Disability’s an important sale

Low long-term interest rates, introduction of International Financial Reporting Standards and unprecedented market volatility have created an uncertain environment for Canadian insurers and advisors.

Insurance companies have re-priced, replaced or withdrawn products, such as permanent life insurance and variable annuity plans. Some insurers have exited the market altogether.

In all this turmoil, a product I’ve been watching since the early 1970s has remained mostly unchanged, even though the companies offering it may have.

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Long-term disability insurance is designed to replace earned income in the event a client suffers an accident or sickness that prevents him from working. There are some semantics, such as “any occupation,” “own occupation,” and “residual” or “partial” disability. But outside that, the contracts are similar.

When I started my career with The Paul Revere Life Insurance Company, an industry leader in DI at the time, we were told all professionals needed disability insurance. In particular, doctors, dentists, lawyers, accountants and affluent business owners needed the coverage because they lacked group insurance plans, or tended to have income replacement needs those plans didn’t cover.

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DI coverage checklist

In Canada, there are two broad types of disability insurance coverage:

• Any-occupation coverage pays if someone is disabled and unable to work at any job. Under this coverage, a surgeon who develops hand spasms, for example, would not qualify if he or she could work as a taxi driver.
• Regular-occupation coverage pays if someone’s disabled and unable to perform the important duties of her normal job. If she can’t work in her profession, her disability payments will continue. Some plans also offer residual benefits, which will top up earnings if someone can only return to work on a part-time basis.

How much does it pay?

Disability insurance is calculated as a percentage of the policyholder’s current salary, and usually offers coverage equal to about two-thirds of earned income. If someone brings home $5,000 a month when healthy, DI would pay about $3,300 a month if that person is unable to work.

The good news is that while a regular paycheque is subject to income taxes, that $3,300 cheque is tax-free, provided the policyholder, not the employer, pays premiums.

But some advisors steer away from DI due to the work needed to design a plan, fully vet the contracts, and become familiar with the particulars of medical and financial underwriting. These contracts often are more difficult to underwrite and take longer to put into force.

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As a result, disability insurance can be a hard sale. No one ever thinks they’re going to become partially or fully disabled during their working years. But one in six Canadians will be disabled for three months or more before the age of 50.

And thirty years of experience has taught me the extra effort can pay off and can make a lifelong difference in the financial security of a client.

My good friend Jack was a long-distance runner and CEO of an advertising firm when he came to me to purchase his disability plan. He was in great shape and training for his second New York marathon, so I expected his DI application to go smoothly. I was astonished when the underwriters called and issued an outright decline.

It took a bit of digging, but it turned out they’d found an enlarged heart and an overabundance of adrenaline in his system. After several calls to Jack, the underwriter, and Jack’s physical trainer, we learned this was not unusual for a marathon runner—especially one preparing for a big race. We had an expert in physical training and a doctor who specialized in athletes contact the underwriter and explain the situation. After several weeks, the case went through on a preferred basis.

Decades after the policy was issued, Jack returned home from a trip. He reached into his trunk to pull out a suitcase but was overcome with pain. He was rushed to hospital where doctors returned a diagnosis of spinal stenosis, a condition which leads to the narrowing of the spinal canal in which the nerves are contained.

Jack’s wife called me from the hospital advising that he was going into surgery and they were going to perform a lumbar laminectomy, a procedure designed to relieve the compression from the nerves. He survived the surgery but the trauma left him unable to walk. Through perseverance and sheer strength of will, Jack taught himself to walk again; going from a wheelchair, to crutches, to leg braces and a cane. Two years later he walks unassisted, swims every day, and is back at work.

During this period Jack’s personal income disability replacement policy paid his bills and kept his family afloat. A separate loan protector disability policy paid for outstanding loan payments, and a business overhead disability policy paid his share of his company’s overhead. Without those contracts, it’s likely he would have lost everything.

Late last year, Jack’s son Dave stopped in to tell me he was going into the insurance business. When I asked him why, he said he wanted the opportunity to do for someone what I did for his father.

The disability sale might be difficult, but the results can be life-changing for both the client and the advisor.