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Personal and Business Banking

Disability Insurance

StreetWise Insurance Guide

Life rings
  • Summary
  • Article

Disability Insurance

What is it?

Disability insurance provides you with a monthly income if you are sick or injured and cannot work. Most people don't think about the need for disability insurance but your odds of being disabled (for 90 days or more) during your working life are higher than your odds of dying during the same period.

There are two types of disability insurance:

  • Short-term disability (STD) has a waiting period of 0 to 14 days and the benefit period can be up to two years.

  • Long-term disability (LTD) has a waiting period of several weeks to several months. The benefit period can be anywhere from a few years to the rest of your life. Typical benefit periods are 5 years, 10 years, or until age 65. If you also have STD, then LTD usually starts after the STD benefit period is exhausted.

How can I get it?

Disability insurance is offered as an employee benefit from many companies. Some employers provide STD with no cost to the employee. If LTD is offered, the employee may have to pay a monthly premium.

If disability insurance isn't offered by your employer then you can purchase an individual policy.

How are premiums determined?

Premiums are determined by your age, sex, health, whether your job is considered risky, and the amount of potential lost income you are trying to protect.

What should I look for in a policy?

Here are some important things to consider when looking at disability policies:

  • Definition of disability

    Does it pay benefits if you are unable to perform the customary duties of your “own occupation”? Or does it only pay benefits if you are unable to do any work? “Own occupation” policies are more expensive.

  • Benefit period

    How long will you receive benefits? You may have a choice of 1 year, 2 years, 5 years, to age 65, or lifetime. The length of the benefit period is a factor in the premium.

  • Waiting period

    How long before you start to receive benefits? There are usually several options such as 60 days, 90 days, or 6 months. The longer you wait, the lower the premium.

  • Amount of income replaced

    The typical policy will replace from 60% to 70% of your monthly taxable income. You may be able to purchase a policy that covers up to 80% for an additional premium.

  • Non-cancellable

    This means the policy can't be cancelled by the insurance company except for nonpayment of premiums. As long as the premiums are paid on time, the premiums can't be raised above what is indicated in the policy.

  • Guaranteed renewable

    This means the insurer can't cancel or refuse to renew the policy as long as the premiums are paid. Premiums can be raised but only if they are raised for all the policyholders in your rating class.

  • Coverage for disability resulting from accident or illness

    Covering one or the other can result in lower premiums but doesn't provide you adequate protection.

  • Cost-of-living increases in benefits

    A cost-of-living adjustment (COLA) will help your benefits keep pace with the increased cost of living. This coverage can be expensive but it is important to provide an appropriate level of benefits in the future.

  • Pays “residual” or partial benefits

    If you can work part-time, this helps to make up the difference in your income. This is a standard feature in some policies and can be added as a rider in others.