Should I buy disability insurance?

How does disability insurance work?

When you talk to a life insurance salesman he is likely going to offer you disability insurance. This is one of those insurance products that you need to understand well when you are making a purchase. It is different then life insurance and car or home insurance. This insurance pays out when you are unable to continue in your job due to injury or illness.

Disability insurance can be for a short term, usually a maximum of two years. Or it can be for a much longer term. With an individual plan you pick the amount that you want to be paid. As well there is a waiting period and you can pick which one will suit you best. These waiting periods can range from 30 to 120 days. The shorter the wait, the higher the premium.

What about my group disability insurance from work?

Often your employer's group plan will include some disability insurance. So while you have your job you do have some coverage. Some insurers will allow you to continue in the group plan even after you retire. There are some group plans that will transfer to the new employer as long as you stay in the same occupation.

There are certain tax implications with receiving disability insurance. If you pay for this out of your own pocket then it is tax free. The payout is usually 66.6% of your salary so that is usually an adequate amount for your needs if it is tax-free. If your employer pays for this part of your group insurance then it is taxable. You need to consider this carefully if you have a choice.

What about WCB disability insurance?

For the sake of this example, let's assume that you do not have disability coverage through your work's group plan. You might have Workers' Compensation Board (WCB) insurance. WCB has some limitations. It is only for while you are on the job. So if you suffer an injury while working in your yard at home then the WCB is not going to respond on your claim. If you do get hurt on the job then your situation will be reviewed by a board and they will determine whether or not you qualify for the insurance. The insurance can include money to live on as well as retraining to a different occupation. WCB coverage is mandatory for certain trades.

What is the best disability insurance plan for me?

What is your situation? To determine what you might need in the future requires that you consider where you are right now. What could happen to you that you will find yourself unable to work? Some of the situations that could occur which involve injury or illness would include:

  • A long-term illness
  • An accident on the job
  • A car accident
  • A catastrophic event

If one of these happened to you then how well are you prepared to handle the financial consequences? How will you pay your bills and support your family? Some options include:

  • Emergency savings fund
  • Credit card
  • Borrow from friends/family
  • Slash all unnecessary expense and go into debt

Expert disability insurance advice

If you have a group plan at work then it may not be optional that you participate in the disability insurance coverage. If it is available then the pricing is usually good enough to make it an obvious first choice. You should also tie this in with the emergency savings fund.

TurnersTips recommends that you consider the emergency savings fund as a long-term method of helping to avert financial disaster. If you can steadily build up this fund then when something does go wrong you have a cushion of money. If you have WCB then this cushion is there for you if you are hurt off the job so will not qualify for payout or retraining expenses.

An individual disability insurance policy is an option if you do not have the emergency savings. Putting a little money aside each month will eventually free you from the insurance payments. Then you can put whatever you were paying on the disability into the emergency fund as well.

Talk to your financial planner, accountant or insurance product adviser as to what is the best thing for you to do in your situation. Be aware that insurance is not always the only answer. Explore your options and take control.