Q&A - Answers to basic questions No. 14 to 17

- - (full list of questions)


14. What are some important factors to consider when dealing with disability insurance?

Cost is always important, of course, but there are many other aspects as well to consider when one buys disability insurance. The most basic factors are:

  • Definition of disability: there are a few versions used by various companies (own occupation, regular occupation, any occupation), with various policies, and you want to make sure that you get the best available for you. Ignoring this may mean that you will not be entitled to the benefit while you could be with a different policy.
  • Length of benefit period, in other words, for how long can you get the monthly benefit if you become disabled to work. Sometime you have a choice (1 year, 2 years, 5 years, 7 years, until age 65), sometime - depending on your occupation and on the particular policy you are dealing with - you can get the coverage for a few years only. When you have the choice, go for the longer term, even if it increases the premium, of course. (But it may happen that you have to pay less even for a longer benefit period to one company than what you would pay for a shorter benefit period to another.)
  • Length of waiting period, that is the period during which you are not yet entitled to the benefit after becoming unable to work. If you are willing to wait longer, you can significantly decrease the cost of the policy.
  • Are the premiums guaranteed? They should be. Do not be satisfied, unless you have no choice, with the condition that the insurer cannot single you out, but can change the premium for a certain group of people you belong to with common characteristics.
  • Can the company cancel your policy? Try to avoid such policies.
  • How is your income calculated? If you have your own business, you might be better off if your gross income (and not the net income) is the basis of calculating the benefit. Most policies do not allow this, but there are such policies.
  • Are there partial disability benefits in the policy?
  • Will you receive residual benefit if your income decreased after you went back to work?
  • Can you buy future insurability? Your income will hopefully grow, at least due to inflation. You may want to ensure that you can buy increased monthly benefit later even if your health will have deteriorated by then.
  • Will the company support rehabilitation programs should you need a career change due to disability?
  • Will the benefit keep pace with inflation? What may seem to be a decent monthly income today will worth peanuts in the future, because of inflation.
  • Are there riders (return of premium if you stay healthy for x number of years, e.g., or the one that provides additional ongoing contribution to a retirement plan while you are disabled) available that might increase the value of a policy to you?
  • What kinds of combinations are there that can help you save money? Combination of D.I. with critical illness insurance? With U.L.? Combination of two disability protection elements (various lengths of waiting / benefit periods, or various injury / sickness coverages, e.g.) perhaps?


15. Are critical illness insurance and disability insurance substituting each other?

Many people believe that if they have either disability or critical illness insurance, they do not need the other one. While there is a grain of truth in this opinion, it's still dangerously false belief. The two kinds of protection complement, rather than substitute for each other. One can compare the two on several dimensions, such as

  • occupational / income restrictions
  • coverage period
  • waiting period
  • benefit amount
  • covered conditions
  • partial benefit availability
  • inflation protection
  • future insurability
  • child protection rider
  • potential payout
  • multiple benefit period
  • claim difficulty
  • retirement savings protection
  • premium pay back option

and while on some dimensions disability insurance will be better, on other ones critical illness coverage offers more. In other words, one can easily describe various realistic scenarios in which one or the other of these insurance types does not help much, if at all, while the other solves the financial problem resulting from sickness or injury. There are cases, of course, when both policies are triggered. (for more detailed comparison, click here)


16. What is the extra charge smokers pay for insurance? What can they do about it?

Smokers have incredibly worse chances for health and longevity than nonsmokers. For example, a 40 year old man can reasonably expect to live until age 80 if he is a nonsmoker, but his life expectancy is only 75 if he is a smoker. Accordingly, smokers have to pay substantially higher premiums for insurance protection. While a 40 year old nonsmoker male can buy a $500,000 ten year term life insurance policy for less than $50 per month, he has to pay more than $100 for the same policy if he is a smoker. The difference varies somewhat, according to age, gender, and type of protection. The extra charge is larger with disability and critical illness policies than with life insurance.

Not all companies define smokers in the same way. For some, cigar or pipe doesn't count, and users of these tobacco products can buy nonsmoker protection with lower premiums. If someone has decided that he/she would quit smoking, buying certain insurance policies can be a good financial incentive to keep and implement that intention. It is so because some companies offer nonsmoker rates even for smokers, but only for a limited period, usually 3-4 years. If the person will really quit in that period, the premium will stay at the lower level, but will be increased otherwise. Even without this special incentive, if someone with an existing smoker policy can declare that he/she has given up the habit (meaning usually no usage at all in the last 12 months), the company may be willing to switch to lower, nonsmoker rates.

Making false declarations regarding smoking habits or history might be tempting, but it isn't worth it. Insurance companies have no tolerance in this regard, and modern science, together with the companies' investigative ability and willingness, give them good chance to discover fraud. Fraud means denial of benefit, even if all the premium was paid for a long time.


17. What demographic, social and economic factors play important roles in the need for, innovations in, and availability of insurance?

Our need for insurance, and the choice from which we can select policies to cover those needs, are largely determined by the state of and changes in economy, society, population demographics, politics, technology, and medicine. Some trends are quite clear:

  • People live much longer than just a few decades ago, and this trend of increasing life expectancy will continue. One consequence is that most people will spend longer periods in retirement than previous generations did. A 65 year old nonsmoker man today has 1 in 2 chance of living until at least age 84 (81 if he is a smoker).
  • Today, 4.7 million Canadians are over age 65. Their proportion, 12% today, will double in 40 years. The size and proportion of the 80 plus age group is increasing even more rapidly: it will triple in the same four decades. In 1966, the number of workers that were supporting social programs in Canada per retiree was 7 to 1. With the aging of the baby boomer generation, this ratio is going to decrease to 3 to 1 by 2015.
  • Increased longevity is at a high price. People live longer not because of the decrease in the occurrence of serious diseases; on the contrary, serious health situations are becoming more frequent, but they are treated with much higher success rates than before. These more powerful treatments are much more costly, and the result of them is frequently saving lives, but not without decreased functionality, expensive ongoing medication, or need for long term care.
  • Individuals can rely less and less on the generosity of government support. No-one really knows how strong and long-lasting this tendency towards more self-reliance will be, but the debate is only about the extent, not the trend itself. This increased self-reliance refers to both coping with health crisis situations and the normal costs of long retirement.
  • Families are smaller, and more loosely knitted and dispersed than in the past, and there is no end of this trend in sight either.


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Key areas:

Life and health insurance (including disability, critical illness, and long-term care protection)

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