Mortgage Insurance Part 2 - Disability Insurance

If you are unable to work, you don’t earn a paycheque, without a paycheque you can’t pay your mortgage. While most people have Employment Insurance (EI) in the event of a layoff, or short term disability, most people do not have any form of Long Term Disability (LTD) insurance. Of those with insurance most are covered through the benefits plan with their employer. Unfortunately for the self employed out there we do not have the luxury of an employer sponsors disability plan, we also don’t get EI benefits either. For people without a disability plan at work, or the self employed, disability insurance can be very important for your financial well being.

In terms of mortgage insurance, when you die your income earning ability stops, but so do your ongoing costs like food and shelter. If you are disabled your income stops, but you will have medical bills, grocery bills, and other expenses.

It makes just as much sense to have your mortgage payment covered if are disabled and it does to have life insurance in place in case you die.

Big Scary Statistics

• The chances of becoming disabled for 90 days or longer, at least once prior to age 65 is 1 in 3.
• The average length of a disability which lasts over 90 days is 2.9 years. ( Source: 1985 Commissioner’s Disability Table A & CIA 86-92 Aggregate Mortality table)

• You are also much more likely to be disabled before age 65 than you are to die before age 65.

Because you are more likely to be disabled than to die before age 65, disability insurance is far more expensive than life insurance. Because of the cost associated with disability insurance, it is important to take the maximum advantage of other benefits available to you such as Employment Insurance (EI) disability benefits, assuming you qualify for them.

Well isn’t the government going to take care of me if I get disabled?

Nope. Most employees are eligible for Employment Insurance (EI) disability benefits. If you are off work for 14 days due to illness or injury you can start to collect EI. Benefits are 55% of your pre-disability income, to a maximum of $435 per week for a maximum of 17 weeks. It’s not a lot of money, but it is better than nothing. Since benefits stop after 17 weeks that is the perfect time to have a disability policy start.

The biggest factors in disability insurance pricing are how long you have to be disabled before you receive a benefit, known as the waiting or elimination period, and how long the benefit is payable for. An elimination period of 30 days is about twice as expensive as an elimination period of 90 days. Also the policy that only has to pay out for 24 months is going to be a lot cheaper than the policy that pays for 10 years. By pushing the waiting period of a disability policy out to 120 days we receive the maximum EI benefit and obtain a far cheaper disability premium.

A 2 year disability policy is going to provide a big cushion for someone who becomes disabled. It can easily be the difference between foreclosure, a distressed sale, or bankruptcy and being able to squeak by and survive. If you are disabled for the rest of your life, you will probably have bigger things to worry about than your mortgage payment. In most cases if you are disabled for more than 2 years you are probably very seriously injured or will and will most likely not make a full recovery. That being said your lifestyle is probably going to be in for a big change. Selling your house is probably going to be part of that change. Because you would probably be forced to sell anyways, there is usually little point in taking out a policy that pays a benefit for 10 years or to age 65, 2 years and 5 years are usually going to provide the same level of assistance for a lot less cost.

Show me the money!

A big point to consider when buying disability insurance for a mortgage is who gets the money. When purchased from a bank, the bank gets the money, they waive your mortgage payment for the length of your disability. When you buy disability insurance from an insurance company, you receive the benefit, you can then use it to pay the mortgage amount, or not, it is up to you. A big caveat of buying from a bank is that if you are forced to sell your home, you lose your disability policy as well. Since you would discharge your mortgage with the bank the benefits stop. Buying from an insurance company, you continue to receive your benefit payments, as long as you meet the definition of disability under your policy. Your other financial issues are not considered in the benefit payments.

The taxman cometh

Disability insurance is a little tricky when it comes to taxation. If you own the policy yourself and pay the premium with after tax dollars, your benefit comes in tax free (good). If you have a plan through an employer or if your company owns the policy, your benefit could be considered taxable income when you claim (bad). Make sure you know if you have to pay tax on the benefit when you are setting up the policy. If the benefit is taxable you are going to need a higher monthly benefit to counteract the taxation drain.

Sweeping generalizations

Everyone needs to take their own consideration into account when setting up their policy. But to generalize a best fit scenario for most people, a disability policy starting after 120 days of disability, with a 2 or 5 year benefit period will provide the best bang for the buck. Paid personally the benefit is tax free, and when purchased from an insurance company you can do whatever you want with the money. The dollar amount of monthly benefit should at a minimum cover your mortgage payments, and fixed monthly costs like food and utilities. When set up like I have mentioned above an average 35 year old white collar worker can receive a $2000 per month benefit for about 30 bucks a month.



Robert Reynolds - GBA
Partner / Group Accounts Manager
HMR Employee Benefits Ltd.

Disclosure: The content of this post are provided as general information only and should not be taken as financial advice. I am a licensed life accident and sickness advisor, I am paid partly by salary for servicing my block of business and by commissions on new sales of insurance and financial products. I do not own any interest in any insurance company nor do any insurance company’s own any portion of my business. The opinions expressed are my own, and do not represent the opinions of HMR Employee Benefits Ltd.