Check yourself before you wreck yourself: The importance of disability and critical illness insurance

When you’re a young professional sometimes life can feel like a raw deal.

Housing prices always seem be rising, expected investment returns always seem to be falling and sometimes your brilliant app idea just doesn’t explode into the public’s consciousness like you thought it would – leaving you billions of dollars short of where you thought you would be at this point in your life.

The point is – when you’re young it’s easy to feel like you don’t own anything. Like you have no assets.

But as my financial guru and sometimes life coach, Lyn Greer, pointed out to me recently this could not be further from the truth.

The trick is to simply expand your definition of “asset”. Stop rolling your eyes, people!

Because if you stop thinking about assets as things you can sell and start thinking about assets as things that have value, you will quickly realize that the most valuable asset you own is… your earning potential!

As a young person you literally have years – and years – and years – left to toil away endlessly for your faceless corporation. Literally decades to go before you could even consider the distant possibility of retiring.

Sorry, what I meant to say is that you have years and years left to rake in that sweet, sweet cash! And not many people can say that. Which means it’s valuable.

That’s right my friend, you own time! Like a wizard or something.

But just having time isn’t good enough. Cats have time. You also need the ability to work. Without that, you’re basically just a cat.

So how can you protect your time – your earning potential?

Well Lyn suggests you consider getting critical illness and disability insurance just in case something happens to you during your prime earning years.

I will freely admit that at the start of my conversation with her I had zero interest in doing this. But after just a few minutes of listening to Lyn’s impromptu scared straight program I was seriously considering it.

Here’s why, a recent study found that in 43% of households someone has been forced to take time off work due to disability.1

The same study claims 1 in 3 people will have to take at least 90 days off work at some point in their career due to a disability issue1.

43% and 1 in 3? Yikes!

I guess the odds are in your favor, but certainly not by very much. Kind of like how the odds are you won’t get picked as a tribute for the next Hunger Games.

But despite the scary stats, Lyn says she still hears plenty of excuses when she brings up coverage options with her younger clients. The numbers support this – only 33% of people surveyed said they have disability insurance2.

“Everyone thinks they’re invincible,” she says (followed by a clearly audible sigh).

“Or they think that if the worst happens to them then their parents or the government will step in to take care of them financially.”

I’ll concede that relying on the government to cover my bills while I recover from a traumatic rollerblading accident probably isn’t the best idea, but do I really need to get a personal policy?

Like a lot of people, I have coverage through my work benefits so I asked Lyn if that means I’m in the clear.

“You want to have enough coverage to make yourself whole in the event that something happens,” was her answer.

Ahh, of course! Enough to make myself “whole”.

But… what does that mean? (Lyn loves it when I ask these dumb questions by the way.)

Turns out it means that I should have enough coverage to replace my income if I were unable to work. Or at least make sure I have enough coverage to live on comfortably.

So in my particular situation I am insured for 60% of my income through my work benefits program – but after the tax impact I’d be left with much less than my regular take home pay.

For people like me, Lyn suggests getting some personal coverage to fill in the gap. Either that or I should be prepared to make significant budget cuts if something does happen (which I’m not).

But if you do decide to rely solely on your work benefits coverage then you should check to see if your disability payments would be taxed or not.

Many policies offered through the workplace will be taxed3, meaning 60% could be looking like a lot less after income taxes. However if you have a personal disability policy outside of work, those payments will not be taxed.

All that said I’m aware that many of my millennial peers don’t share my somewhat irrational fear of worst case scenarios.

Because if we were to flip those scary stats around, you could easily argue that 57% of households will never need disability insurance and 2 in 3 people will never be off work for more than 90 consecutive days.

These are the lucky ones – the people whose sister is always the one who gets picked to represent the district at The Hunger Games.

But before you roll the dice you should evaluate your personal situation. A disability or serious illness would be much more financially devastating for some than it would be for others. According to Lyn, you are most at risk if you:

  1. Are self-employed
  2. Work on commission
  3. Don’t have a spouse or family member to rely on financially
  4. Have family members who rely on you financially

Something else to keep in mind is that like most types of insurance, disability and critical illness coverage can be a lot easier to get and less expensive when you’re young and healthy.

“There are a lot of people who would qualify for a life insurance policy who could also add on a critical illness rider. But some of those people would have trouble qualifying for disability insurance,” says Lyn.

“Depending on your health and medical history, disability policies can be difficult to get. Or they may come with restrictions that lower the quality of coverage you qualify for.”

Which means getting coverage is something you may want to consider sooner than later. Because while most of us will steer clear of any life altering illnesses or injuries during our prime working years, not everyone will be so lucky.

“This stuff happens and it’s really sad when it happens,” Lyn warns. “And usually these people have to stop contributing to their investments and start raiding their savings. Then once they do recover they have to work that much longer because they can’t afford to retire.”

And if you’re like me, you don’t want to have to work any longer than necessary.

Also read: Life insurance – What’s in it for me while I’m still alive?

Lyn GreerLyn Greer is a Chartered Accountant and independent Certified Financial Planner with Investment Planning Counsel in Richmond Hill, Ontario. She is a past member of IPC’s National Advisory Board and has also volunteered on the Financial Standards Planning Council. Lyn’s specialty is in comprehensive tax planning which is a key focus of her wealth management approach, alongside cash flow analysis, disciplined savings, insurance, and estate planning. You can contact Lyn or learn more at The Greer Team’s official website.

1Canadians off work due to disability face a perfect storm. Royal Bank of Canada and Ipsos, 2015.

2Insurance Barometer Study. LIMRA and Life Happens 2016.

Foresters Financial, their employees and life insurance representatives, do not provide, on Foresters behalf, legal or tax advice. Prospective purchasers should consult their tax or legal advisor.

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Eric Tyndale

Eric has an extensive background in content marketing and professional writing. He loves to write about personal finance and life insurance issues for the Lifenotes blog because he enjoys the challenge of making complicated topics fun for readers! Eric also covers community outreach initiatives.