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Disability Insurance Unplugged

Disability Insurance Unplugged

Written By: John Klotz
1-28-2008
If you are a self-employed consultant working in the Internet space, you should consider purchasing disability insurance. You might be asking yourself, what are the chances of becoming disabled for a period of more than 90 days before you reach the age of 65? At the age of 35, you have a 50 percent chance of become disabled for more than 90 days. And if your disability did last 90 days, the average length of time for disability would be 2.8 years. Source: Commissioners IDA Morbidity & Commissioners Mortality Tables, & Commissioners Ordinary Table, Society of Actuaries.
What would be the impact on your life of not having any income for 2.8 years? For most of us, it would be both financially and emotionally devastating.
So, what possible sources of income would you have if you became disabled for 2 or 3 years? Well, you could utilize your savings. Unfortunately, it only takes 6 months of a disability to wipe out 10 years of savings. How would you feel if you depleted all your assets in that short a period of time?
Another alternative source of money would be to borrow money from the bank. However, the banks make it hard enough for us to borrow money when we are physically well. Imagine how difficult they will make it for you if you apply for a loan and you are disabled. In fact, being disabled is the worst possible time to apply for a line of credit, so it’s really not an option.
Another option would be to borrow money from your relatives. I think this option is self-explanatory and its only consequence is strained family relationships and bad feelings towards the disabled person (you).
Or, your spouse can take care of the family income. But the problem is, that unless you are currently banking one full income, can your spouse be expected to become the sole parent, private nurse and breadwinner at the same time. As well, this option is not available to the “single” people of the e-commerce world.
Another alternative would be to rely on government benefits like the disability benefit on the Canada Pension plan. However, you should read the fine print on this program. The definition states that in order to collect on CPP, your disability must be “severe and prolonged.” This means that your disability must have no chance of rehabilitation and death is to be expected within a twelve-month period. This is a very restrictive definition and disability has to be total.
Finally, you can purchase Disability Insurance, the most reasonable solution. This is the only source of money you can really count on during a period of disability – and the least expensive. For a reasonable monthly premium, you can protect yourself and your family from an unexpected event.
Here are some features to look for when purchasing disability insurance. Firstly, the definition of disability should recognize your talents as an Internet professional. The most liberal definition of disability in a contract is the Own Occupation. This states that you will be disabled if, “due to sickness or injury, you are unable to perform the important duties of your occupation.”
This type of disability will allow you to work in another professional and still receive benefits. And the insurer cannot force you to work at a demeaning job like the serving tables. (not that there is anything wrong with serving tables, but it should be your choice to do so, and not the insurer).
The definition that is the most restrictive is the “Any Occupation” which states that you are disabled if “due to sickness or injury, you are unable to perform any occupation for which you are reasonably fitted by training, education, or experience.” It’s this type of definition that is very subjective and you can find yourself waiting tables with the insurer claiming you are fit and not eligible to receive benefits.
Other features that are important on a disability contract include the Residual disability benefit. This clause states that if you become partially disabled and suffer a loss of earnings of say 30 percent, then you will receive 30 percent of your benefit. This is probably the most important clause to an Internet Professional because it allows you to work part time and receive partial benefits. Since most of your work is sedentary, you could potentially work part time from home and still receive benefits.
The policy should also be Non Cancellable. This means that regardless of claims and experience, the insurer cannot increase premiums or add restrictive riders to the contract.
There are additional riders you may want to consider, such as a Future Increase Option (FIO) and a Cost of Living Rider (COLA). . The FIO is important to you as it allows you to increase your coverage each year without showing proof of good health. While we are young, we can take our health for granted, but as we age, this is not the case. As well, the application process to obtain disability coverage is invasive, and most of my clients don’t want to face the scrutiny of the insurance company each year. And the COLA increases your benefit each year in the event you go on claim. Inflation is the enemy of a fixed income person and eats away at your purchasing power. The COLA protects you from this.

If you are a die in your bootstraps kind of individual, you may want to consider the Return of Premium benefit. This provision guarantees to return a large percentage of your premiums in a given period in the event you do not make any claims. Usually, the policy has to be inforce for 10 years. You do pay a premium for this benefit, but it might make sense for you to do so.
There are other features of this coverage to consider, but it’s best done on a case by case basis. Give this article some thought and look into protecting yourself and your family. Northwood Mortgage Life provides a discounted insurance program available through your association.
If you would like more information on this topic, please contact John Klotz. John is President of Northwood Mortgage Life. You can reach him at john.klotz@northwoodmortgage.com or call 416-969-8130 ext. 230.