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Posted: 16 Aug '11

How Much Disability Insurance Should I Purchase?

How Much Disability Insurance Should I Purchase?

This is what I’m asked by individuals looking to purchase disability insurance. 

As a rule of thumb I’ve always suggested that a person should have a monthly benefit equal to 80% of your month spending.  This would assume that when disabled you can reduce your month spending by 20%.  This is a reliable formula at the start.  

Where this formula fails is that over time monthly benefits are not adjusted.  With disability insurance the premiums with most contracts stay level to age 65.  So the premium is determined originally by your age at issue and from that point the premium stays level.

We tend to get accustomed to the premiums we pay and forget that over time the value of the benefit is decreased by inflation.  The Bank of Canada inflation calculator,  shows us that over the last 10 years the annual inflation rate has been about 2.03%.  Take a look at your house bills, gasoline, food, housing, etc, do you have any bills that only increased 2.03%?  I think you would agree that most of these expenses increased substantially more.

We look to statics from Bank of Canada, watch the latest news program to learn about the current inflation numbers and then  we actually believe that is the correct number for our lives.I would like to challenge that reasoning.

From the Statistic Canada website, transportation increased by 7.0%, food prices rose 4.3%, recreation increased 3.3%, health and personal care items increased 3.1% and all these increases are over the last 12 months only.  And what about house prices that almost doubled over the last 5 years in Alberta.

That same Bank of Canada calculator would show that if your disability benefit in 2001 was 4,000 per month then today, 2011 it should be 4,892 per month.  But really if you could live on 4,000 per month in 2001, do you really think you could live on 4,892 per month in 2011.   The sad thing is that if you had 4,000 per month of disability coverage in 2001, you might still have that amount today.

You feel good with your current premium, but will you feel as good getting the month benefit you have should you be disabled? 

Everyone should know what your monthly disability benefit is and then imagine living on that amount.  Forget the premium.  If you stay healthy, you will never miss the premium.  But if you get sick or are injured that monthly disability benefit will pay your bills and it will form your new lifestyle.  

The original question, “How much disability insurance should I have?”  Start with about 80% of your current monthly spending.  But then keep it at 80% of your monthly spending by reviewing your coverage every 2 years and making adjustments.  And if you have not reviewed the amount of disability coverage you have I would suggest today is the best day to look after it.  I would be happy to help you do that,  Today you can take action, tomorrow is only a promise.


About the Author - David Motkoski

David Motkoski—At the Helm of Vistaplan Financial Group

The team at Vistaplan is led by David Motkoski, a well-respected insurance adviser to hundreds of business and individual clients. David has 30+ years of experience in this industry helping clients understand their life and disability insurance, office overhead, critical illness, long term care, and accident insurance. David’s focus has been medical doctors, dentists and business owners who are concerned with having the right coverage to provide for their family or business and protecting their income

David is an independent broker offering policies with Manulife, ivari and RBC to name a few. Vistaplan Financial Group has clients dating back to 1983 and they stay loyal with David because of the strong relationships he builds.