Job Termination

Almost all employer group disability insurance programs terminate when your job terminates. Other benefits such as health, dental, and life insurance may be continued, but rarely disability insurance. Indeed, when you don’t have a job it is difficult to get any kind of disability insurance, at least in the conventional market. The reason is that disability insurance is designed to insure a current earned income; when you no longer have an earned income, you have nothing to insure. The only earned income you then have is historic, not current, so you have nothing to insure. If you have just lost your job, you probably would not agree, but that is how the insurance industry thinks. And until a very few years ago, that would have been that.

In the last few years, however, products have emerged which provide a type of long term disability insurance as a bridge for those who have been terminated and are looking for a new job or to set up in business on their own. There are, effectively, two products available and we shall discuss them shortly. First a little stage-setting.

The world of disability insurance has its own culture, which is quite different from that of any other kind of insurance, such as life. First of all it usually is difficult to get as much insurance as you might think you need. The idea here is that you need to be made financially uncomfortable during a claim period in order to be motivated to get back to work and, thus, off claim. Secondly, proof of income, and of income stability, is required. You would not have a stable income if you just got terminated from a high-powered job and decided to set up your own consulting practice. At least not for a couple of years, or until you could prove you have lucrative contracts in your hands. So, if you do start in business on your own, it usually takes a couple of years of steady income growth to convince a disability insurer that you are “stable” enough for them to issue a policy. Employed people, with jobs, are a lot easier to underwrite for disability insurance than are individuals working for themselves, especially those who work at home.

Disability insurance is a lot harder to get than life insurance and this is due to the much higher incidence of claims -- about five for every life insurance claim. Claims handling with life insurance is relatively straight forward: you are either dead (pay the claim) or alive (don’t pay the claim).
Disability insurance involves many situations, often themselves unique, along with a large number of different policy wordings. So the underwriting is much more detailed, not just as to occupation, but as to earned income, health, hobbies, and avocations. Are you a claim looking for a place to happen?

So, if you need a disability bridge on account of job termination, what can you do and where can you go? First, Lloyd’s of London came out with their Bridging Long Term Disability Insurance Benefit program. A couple of years later Crown Life came out with their Transition LTD program, subsequently taken over by Allianz Life of Canada, and now by Reliable Life Insurance Company. They are quite different from each other and they both have their strengths and weaknesses. A chart summarizing the basic features of both plans follows.

Let’s dig a little. The pivotal point of any disability insurance policy is the definition of disability and, hence, what triggers the payment of a claim. Everything in the policy takes second place to this. Also important is how long the definition holds, as often the definition is time-weighted and changes after a period of time, usually two years. This is typical of most employer group disability plans.

The Lloyd’s plan has a definition of disability that relates to your previous, or historic occupation, and the income related thereto. It defines a disability as your being unable to do your previous occupation. This holds for two years. After two years on claim the definition changes to a wording that reflects your being unable to perform any work for which you are reasonably suited. Reliable defines disability as your inability to do the substantial duties of your regular occupation for the first two years of benefit payments and, thereafter, unable to do any occupation for which you are reasonably suited. The two are similar thus far.

How long the benefit lasts is also crucial. The Lloyd’s plan provides a monthly income for two years and then a lump sum if you are deemed totally and permanently disabled after that (details coming up). Reliable provides a monthly income up to your age 60, or to your age 65 for an extra premium, provided the disability lasts that long (ie you don’t either recover or die sooner). Remember, the definition of total disability changes with both plans after two years on claim.

Reliable provides an indexing feature, as an optional extra, which is extremely useful if your claim is a prolonged one. It’s expensive, but so it is with any long term disability insurance policy, and usually well worth it unless you are closing in on the end of your career. The Lloyd’s plan takes a different approach: if you are deemed to be permanently and totally disabled after the two year own occupation period, they settle with a lump sum of cash leaving you to invest it and live on the return. The basic plan provides three times your pre-termination base pay to a maximum of $180,000 (six times to a maximum of $360,000 is available as an optional extra).