CHAPTER 1
Disability Income Insurance
How disability income insurance works, key definitions, and what makes a strong individual disability contract.
Purpose & Key Definitions
Disability income insurance replaces a portion of earned income (typically 60–80%) when the insured cannot work due to illness or injury.
Key definitions of disability:
Own occupation — the insured is disabled if they cannot perform the material duties of their own specific occupation. The strongest and most favourable definition. Benefits are payable even if the insured can work in another field.
Any occupation — the insured is disabled only if they cannot perform any occupation for which they are reasonably suited by education, training, or experience. Much harder to qualify for.
Regular occupation — a middle ground: own occupation for an initial period (typically 2 years), then transitions to any occupation.
Group LTD policies commonly use own occupation for the first 24 months, then switch to any occupation.
KEY POINTS
- ✓Own occupation: strongest definition — can't do YOUR job
- ✓Any occupation: hardest to qualify — can't do ANY job
- ✓Group LTD typically switches from own to any occupation after 24 months
- ✓Income replacement is typically 60–80% of pre-disability earnings
Elimination & Benefit Periods
- Elimination period (waiting period) — the length of time the insured must be continuously disabled before benefits begin.
- Common periods: 30, 60, 90, 120 days
- Longer elimination period = lower premium
- The insured self-insures for this initial period
- 90 days is the most common for individual disability policies
- Benefit period — the maximum duration benefits are paid for a single disability.
- Short-term disability (STD): typically weeks to 6 months
- Long-term disability (LTD): 2 years, 5 years, to age 65, or to age 70
- To age 65 is the most comprehensive individual option
Coordination between STD and LTD: STD benefits end → LTD elimination period should have been running concurrently → LTD benefits begin seamlessly.
KEY POINTS
- ✓Elimination period: waiting time before benefits start
- ✓Longer elimination period = lower premium
- ✓90-day elimination is most common for individual DI
- ✓Benefit period to age 65 provides the most comprehensive coverage
- ✓STD and LTD should be coordinated to avoid gaps
Policy Features & Riders
- Non-cancellable and guaranteed renewable — the strongest protection:
- Insurer cannot cancel the policy
- Cannot increase premiums
- Cannot change any terms
- As long as premiums are paid on time.
Guaranteed renewable — insurer cannot cancel but CAN increase premiums on a class basis (not individually).
Key riders:
COLA (Cost of Living Adjustment) — benefits increase annually during a claim, tied to CPI. Protects purchasing power in long-term claims.
Future Purchase Option (FPO) — allows the insured to buy more coverage at future dates without medical evidence (only proof of income increase required). Essential for clients early in their career.
Return of Premium (ROP) — if no claim is made by a specified age, a portion or all premiums are refunded.
Partial/Residual Disability — pays a proportionate benefit when the insured returns to work at reduced capacity or earnings.
KEY POINTS
- ✓Non-can + guaranteed renewable: strongest — insurer cannot change anything
- ✓COLA rider: benefits increase with inflation during long claims
- ✓FPO rider: buy more coverage as income grows, no medical exam
- ✓Partial disability: prevents cliff-edge loss of all benefits on partial return to work
- ✓ROP: premiums refunded if no claim made