Disability insurance elimination period

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Disability Insurance Elimination Period

Elimination period definition

The disability insurance elimination period, also known as the waiting period, is the period of time that must elapse in a disability before benefits are paid. Benefits begin one month after you have satisfied the elimination period. For example, a disability insurance policy with a 90 day elimination period will have benefits start one month after 90 days of disability have passed. Along with the benefit period, the elimination period is the most common option for customizing the premium of your policy.

The most common elimination periods are 90 and 120 days, because the majority of insureds will be able to self-insure for the first 3-4 months. The elimination period serves a similar function to a deductible, in which the insured covers his/her expenses for the chosen period, and the insurance company becomes liable for disabilities that exceed this period. Common elimination periods offered by Canadian insurance companies are 30, 60, 90, 120, 180, 365 and 730 days.

One of the built-in benefits of disability insurance policies is the accumulation of days to satisfy the elimination period. What this essentially means is that if different periods of disability are interrupted by a return to work, the number of disabled days can be added together to satisfy the elimination period. This is true as long as the disabilities are due to the same or related causes and are separated by less than 6, 12 or 24 months (number of months depends on the policy).

The premium of the policy depends on the length of the elimination period you choose. A shorter elimination period means a higher number of claims, especially for short-term disabilities. This results in a higher premium for the insured. Conversely, longer elimination periods equal a lower number of claims, since the short-term disabilities may have already passed by the time the elimination period ends. This leads to a lower premium for the insured.

To give you an idea of how much a policy with each elimination period costs, see the tables below.

Monthly premium for a male non-smoker with annual earnings of $50,500, who is eligible for $3,000 of non-taxable monthly benefit. Occupation class 4A, benefit period to age 65, premium level and guaranteed until age 65. Quote from RBC Insurance's Professional Series. Rates are current as of May, 2015.
Age30 days60 days90 days120 days180 days365 days730 days
25$77.78$55.31$46.75$45.36$43.02$40.69$38.35
30$88.04$62.61$51.48$49.93$47.36$44.78$42.21
35$105.68$75.71$62.27$60.40$57.30$54.21$51.06
40$130.20$94.45$78.96$76.62$72.66$68.72$64.76
45$157.55$115.79$98.41$95.50$90.56$85.65$80.69
50$196.59$146.19$128.26$124.43$118.02$111.62$105.18
55$250.40$186.74$167.13$162.12$153.75$145.40$137.05
60$321.62$238.35$211.81$205.46$194.85$184.28$173.75
Monthly premium for a female non-smoker with annual earnings of $50,500, who is eligible for $3,000 of non-taxable monthly benefit. Occupation class 4A, benefit period to age 65, premium level and guaranteed until age 65. Quote from RBC Insurance's Professional Series. Rates are current as of May, 2015.
Age30 days60 days90 days120 days180 days365 days730 days
25$125.21$89.04$75.29$73.03$69.25$65.52$61.74
30$162.91$115.84$95.24$92.37$87.62$82.85$78.09
35$198.06$141.86$116.68$113.16$107.34$101.51$95.68
40$222.94$161.78$135.24$131.17$124.40$117.65$110.88
45$241.26$177.35$150.62$146.11$138.57$131.04$123.51
50$260.69$193.83$170.00$164.90$156.42$147.89$139.41
55$298.49$222.68$199.40$193.38$183.44$173.46$163.51
60$374.22$277.36$246.46$239.06$226.75$214.41$202.15

There are a few interesting things to gather from these tables. The first is that going from shorter to longer elimination periods, the premium drops dramatically initially before slowing down. In fact, the premium drops almost 30% from the 30 day to 60 day elimination period, but only about 6% from 365 days to 730 days.

The reason the 30 day elimination period policy is so expensive is because short-term disabilities are much more common than long-term disabilities, and results in more claims being paid. Once a disability reaches a certain length, it tends to take much longer to recover. Therefore, the elimination period does not have as large of an impact on the total amount paid by the insurance company.

It appears that there is a sweet spot for the choice of elimination period. While the 30 day elimination period offers the best protection, its cost outweighs its benefits. On the other end of the spectrum, the 730 day requires a disability of over two years before payments are made, for only a slight decrease in premium over the shorter options. Many households will be financially devastated without an income for two years. If you’re able to keep an emergency fund of 3-4 months, choosing the 90 or 120 day elimination period will help you optimize your policy to both save premium and provide for sufficient coverage.

You also have the option of choosing a shorter elimination period at issue and extending it at a later date. For example, if you believe your emergency funds will only last you three months, you can choose a 60 day elimination period to start. After a while when your emergency fund can last half a year, you can increase the elimination period to 180 days without any underwriting. Your new premium will be reduced to reflect this change.


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