Disability And Life Insurance: What's The Connection?

Life insurance and disability insurance are two separate policy types with payouts that are triggered by different circumstances. While both policies are designed to provide income protection, they serve distinct purposes. Life insurance provides financial security for loved ones after the policyholder's death, whereas disability insurance offers income replacement if the policyholder becomes incapacitated during their lifetime. People with disabilities may face challenges in obtaining life insurance due to perceived higher risk, resulting in higher premiums and limited choices. However, having a disability does not disqualify an individual from obtaining life insurance. The nature and severity of the disability, overall health, and lifestyle factors influence eligibility and rates. Additionally, certain riders can be added to life insurance policies to enhance coverage during periods of disability.

Life insurance for disabled children

Purchasing Life Insurance for a Disabled Child

When considering purchasing life insurance for a disabled child, it's important to contact a reputable advisor. The insurance industry is often driven by commissions, so finding an advisor who understands your family's needs and the guidelines for writing policies for people with disabilities is crucial. Some advisors may suggest that a child with special needs is uninsurable due to pre-existing conditions or disabilities, but this should not be accepted as a final denial. There may still be options, such as requesting a rating, a graded life benefit, or a policy based on the child's functional level.

When applying for insurance, it's important to present medical and psychological issues in a way that is favourable for the issuance of the policy. Details must be accurate and honest, but there is usually no need to volunteer additional information. The insurance company may request further explanations or details at a later date.

The amount of coverage requested depends on the reasons for purchasing the policy. If it is only to cover funeral and related expenses, a substantial death benefit may not be necessary. However, if the proceeds will be used to support dependents or replace a caregiver's lost wages, a larger death benefit may be more appropriate.

Since the child is often a minor or is receiving government benefits, they should not own the policy to avoid losing those benefits. Instead, a parent or another child can own the policy, or an appropriate type of trust can be the owner and beneficiary.

Types of Policies for People with Special Needs

The two main types of life insurance policies are term and whole life insurance. Term insurance is guaranteed for a set number of years, after which the insurance company may or may not renew the policy. Whole life insurance, on the other hand, is typically for the lifetime of the insured and accumulates a cash value over time. Whole life insurance is generally more expensive but guarantees coverage even if health conditions deteriorate. If the child's health is stable, term insurance may be a less risky option.

Due to the risk of insuring a person with special needs, insurance companies often have separate guidelines and cost structures for writing policies for individuals with disabilities. They may rate certain conditions or assign a graded life benefit, which adjusts how or when benefits will be paid. For example, if the insured dies in the first year, the premium may be returned without interest, and if they die in the second year, the death benefit may be 50% of the face amount.

The cost of premiums will depend on the type of policy, the child's age, and their health condition. Some companies charge higher premiums for younger insured individuals, while others charge more for older individuals.

Benefits of Life Insurance for a Disabled Child

For caregivers who have foregone career development to care for a child with special needs, a life insurance policy on the child may help replace lost wages and retirement accounts in the event of the child's death. It can also help cover funeral expenses and make up for lost income opportunities.

The nature of the disability

The nature of a disability plays a significant role in determining eligibility and the cost of life insurance. Disabilities that have little effect on life expectancy, such as loss of vision or hearing, may not significantly impact life insurance options. However, disabilities that affect life expectancy or require high doses of pain medication can limit the available insurance options.

The impact of a disability on life expectancy is a crucial factor. If a disability severely impacts life expectancy or is compounded by other health issues, most traditional life insurance providers will likely deny coverage. For example, advanced stages of multiple sclerosis or addiction to pain medication can affect eligibility.

The type of disability and its management also matter. Disabilities that are well-managed and do not affect lifespan may still result in higher premiums. Conditions such as PTSD, anxiety, or depression could lead to higher rates, whereas a back injury that doesn't impact life expectancy may not affect rates as much.

Additionally, disabilities that require constant care or significantly affect quality of life may trigger certain riders within a life insurance policy. For instance, an accelerated death benefit rider allows the policyholder to access a portion of the death benefit if diagnosed with a qualifying chronic or terminal illness.

Medical treatments and history

When applying for life insurance, you'll need to provide information about your personal medical history, as well as any illnesses or trends in your family's medical history that could suggest a higher risk of developing certain conditions. This is because insurers view applicants with disabilities or pre-existing conditions as a greater risk, and so it can be harder to find suitable coverage options.

Personal Medical History

Insurers favour applicants who have their medical conditions under control, so if you're not following medical recommendations, it's wise to start. This can include taking medication as directed, attending therapy sessions, or undergoing medical procedures. Insurers will also want to see that you're taking steps to improve your overall health, such as exercising and eating well, regulating your blood pressure, and quitting smoking.

Family Medical History

The most common health conditions that insurers may ask about include cancer (including breast, colon, lung, melanoma, and prostate cancer), heart disease, kidney disease, and diabetes. They may also ask about other conditions with a genetic or family history component, such as Alzheimer's disease, amyotrophic lateral sclerosis (ALS), attempted suicide, or Huntington's disease.

If you don't know your family's medical history, don't worry. Your family's medical history won't be included in your health profile, and insurers will assume a best-case scenario. However, it's important to answer all questions on your application truthfully to the best of your knowledge.

Employment status

Firstly, insurance companies view steady employment as a general indicator of health. Regular employment also reflects an applicant's ability to make regular payments. Therefore, being employed will count in your favour when applying for life insurance.

Secondly, unemployment can impact your financial situation, reducing your resources and potentially affecting your ability to pay premiums. This may cause delays or denials of your insurance application. However, it is important to note that each insurance company has its own screening process, and being unemployed may not always be a barrier to obtaining life insurance.

If you are unemployed and seeking life insurance, there are several measures you can take to improve your chances of approval:

• Reduce your coverage requirement: Opting for a policy with reduced coverage may increase your chances of obtaining life insurance.
• Seek more cost-effective insurance: Term life insurance is typically less expensive than other options and can provide coverage for a fixed duration, usually between 10 and 40 years.
• Justify your position: Providing a copy of your CV and a letter explaining your circumstances before initiating the application process may increase your chances of acceptance, especially if you have a strong probability of finding employment in a similar position.

It is worth noting that certain types of life insurance, such as group life insurance offered through an employer, are linked to your employment status. If you leave your job, you may lose these benefits unless you convert your group policy to an individual one, which may be more expensive. Therefore, it is generally recommended to supplement employer-provided life insurance with an individual policy to ensure continuous coverage.

Insurance riders

• Automatic increase rider: This rider increases your monthly benefit for a few years without requiring you to go through the underwriting process again.
• Catastrophic disability rider: This rider pays additional benefits if you lose cognitive function or the ability to perform two or more activities of daily living.
• Cost-of-living adjustment: Also called the COLA rider, this add-on increases your monthly benefit to account for inflation.
• Future increase option: Also known as a future insurability rider, this add-on lets you increase your disability benefits in the future without undergoing a medical examination.
• Guaranteed renewable and non-cancelable: This rider guarantees that your insurance company cannot cancel your policy or raise your rates as long as you continue to pay your premiums on time.
• Lifetime extended benefit: This rider allows you to keep collecting disability insurance benefits for total disabilities beyond your policy's expiration date.
• Own-occupation rider: This rider changes the definition of what a disability is and when you receive benefits. With this rider, you receive benefits as long as you can't do the specific job you were trained for, even if you get a different job.
• Partial or residual disability benefit rider: This rider lets you collect benefits if you can still perform some, but not all, of your job due to a disability.
• Presumptive total disability: This rider allows you to receive your disability insurance benefits immediately after losing your hearing, speech, sight, or the use of at least two limbs, even if you're still able to work.
• Rehabilitation waiver: This rider helps you pay for the cost of occupational or vocational rehab after a disability.
• Retirement protection rider: This rider covers payments you would have made to a retirement account while you can't work by paying the funds into a trust.
• Return of premium rider: This rider returns a part of your paid premiums when you cancel a policy, allowing you to receive some money back if you never use your disability benefits.
• Social insurance benefit rider: With this rider, you agree to apply for Social Security Disability Insurance (SSDI) in the event of a disability. If you qualify, your insurer will subtract your SSDI benefit from the amount it pays you and lower your premiums.
• Student loan protection rider: This rider helps you continue to make student loan payments after filing for disability insurance.
• Survivor benefit or death benefit: This disability rider pays money to your beneficiary if you die while receiving disability benefits.
• Unemployment premium suspension: With this rider, you can stop paying premiums if you're unemployed. You'll still own the policy, but your coverage will be suspended.
• Waiver of premium rider: This rider waives your premiums after you file a claim, so you don't have to pay your premiums until you're able to work again.

Frequently asked questions