Disability of a Key Person – Understanding Coverage

There's really only one type of disability insurance – the type that pays out when the person is disabled and unable to perform the duties of their job. However there are some idiosyncrasies, definitions and structures that I'll go over here so that you understand the basics. Before we get into the specific types, let's look at the basic structure of a long term disability policy.

Premium Structure

Premiums are based on the key person's age, gender, health, occupation and the amount of coverage.

Once the policy has been issued, premiums are level to age 65, guaranteed, irrevocable, can't increase or change based on future insurability changes of the key person. Nothing can change. Again, we are removing risk, exchanging the competitive cost of these insurance premiums, against the expense to your business should a key person become disabled.

Benefit Structure

Definition of Disability

The definition of disability is important because it tells us when a benefit is to be paid.

There are very roughly, three definitions of disability (exact definitions vary mildly in the industry):

Own Occupation.You are disabled if you can't do the duties of your occupation. However you can earn an income elsewhere. The obvious example is a surgeon who's lost their thumbs. They can't cut people open anymore, so they're disabled. But they can, and do, go to work as a family doctor. In this case they are disabled and receive benefits, even though they are earning an income elsewhere. This is not the definition we generally use in key person disability insurance.

Regular Occupation. In this definition you are disabled if you cannot perform the duties of your current job, and you are not working elsewhere. This is the intuitive definition, and the definition we would expect for most key person disability insurance policies.

Any Occupation.With this definition, you're not disabled if you can do anything reasonably suited for your education and income level. In other words, you are not disabled if you can do something else, even if you are disabled from your current occupation. We would try to avoid this definition.

So we would expect that your key person coverage would have the Regular Occupation definition of disability, which is likely what you would expect as a definition. Here's the actual contract wording from RBC's Business Overhead Expense disability insurance policy:

Total Disability means that because of Injury or Sickness:

• You are under the regular and personal care of a physician and
• You are unable to perform the important duties of your regular occupation.

If you're thinking that you already have long term disability benefits, you should know these are insufficient. Group workplace disability benefits use Regular Occupation definition – the 'good' definition – for two years. Then the definition switches to Any Occupation. The implication of this switch is that you may be disabled for two years and receiving benefits and then at the end of year two you are still disabled from your job, but the company can stop paying benefits – you can get out and do something else for work. This is a common complaint in practice with group workplace disability, when people talk about getting 'cut off', this is often the reason why. No such change in definition occurs with key person disability insurance. Plus, individual coverage protects yours and your employees against income loss, it does not protect the corporation.

In long term disability contracts, the fine policy details and the extent of coverage are paramount. In Canada, it's generally accepted that only two companies offer the top tier of policies – RBC Insurance and Canada Life. Both are excellent policies, both have almost identical premiums – for your purposes they're effectively indistinguishable. Therefore most advisors simply pick their 'favourite' company and offer that. I'm not suggesting that RBC Insurance is a favourite company (I love all my life insurance companies equally) but I generally prefer to quote them first. However if you have a preference to Canada Life, I'm happy to oblige as well.

The Three Types of Key Person Disability Policies