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Income protection vs. asset protection (or both)

One decision many Canadians face when buying life insurance is whether or not to add disability insurance. Unfortunately, the majority of the population doesn’t even know the dilemma exists. Most of us just pay our monthly life insurance premiums, never thinking that there could be a great deal more we could be doing for our families, and ourselves. 

Life insurance is a way to help the loved ones we leave behind. It protects your assets. It covers your liabilities enabling your loved ones to pay off your debts when you die. Sufficient coverage will keep them living the lifestyle to which they are accustomed. 

But, what happens to our loved ones if we become disabled? As a great example, the novel coronavirus’ list of long term effects is still growing, with one study out of Italy reporting 87% of one cohort were still in hospital 2 months later. What happens to your income if you suddenly need hospitalization or can’t work for an extended period of time? Can you protect your income?

What is income protection insurance?

Income protection insurance, also known as disability insurance, replaces a percentage of your income in case you are unable to work for a period of time due to illness or injury. To be clear, disability insurance covers a percentage of your income, not the cost of special treatments or any other expenses you may incur. For that, you might consider adding critical illness insurance to your life insurance policy. 

What is critical illness insurance?

Another type of living benefit, critical illness insurance (CI), pays a one-time lump sum if you are diagnosed with a particular critical illness. This money can be used to pay for treatment, medication or anything you need.

Does critical illness insurance cover COVID-19?

No, critical illness insurance doesn’t cover the coronavirus, however, it does protect a number of complications that can arise from COVID including strokes, heart attacks, and other serious medical problems resulting from blood clots, which are all directly related to the coronavirus. 

According to Richard Gilbert, president at Megacorp insurance, 80% of those infected with Covid-19 will recover without requiring hospitalization. 15% will become seriously ill and 5% will become critically ill. Some of the complications being reported include organs such as the heart, liver, and kidneys – if an organ fails and you require a transplant, you could miss that regular paycheque. 

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What you should know about income protection

Disability insurance can be tricky. Consider these features when choosing the right one for you.

  • Non-cancellable coverage. As long as you pay the premiums, the insurance company guarantees continued coverage and no premium increases until the age of 65.
  • Own occupation rider (add-on). This means that if you have a significant amount of training and experience invested in your occupation, you’re still entitled to your disability benefits. Without it, they can make you work a lower paying job and not claim benefits. 
  • Cost of living rider (add-on). You can add this rider to your policy to cover to ensure your monthly benefit keeps up the cost of inflation.
  • Residual disability benefit. If you’re not totally disabled, you could be entitled to a residual disability payment. You can choose a partial disability payment or a residual disability benefit, whichever is greater.
  • Future income protection. This allows you to increase your coverage to keep in line with income increases. However, you will have to prove the increases are justified.

How much is income protection insurance?

Much depends on your age and health status, but expect to pay between $25–$100 per month. Because it replaces up to 70% of your income, some say to consider the cost as a percentage of your income, usually between 1–3%. It also varies by provider and selected plan.  You can compare income protection quotes on our site and speak with a life insurance advisor. 

How to decide what you need: critical illness or income protection?

A critical illness can come upon you without notice or invitation, seriously disrupting your lifestyle. Once you have been diagnosed, finding insurance can be difficult, if not impossible. 

The best time to think about insurance is when you are young and healthy. You will get the best rates and the best coverage. And with the right policy, you can keep this coverage for many years to come.

Life insurance is a universal need for anyone who has dependents or assets to protect. However, your ability to earn a living may be more valuable. Accidents happen. In a fraction of a second, you could be out of work for weeks, months or even permanently. Through no fault of your own, you can lose your income stream without notice. It’s why there’s an argument that disability insurance should be a priority over life insurance.

The bottom line

Do you need income protection insurance? Many companies provide short term disability and long term disability in their workplace benefits. If it’s not part of yours and you have dependents, weigh your risks, and act accordingly. 

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