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Disability and critical insurance can seem complicated  – not only must you choose the right level of coverage, but you also have the option of adding an insurance rider to your policy; as with home insurance, many life insurance policies come with riders.

But what exactly is an insurance rider, and how do they work? And what should policy holders be aware of when adding one to their coverage?

What is an insurance rider?

An insurance rider is optional coverage you can add to your policy.

“An insurance rider is really enhanced coverage or benefit to the policy holder for a cost above the base plan,” says Brian Poncelet, an independent certified financial planner (CFP) and owner of RightInsurance.ca. “You’ll pay additional premiums for additional coverage.”

While the purpose of purchasing an insurance rider is to provide additional coverage, it's important to be aware that some exclusions still apply that can void your future coverage.

“Policy holders may have exclusions at the time of underwriting,” says Poncelet, who adds that, for example, having pre-existing back problems at the time of application for a disability policy can result in no payment down the road if disability is the result of a back injury.

The same applies for illness or existing disabilities: "For critical illness insurance, one example is a client who cannot hear would not be covered for deafness."

Disability and critical illness riders: what to know before you buy

Disability and critical illness are two types of insurance often overlooked by Canadians. Both protect your most valuable asset: your ability to earn income.

Disability coverage and critical illness coverage are especially important for people who are self-employed or do not have good benefits.

If you do have benefits, and haven't reviewed your policy book recently, you should; could you take a two-year (or longer) vacation without pay? If not, chances are you need disability and critical illness insurance. Here's a breakdown of the most common rider types:

Disability riders

Own occupation: This means if you cannot do your job and are disabled, even if you find another job or change careers, you will get paid. For example, a dentist who cannot use his hands and changes careers to sell real estate would still qualify for coverage.

“If you can get this rider, get it. It’s that simple,” says Poncelet.

Regular occupation extender: Under a basic policy, such as group disability, benefits may be denied after 24 months if you are able to work in another occupation based on your education training and experience, such as a minimum wage service job. The extender may add three more years before you are forced to find work elsewhere if possible.

“If you can’t get own occupation this is the next best rider,” says Poncelet.

Residual disability (partially disabled): This applies if you are unable to perform one or more of the important duties of your gainful occupation. You would receive monthly benefit if income loss is 80% or more.

“This is a must-have rider,” he says.

Future insurability: Once a year you can increase coverage without a medical exam. An example would be if you had a back injury from a car accident, which could worsen over time.

“Depending on occupation this a good option to have, but not critical,” he says.

Cost of living:  This will increase coverage once a year based on inflation.

“One thousand dollars per month with three per cent inflation in ten years would be $1,300 per month,” Poncelet says. “This is very important to have.”

ROP (return of premium): Usually 50% of all premiums paid are refunded if no claim is made every seven years.

“If your cash flow is reasonable, this is a good rider to consider, but is not as important as the other riders,” he says.  “If no claims made, this actually makes the coverage a lot cheaper.”

Critical illness riders

“These riders are best if you plan on permanent coverage,” says Poncelet. “Since rates go up every 10 years, this quickly becomes expensive.”

Loss of independent existence: In a nutshell, this coverage applies if you cannot perform at least two of six activities of daily living: getting out bed with or without using equipment, bathing, toileting and maintaining personal hygiene.

“Something to consider if having a permanent policy … it could easily be viewed as a type of long term care coverage,” says Poncelet.

Return of premium at death: This is an ok rider as long as you aren’t diagnosed with cancer, hit by bus, or die within 30 days instead of getting paid a lump sum for a serious critical illness.

“I own this myself, Poncelet says. “For example, if I paid $50,000 worth of premiums over 13 years and I get hit by a bus or in a car accident or have a fatal heart attack all premiums are returned to my beneficiary.”

Return of premiums: Normally at the end of 20 years if you pay extra for this you can surrender the policy and get your money back.

“I have mixed feelings on this,” he says. “The cost is about 30 per cent more.”

Disability waiver: If you become totally disabled for 90 days before age 60 the insurance company will pay for the coverage and the premium paid for the 90 days will be refunded.

“Pass on this,” he recommends. “Even though the cost is small the odds of collecting are slim. Better make sure you have a good disability plan.” 

Sean Cooper

Sean Cooper is the author of the new book, Burn Your Mortgage. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Financial Journalist, Speaker and Money Coach, his articles and blogs have been featured in publications such as The Toronto Star, Globe and Mail, Financial Post, Tangerine: Forward Thinking blog and TheDot. You can follow him on Twitter @SeanCooperWrite.

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