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					Disability Insurance – The Need for and Coverage Explained


1.0 What is Disability Insurance?

        Disability insurance is a policy which protects an individual or family against loss
of income. Loss of income must be due to a critical illness or incapacitation of an
individual. Disability insurance will supplement income in the hands of the policyholder
until the individual is considered capable of returning to employment. The insurance is by
nature, a short-term coverage, which is dependent on the terms of the policy. All
disability insurance is different; therefore, the coverage an individual buys is unique to
that individual. The specific coverage provided is documented in the policy, and careful
examination of terms and conditions should be done before any coverage is accepted.

2.0 Key Terms
Disability:         Inability to perform normal employment duties. (Definition
                    changes between policies)
Critical Illness:   A disease or sickness which could lead to death. (I.e. cancer, aids)
Waiting Period:     The period of time between the incident of incapacitation and the
                    commencement of insurance payments.
Waiver of Premiums: The exclusion of having to pay premiums when in disabled
                    status.
Exclusions:         Events which cause disabilities which are not covered. (I.e. war,
                    pregnancy)
Length of Contract: The period the individual is covered for event of disability.
Length of Coverage: The maximum length of time an individual can receive insurance
                    payments.
Premium Rates:      The amount paid on a monthly basis to maintain the insurance
                    coverage.

3.0 What Does Disability Insurance Do?

         Disability insurance performs two basic functions: Supplementation of Income, or
Supplement Minimum Payments. The function provided by the policy is dictated by the
institution offering the insurance and the reason for the insurance.

3.1 Supplement Income

       When disability insurance is provided by an employer, an individual’s own
independent policy, or by the government; the coverage provided pays a continuous
stream of payments until the individual returns to employment. Certain policies will
contain a length of contract clause, which limit the number of years an individual will
receive compensation. Benefits will provide the insured with a percentage of previously
earned income on a monthly basis. Typically the payments will be indexed for inflation;
however, this is not always the case.




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Disability Insurance – The Need for and Coverage Explained

3.2 Supplement Minimum Payments

        The supplementation of minimum payments is provided when the insurance is
offered on financial devices. Disability insurance provided on loans, credit cards, and
lines of credit provide the holder with the option to insure that the minimum payment on
these accounts is met when an individual losses the ability to earn income. The premiums
on these accounts are calculated on the basis of premium per unit. A unit is typically a set
amount of borrowings. On credit cards the unit is set at $100, where as a loan or line of
credit typically have units of $1000. The premium levied on these accounts fluctuates
with the amount borrowed, and the premium is applied to the account on a monthly basis.
In the event that an individual is unable to earn an income, the disability policy will pay
the minimum payments on the account for a given time period (length of coverage).
        These policies contain two important features which should be identified. First,
the coverage provided is not only disability insurance but also employment insurance.
Thus, if an individual losses their job (through no fault of their own) the policy will
provide the coverage. The second interesting item is the time of coverage. Typically the
coverage period is only five years, and while it may provide short-term financial relief
the individual will still pay back the majority of the principle in the long-term.

4.0 Who Offers Disability Insurance?

        Disability coverage is offered from several different sources; however, the
coverage provided varies greatly. Banks will offer insurance on loans and lines of credit.
Typically the premium for such an account is approximately $1.50 per $1000 unit of
borrowing. Insurance companies or brokers provide disability insurance, however, these
companies prefer having the disability insurance as a component of a life insurance
policy. Credit card companies provide disability/employment insurance for a price of $1
per $100 unit of outstanding balance per month. Retail credit cards also offer a similar
policy and premiums for these accounts are $1.20 per unit. Employers offer disability
insurance which in turn provides a percentage of regular earnings to the policyholder, the
premiums on these accounts can be completely provided for by the employer, however,
the employee can have the option of purchasing addition coverage. Finally, the
government can provide disability relief through CPP (Canadian Pension Plan) as long as
the individual is in good standing (paid CPP during the previous five taxation years), and
these benefits are paid based on financial need after all other sources of income and
savings have been considered.

5.0 What Coverage is Required?

        Many companies use a mathematical calculation based on the expense approach
to insurance. The examination of financial burdens of an individual will determine what
amount of coverage is required view appendix A. One of the most important pieces of
information which cannot be overlooked is the new liabilities brought by a disability;
these costs can take the form of wheelchairs, drugs, and physical therapy. There is no
certain way to account for these costs as certain disabilities may require new equipment
and services, and other disabilities may not.

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Disability Insurance – The Need for and Coverage Explained

        Once the value of the monthly payments is determined, the second consideration
is the potential that the individual will be rendered unable to work. The following table
shows the number of disabilities reported each year. While on average an individual is
three times more likely to be rendered disabled than dying, this does not necessarily mean
that disability coverage should more highly sought than life insurance. The table below
shows the likelihood of disability by age group. Depending on the age of the individual
and the exposure to risk at their workplace a more informed choice to insure can be
made.

                                     Population
                                         Not        Population     Percentage
                                     Affected by    Affected by        of
                Age    Population    Disabilities   Disabilities   Disabilities
               15-64   19,858,350    17,889,850      1,968,490               9.9
               15-24    3,883,690     3,732,670        151,030               3.9
               25-44    8,849,090     8,222,480        626,610               7.1
               45-64    7,125,570     5,934,710      1,190,850            16.7




6.0 Informational Considerations for Disability Coverage

       There are other considerations as well when considering the coverage required.
The government affects the coverage of individuals in three key ways. These
considerations should also be weighted when the choice for disability insurance is made.

6.1 Canada Pension Plan

        Through CPP the government provides disability coverage up to a total of
$992.80 per month (based on financial need). To qualify for disability coverage an
individual would have to be in good standing by paying the required CPP premiums for
five years previous to the disability. This disability coverage is long-term in nature and an
individual must be seen as unable to work any employment position for a minimum of 12
months. The benefit to this coverage is that there is no length of coverage specified and
can last well beyond retirement. Additional coverage benefits include payments which
are indexed for inflation, and provide further coverage if the disabled individual has
dependents (spouse, children and elders).

6.2 Minimum Car Insurance Policies

        For protection of its citizens the government also requires that the individual’s car
insurance contains disability coverage in its basic coverage package. If an individual
becomes disabled due to a car accident the auto insurance will provide coverage of 80%
of the individuals income, up to $400 per week, furthermore, this coverage only has a 7
day waiting period for employed individuals.



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Disability Insurance – The Need for and Coverage Explained

6.3 Tax Consequences

       All proceeds received through any disability coverage are 100% taxable. Hence
when calculating disability insurance coverage needs it is important to consider the
marginal tax rate which will be applied to all receipts of payment. If the individual is in
the lowest tax bracket a marginal rate of 22% should be included in the calculation.


7.0 Disability Insurance Applied

      Now that all the finer points of disability insurance have been flushed out the
comprehensive application of disability insurance can be done.

EXAMPLE:

       Shelia Hurtherself is a single mother of one (8 years old). She works at Lakehead
University and makes an annual salary of $32,000. She currently rents a small apartment
which has a monthly rent (including utilities) of $800. She currently has credit card debt
of $4,500 and the current monthly payments are $135. She does not believe that the $45
per month ($1 per unit) is worth the insurance coverage, and as a result, turns down the
coverage when offered to her. She currently drives a 1999 Sunfire; she has seven more
payments of $260 until the car is hers. Her insurance on the vehicle is $100 per month
due on the 2nd of each month. Between herself and her daughter she estimates that they
eat $350 worth of food each month. Expenses for her daughter are approximately $400
per month including clothing($100), child care($200), and toys($100). Her miscellaneous
expenses each month amount to $200, this amount includes gas for the vehicle($70),
telephone/internet($60) and the occasional night out to relax($70). Although the financial
burden of being a single parent is though Shelia has been able to save $2,000 in a savings
account. Her ex-husband provides $400 per month child support.

        Through Lakehead University the school offers an extensive disability plan and
her policy will provide her with coverage of 80% of gross income for any disability
which last longer than 60 days. The waiting period on this insurance policy is also 60
days and provides a coverage term of five years.

If she gets into an accident in the parking lot later today will she have enough disability
coverage to provide over the next 4 years over which she is expected to make a full
recovery? See Appendix A

***Note: Upon claiming with LU she determines that she will receive the full 80% of her
gross income. Her car insurance company has informed her that due to the coverage
provided by LU they have determined her financial need to be $100 of coverage per
week.




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Disability Insurance – The Need for and Coverage Explained

Appendix A - Needs Analysis for Ms. Hurtherself:
                                 Disability Insurance Needs Analysis
Current Personal Expenses           Monthly        Current Sources Of Income     Monthly

Mortgage / Rent                         800        Group Disability Insurance        2,133.33
                                    $                                            $
                                                   Personally Owned Disability
Food                                    350                                          0
                                                   Insurance

Utilities / Heat, Hydro, Phone          60         U.I.C                             0


Loans / Leases                          260        C.P.P / W.C.B                     0

Insurance / Home, Car,                  100
                                                   Personal Savings                  41.67
Cottage                                            (cash total by 12 mo.)

Clothing                                100        Investment Income                 0


Education                               0
                                                   Other (specify):
                                                                                     825


Child Care                              200        Car Ins. + Support

Taxes                                   416.17


                                        375
Other (specify):

Total                                   -2661.17   Total                             3000
                                    $                                            $

                                                   Total Surplus / Deficit           338.83
                                                                                 $


* Taxes = Disability Coverage of 25600 (LU) + 5100 (Car Ins.)
       = Taxable Income of          30,700
       - Personal deduction         8,000
       = Taxable Income of          22,700
       x Marginal Tax Rate          22%
       = Tax / Year                 4994
       / 12 = Tax / Month           416.17




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Disability Insurance – The Need for and Coverage Explained


Want to learn more about disability insurance?
Car Insurance Coverage Explained by Province:
http://canadaonline.about.com/gi/dynamic/offsite.htm?site=http%3A%2F%2Fwww.ibc.c
a%2Fhomeauto_auto_law_provinces.asp

Cost of Health Care Devices (Wheelchairs, Home Modifications, etc.) in U.S. Funds:
http://www.invacare.com/cgi-bin/imhqprd/inv_catalog/prod_cat.jsp?s=0

CPP Coverage Rates for 2004:
http://www.hrdc-drhc.gc.ca/isp/cpp/rates_e.shtml

Disability Calculator:
http://www.barakettfinancial.com/calc/living-disab.asp?section=personal

Disability Statistics for 2001:
http://www.statcan.ca/Daily/English/021203/d021203a.htm

Mark’s Disability Bedtime Reading (Insurance Canada):
http://www.insurance-canada.ca/consinfodisability/l25.php




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