Buying term life insurance is the most affordable way to protect your loved ones after you die. Term life insurance provides financial security for your loved ones during the years they need it.
However, what happens if you become disabled and unable to work, resulting in a loss of your family’s income? Does term life insurance cover disability? Do you receive any payout when you are in a position that prevents you from earning your regular income?
As great as term life insurance is, it doesn’t cover everything. Term life insurance does not cover mental or physical disabilities.
That’s why you need disability insurance. Disability insurance protects your income and pays for your day-to-day living expenses if you become disabled.
If you are asking, does term life insurance cover disability? The answer is no. Meanwhile, there are riders and disability insurance policies that you can purchase to protect your income and family in case of a disability.
Does Term Life Insurance Cover Disability?
Life insurance is a contract between you and an insurance company to provide financial protection to your family and dependents if you pass away. The insurance company pays a lump-sum death benefit to your designated beneficiary should something happen to you. In return, you pay specified premiums throughout the policy, monthly or annually.
However, life insurance doesn’t have a built-in clause that covers disability. Your insurer won’t pay you anything if you suddenly face impairment in your mental or physical health. So, in a nutshell, term life insurance doesn’t cover disabilities.
The death benefit of life insurance only pays out when the policyholder (insured) passes away. Suppose you experience illness or injury resulting in long-term disability and you cannot earn income and support your family. In that case, life insurance won’t pay any money to you.
However, some insurance companies in Canada offer optional riders. You can add these riders to your term life insurance coverage during your application process. These riders provide options and coverage for future scenarios like long-term disabilities or severe illness.
Life Insurance Riders for Disability Coverage
Dorothy wanted to buy term life insurance to protect herself and her family. However, her friend, Jess, was recently involved in a road accident that completely disabled her. Dorothy becomes bothered and visits her brother, James, a financial consultant.
James informs Dorothy that term life insurance has the option of a rider that provides benefits for disabilities due to illness or injury. Dorothy goes on to buy a term insurance policy with a disability rider to protect her family’s income from unforeseen circumstances.
Any life insurance policyholder can add riders to their already existing or new insurance policy. Life insurance riders allow you to tweak your insurance policy to suit your unique needs at a small added cost.
An insurance rider is an attachment to your insurance policy that supplements your existing coverage. If you do not want to or cannot afford to purchase a separate disability insurance policy, you can add a disability rider to your term life insurance policy.
There are typically three kinds of insurance riders.
1. Disability Income Rider
Suppose you are disabled, cannot work, and earn a regular income. In that case, your insurer pays you a monthly stipend as supplementary income. This rider has a 30 or 90-day waiting period, and payments start after the waiting period is over.
Your policy specifies the monthly benefit, a certain percentage of your policy’s coverage amount. So, if you have a $100,000 coverage amount and your disability income benefit is set at 1%, you will receive $1,000 monthly as a rider benefit.
2. Waiver Of Premium Rider
This rider doesn’t pay out money to the insured. It only allows you to stop paying your policy’s premiums until you can work again.
If you meet the eligibility requirement for total disability, you can maintain your term and coverage without paying premiums.
The requirement for total disability varies from one insurance company to another, so compare policies before you commit.
3. Accelerated Death Benefit Rider
Suppose you are diagnosed with a terminal illness that requires lots of money. In that case, this rider will allow you to use a portion of your death benefit to cover your expenses.
Do I Need Disability Coverage?
According to Statistics Canada, one of every six Canadians will be disabled for more than three months before age 50. So, if you do not have enough savings to cover your family’s living expenses for a few months, you must purchase disability coverage.
Suppose you experience a severe injury or illness that results in disability and cannot earn an income for a few months. Do you have enough to sustain yourself and your family without exhausting your savings?
You probably need to get disability insurance coverage:
- If you can’t sustain yourself without a paycheck
- If you are the breadwinner of your family
- If you are paying off debt
- If you don’t have any form of coverage from your job
- If you are prone to injury from your profession
- If you are self-employed
You might think that only those with high-risk jobs should get disability coverage. But that is not true. In Canada, nearly nine of every ten long-term disabilities result from illnesses like cancer or chronic conditions like slipped discs or multiple sclerosis.
Why You Might Need Disability Insurance
There are situations when you might not need to buy disability insurance. On these occasions, buying coverage will not make sense. So, you might not need disability coverage:
- If you have enough money and can self-insure the risk of not working.
- If your Canada Pension Plan (CPP) disability benefit is enough.
- If your spouse is a higher income earner and can afford to sustain the both of you on one income
- If you are in the Canadian military and your military benefits, provide enough disability coverage.
How much Disability Coverage Do I Need?
If you plan to get disability insurance, you should buy enough coverage to comfortably sustain yourself if you lose your income due to disability.
Insurance advisors usually advise buying disability insurance big enough to replace 60-70% of your total income before the disability.
The amount of disability coverage you need would depend on your situation. There is no one-size-fits-all coverage amount. Your situation is unique to you.
However, you can calculate the minimum coverage you need by adding your monthly expenses and total loan repayments. Find out how much you spend monthly and add your loan repayments.
Since you are not working due to disability, your current spending will be slightly reduced. You will not pay for commuting, workday lunches, or wardrobe. If you factor out these expenses, you can determine how much disability coverage you need.
What is Disability Insurance?
Disability insurance pays a portion of your salary (usually 60-85% of your pre-disability salary) when you are too ill or injured to work. It offers income to cover your living expenses and any additional costs that may pop up due to your disability.
Disability insurance protects your ability to earn a paycheck and replaces a part of your monthly income.
There are two main types of disability insurance policy: Long-term disability insurance and Short-term disability insurance.
Long-term disability insurance (LTD) typically lasts about two to ten years until you retire. It covers cancer, accidental injuries, cardiovascular disorder, mental illnesses, and other long-term diseases. It pays monthly benefits after you have exhausted your short-term and sick leave benefits. It has a 90-120 days waiting period.
Short-term disability insurance (STD) pays out a part of your income for three to six months after your sick leave expires. It covers disabling injuries like broken leg or hand, pregnancy or maternity leave, or other prolonged sicknesses like glandular fever. It has a 1-10 days waiting period.
Life Insurance vs. Disability Insurance
Life and disability insurance provide income protection for you and your family. However, they are triggered by different circumstances.
Life insurance is paid out to your designated beneficiaries when you die. The death benefit payout is only paid to your beneficiary if you die.
Disability insurance offers you financial protection while alive. If you have a disability that prevents you from working and earning money, the disability insurance will pay benefits to you.
While life insurance pays out a lump-sum death benefit, disability insurance pays out a percentage of your pre-disability income weekly or monthly, depending on your insurance policy.
Final Thoughts on Does Term Life Insurance Cover Disability
If you solely rely on your income to cover monthly living expenses, pay for loans, and save for your family’s future, you need to buy disability insurance.
Disability insurance can protect your income should you become disabled and unable to work.
Before you buy any disability insurance or add disability benefits to your life insurance, contact an insurance expert and compare life insurance companies that offer the best products.
Hi, I'm Adeola Adegoke. I am a licensed Insurance Broker in Manitoba, and I hold a master’s degree in Mathematical Sciences (with a major in Financial Modeling) from the African Institute for Mathematical Sciences (AIMS), Tanzania.
Also, I have a second master's degree in Statistics from the University of Regina, and I am currently pursuing my Ph.D. in Statistics at the University of Manitoba.
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