How to plan for the financial risk of a disability

The World Health Organization (WHO) so aptly says “disability is part of being human.” They explain that “almost everyone will temporarily or permanently experience disability at some point in their life.” At the same time, we also know that almost half of people with a disability have a hard time meeting their financial obligations.¹ And yet, many of us don’t have plans in place to pay for the financial impact of a health event like a disability. Let’s change that.

To help you get started, we’ll answer these questions:

• What is the definition of a disability?
• How likely are you to experience a disability?
• How can a disability affect your finances?
• How can you plan for the financial risk of a disability?
• What are your planning options if you’re experiencing a disability?
• What do you need to plan if your child experiences a disability?
• Who can help you plan for, or deal with, the financial impact of a disability?

What is the definition of a disability?

The most widely accepted definition comes from the World Health Organization. They say disability is an umbrella term, covering:

• impairments (problems in body function or structure),
• activity limitations (difficulty encountered by an individual in executing a task or action) and
• participation restrictions (problems experienced by an individual in involvement in life situations).

The most common disabilities are¹:

• Mental disorders: 31%
• Cancers: 16%
• Cardiovascular diseases: 12%
• Injuries: 8%
• Musculoskeletal diseases: 5%
• Other: 28%

How likely are you to experience a disability?

It’s higher than you may think:

• 1 in 3 people, on average, will be disabled for 90 days of more at least once before they reach age 65.²
• In 2022, almost 30% of Canadians had a disability that limited their daily life. And experts expect that number to continually increase.³

How can a disability affect your finances?

When it comes to the financial impact of a disability, it’s twofold.

1. Day-to-day finances. If your disability prevents you from working, your income will stop. If you don’t have plans in place, that will likely make your daily life hard to afford. If you’re able to work, you may still have higher than average costs of living to accommodate new medical needs and enhance your daily life.
2. Saving for the future. You probably have some goals for your future, like buying a home, or paying for your children's education – and an eventual retirement. However, if you become disabled, you might not be able to achieve these goals due to:

• Using your savings to cover your living expenses, medical bills, or home modifications.
• Reducing, postponing, or stopping your retirement savings.

What’s the average cost of experiencing a disability?

The cost varies depending on the type, severity, and individual circumstances. According to a 2013 study by the Canadian Disability Alliance, the average lifetime financial cost of having a disability in Canada is approximately $640,000. This estimate considered things like:

• direct medical costs,
• indirect costs from lost wages/productivity, and
• other costs associated with living with a disability over a person's lifetime. (e.g. health-care services, special equipment, home/vehicle modifications, personal assistance, and lost income potential.)

Given the rising cost of living and inflation, we can expect that this number is likely higher today than it was when the study was conducted.

Read more: How to protect your finances from a health crisis

How can you plan for the financial risk of a disability?

The short answer to this question is: with a plan.

A good financial strategy will consider the uncontrollable events in your life. These events are the kinds that may limit your ability to earn money and meet your lifestyle expenses. (e.g. becoming disabled or dependent, suffering a serious illness and unexpected medical expenses). Having a plan in place can help ensure you have the right protection if something happens.

Here are some key things you can include in a plan to protect against the risk of an uncontrollable health event:

• Disability insurance. This replaces a portion of your income if you become unable to work. Some policies cover injury only, and some cover both illness and injury. It’s important to have enough coverage to meet your living expenses.
• Critical illness insurance. This can provide a lump-sum payment if you’re diagnosed with a specific illness or medical condition covered by your policy. You can use the money to cover medical expenses, lost income, or any other expenses.
• Long-term care insurance. This helps cover costs for assisted living, nursing homes, home health aids, etc. if you need long-term care.
• Workplace benefits. If you’re a full-time employee, your benefits plan likely includes disability insurance – either short-term or long-term, or both. If you become disabled, many employer plans replace 60-85% of your monthly after-tax income, to a maximum amount per month.
  • If your employer offers a Health Spending Account (HAS), it’s a good idea to contribute the maximum each year. It can help you save pre-tax funds for medical expenses, including those related to disability.
• Emergency savings. It’s a good idea to have 3-6 months’ worth of living expenses available in case of income loss. This can help bridge the gap until your insurance kicks in. A tax-free savings account (TFSA) is a good place to save.
• Life insurance. Make sure you protect your loved ones financially if you pass away. Consider life insurance that would help pay off debts and provide income for your beneficiaries.
• Powers of attorney, health-care directives and/or protection mandates. Designate someone you trust with legal authority to handle financial and health-care matters if you become incapacitated.
• Will and estate plan. Make sure you distribute your assets according to your wishes if disability or death occurs.

You can take some other steps to prepare for the risk of disability, such as:

• Creating a budget and tracking your spending habits.
• Paying off your high-interest debts and avoiding new ones.
• Investing in your health and wellness by eating well, exercising regularly, and managing stress.
• Reviewing your financial plan regularly and adjusting it as needed.

Are you ready to start preparing for this risk?

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What are your planning options if you’re experiencing a disability?

If you or a loved one are experiencing a disability, you may have some options that can help your finances:

• Registered Disability Savings Plan (RDSP). This allows you to save without affecting your government benefits. Depending on your income, the government could contribute grant and bond money to the plan. You can use the money in an RDSP for things like education, housing, transportation, and retirement.
• Trusts. This is a tool that can help manage and distribute your assets while potentially maintaining your government benefits. Some examples of these trusts are: Absolute discretionary (or “Henson”), Qualified disability and Lifetime benefit.
• Government support, for example:
  • Disability tax credit. This is a tax break for people with prolonged disability, certified by a medical professional. This credit also makes a person eligible for other disability supports and benefits. So, qualifying for the disability tax credit could open more financial planning opportunities.
  • Medical expense tax credit (METC). This can allow you to reduce the amount of income tax you owe based on certain medical expenses. (e.g. prescription medications, dental work, medical equipment, and home care).
  • Disability supports deduction. This allows people with disabilities to claim expenses that help remove barriers. (e.g. assistive devices, sign language services, etc.)
  • Canada/Quebec Pension Plan (CPP/QPP) disability benefit. This pays a taxable monthly benefit to those unable to work long-term because of a disability, under age 65.
  • Child Disability Benefit (CDB). This is a monthly payment that families can receive to help with the costs of caring for a child with a disability who is under 18 years old.
• An updated will. This helps ensure you distribute your assets according to your wishes if you pass away. It also names a guardian for any dependents. Consider setting up a testamentary trust in your will. This protects government benefits by controlling how money is distributed. It’s also a good idea to name trustees you trust to manage assets and care for you.
• Updated powers of attorney and health-care directives. Designate someone you trust with legal authority to handle financial and health-care matters if you become incapacitated and unable to care for your child.

What do you need to plan for if your child experiences a disability?

Caring for a child with a disability can be financially challenging. And your plan needs to potentially support their care for a lifetime. We can work together, covering some of these solutions, to support you and your child’s current and future needs:

• Estate planning. This is important to ensure ongoing support for your child after you’re gone.
• Insurance. Consider options like critical illness, disability, and life insurance to help protect your family financially in case something happens to you, as the caregiver.
• Planning and budgeting. Consider how to cover both immediate and long-term expenses for things like specialized equipment, therapies, home modifications, transportation, etc. We can investigate Government benefits and tax credits available to help offset some of your costs.

Who can help you plan for, or deal with, the financial impact of a disability?

Preparing for the financial risks of disability is an important part of your overall plan. By taking some proactive steps, you can help protect your lifestyle and future goals from the potential effects of uncontrollable events like becoming disabled or dependent, suffering a serious illness or unexpected medical expenses.

By working with an advisor, you can:

• review your specific needs and risks,
• identify any gaps in your current plans, and
• help prepare while maintaining your financial security and independence.

Work with a Sun Life advisor to understand your options.

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This article is for information and illustrative purposes only. It's not intended to provide specific financial, tax, insurance, investment, legal or accounting advice. It does not constitute a specific offer to buy and/or sell securities. We've compiled information in this article and webinar from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy.