Welcome back to the Financial Pulse. In our last lesson, we talked about debt. In this lesson, we will get into the ever fascinating topic of insurance. Today, we’ll be covering disability insurance, life insurance, and critical illness insurance.
Did you know 1 in 6 Canadians will be disabled for 3 or more months before the age of 50. This can mean a significant loss of income that can delay financial independence. Residents and physicians have invested a considerable amount of time and money into our education and in many cases, the income tied to our skillset is our greatest financial asset. Long term disability protects against the loss of this income.
If you are unable to work temporarily or permanently because of an unexpected illness or injury, long term disability will provide a monthly payout. After an illness or injury, a claim is submitted with your insurance company and payouts typically begin 90 days from the onset of your disability. In those first 90 days of disability, people will either use short term disability benefits or personal emergency funds to cover expenses.
There are several different types of disability insurance with different occupational riders.
“Any occupation” disability insurance provides coverage when you’re unable to work in a job that the insurance company deems is suitable for you based on your education, experience and age, even if this is not the exact job that you are currently working in and even if this “suitable job” is lower paying that your current one. This narrower definition of disability means that you’ll only be able to claim insurance if you’re not able to do any function of your job. For example, if you are a surgeon and you can’t operate anymore due to a hand injury, you may not be able to qualify for disability insurance because the insurance company might say that you can still do clinic work or teach, even though this is not your full scope of practice and may mean reduced income.
“Own occupation” disability insurance, on the other hand, will kick in if you are unable to work your regular job. You will get your monthly payout for as long as you’re unable to do the specific duties associated with your current job, even if you choose to work elsewhere after your disability. So the surgeon with the hand injury will continue to get monthly payments even if they are able to work at their new job as a university professor or a marketing director.
Some companies offer a hybrid own occupation insurance that will either partially reduce your payout if you choose to work in another occupation or offer own occupation for the first two years of coverage then any occupation thereafter.
Some insurance products also come with a cost of living adjustment, which will increase the monthly payout by a certain percentage every year to keep up with the rate of inflation.
As a general rule of thumb, the amount of disability insurance coverage you get should be enough to replace your living expenses with some extra leftover to put aside as retirement savings because disability payouts stop after you reach the age of 65 or sooner, depending on your policy. You may also need to take into consideration that your monthly expenses may be more when you have a disability than they are currently. Usually, the goal is to keep your disability insurance until you are able to self-insure, which means that you have enough passive income flow through your investments and savings to cover your living expenses if you lose your job.
For some products, the younger and healthier you are when you purchase your disability insurance, the cheaper the premiums will be. So it is beneficial to get coverage sooner rather than later!
Life/Critical Illness Insurance
Life insurance provides a tax-free, lump sum payout at the time of your death to a beneficiary that you name. This allows you to continue providing for dependents after your death and can help pay for your funeral expenses. It can also be useful if you want to help your loved ones pay off your debt or if you want to help provide for your dependents’ future education. If there is no one who depends on you, or who would struggle financially from your passing, this is not an insurance product you need.
There are two main types of life insurance.
Term life insurance provides coverage for a specific time period, often 10 or 20 years, and only pays out if you pass away during this time period. So, if you select a 10-year life insurance product, you will only get a pay out if you pass away in the next 10 years. If you pass away 10 years and a day after you purchase your policy, your beneficiaries won’t get any money. But it also means that you are only paying insurance premiums for 10 years. This can be cost effective because it allows you to only pay for coverage during the stage of your life that you need it most, which is typically when you have young dependents.
Permanent life insurance provides coverage throughout your lifetime so payout happens if you die at any point while the policy is in effect, which is as long as you are paying your premiums. It also builds up cash value and accumulates interest during the years you are paying for it which means that you can get a portion of your money back if you cancel your policy before your death. But permanent life insurance policies can be 10 to 20 times more expensive than term insurance. For residents in the early stage of their career, the cost of permanent life insurance generally outweighs the benefits. Better to consider this product, if at all, much later in your career.
Similar to life insurance, critical illness insurance offers payouts as a tax-free lump sum. This payout happens if you are diagnosed with any of the illnesses listed in your policy. Common illnesses include cancer, heart attacks, strokes, blindness, paralysis and organ transplant. Often the criteria can be pretty stringent so the insurance company might not pay out unless you have a specific stage of cancer or have a certain level of impairment from the illness listed.
Critical illness insurance can be helpful for upfront costs like retrofitting cars and homes for accessibility, treatment options not covered by insurance, and increases in costs of living associated with your illness like home care. It can also be beneficial for stay at home spouses who have no earned income and so aren’t able to qualify for disability insurance but whose contributions to the family still have monetary value. That being said, generally the qualifying criteria are so stringent that critical illness insurance is often considered an unnecessary product. Better to spend your time learning how to manage your own investments rather than pick the ideal critical illness insurance policy you will almost certainly never benefit from.
Just like disability insurance, life and critical illness insurance are cheapest when you are young and healthy. So if it is something you think you may want down the road, it’s worth exploring sooner rather than later.
And that’s it! Not so complicated after all. We hope you enjoyed learning about disability insurance, life insurance, and critical illness insurance. That’s it for the Plan Module. The next stage of training is the Build Module, where we will learn about how to build our wealth through lessons on income, investments, taxes and more.