporated business owners, you can also consider the client’s share of profits. I am often asked whether dividends are insurable. They are not; business profits, however, are insurable because dividends must be paid out of the business’s profits in the current year.


Waiting period

The shorter the waiting period for the disability insurance payment, the higher the premium. In my view, increasing the waiting period is preferable to reducing the benefit amount. In the long run, this will benefit the clients. Furthermore, increasing the waiting period will automatically reduce the premium amount, which could provide the financial flexibility to add supplementary riders.


Benefit duration

In terms of benefit duration, it is clearly advantageous to offer a policy that covers the client to age 65. This ensures the client is covered for any and all contingencies because the average duration of a disability of more than 90 days is 5.75 years.[1]


Riders worth considering

Future insurability guarantee

The future insurability guarantee increases the client’s coverage without evidence of insurability. They simply have to provide financial evidence. On the other hand, be sure to watch out for any automatic increases that are included in the policy: if the client accepts them, they must be able to provide proof of income.


Regular occupation

The basic policy occupation coverage is for two years. Extending the regular occupation period through a rider ensures that disability benefits will be paid as long as the insured party is totally incapable of performing the duties of their regular occupation until the end of the selected compensation period.


Refund of premiums

In the case of premium refund insurance, the insurer will refund the premiums paid to the insured party at the end of the selected term. While that may sound interesting, you must be careful: the total claims amount (and even more with some companies) is simply subtracted from the refunded premiums amount. Moreover, the rider is quite expensive. On the other hand, some people will see this as an advantage, as a way of achieving forced savings. Others will find that the coverage is quite costly and will therefore prefer saving money by investing in their RRSP. Different clients perceive the issue differently, which means it must be considered on a case-by-case basis!


Guaranteed products or renewable guaranteed products?

The issue of recommending a guaranteed product or renewable guaranteed product comes up frequently for advisors. What really matters is the quality of the insurance and the suitability of the product to the client’s profile. No single disability insurance product on the market today will suit the needs of all clients (in other words, there is no “one size fits all” solution); however, several products can be adapted for different situations. Since every individual’s needs are different, it is suggested that their file be subjected to a rigorous analysis in order to offer the product that meets the client’s specific needs.

You must also remember to check the client’s insurability as well as the various situations that may arise. Is this client starting a business? Does this client work from home? Does this client have group insurance that provides complete coverage? Does this client have pre-existing medical conditions? All of these issues should be taken into account before recommending a disability insurance product to your clients.

On that note, I wish you productive disability insurance sales!

[1] SOURCE: Canadian Institute of Actuaries (CIA) – Aggregate Table 86-92 and Society of Actuaries 2012 – Individual Disability Experience Committee Table.