May 5, 2021
I also cover this subject in a YouTube video. Click here to watch!
Do you think you know everything you need to know about Disability Insurance? Well, by the end of this blog I’ll give you all the facts so you can make an informed decision – because if something happened to you and you couldn’t work anymore, what’s your game plan?
If you own a home or a car today, chances are you have insurance on both of these assets and you might even think they are your most important assets.
In fact, your most important asset is your ability each and every day to get up and go to work to earn a living.
And so, if something had happened to you last night and you couldn’t work today, the question I always ask is…
What is going to be your pay cheque?
If this happened to you, the best way to address this issue is something called Disability Insurance and it will step in to become your paycheque for the rest of your working life.
Now, most people who have a group disability plan at work probably haven’t even read the benefits manual or even fully understand their group disability plan. I know I didn’t when I worked for corporate Canada. However, every group disability plan in Canada has one huge flaw with it and I am going to share that flaw, and more importantly, I am going to educate you on how we can correct that flaw.
Disability insurance premiums should always be paid for with personal tax dollars. So even if you are in a group plan and they provide you with “flex dollars” to pay for your benefits, make sure that you direct those flex dollars only to your dental benefits – because if you use any of those flex dollars to pay for your group disability insurance, unless your company makes sure you receive this as a taxable benefit on your T4 slip, then if you ever went on disability all of the income that you receive would be taxable income. But that’s only if you only pay for the premiums with personal dollars and not flex dollars – then, if you ever went on disability, all of the income that you would receive would be “tax-free income.” So this is so very important.
Also, if you are an incorporated business owner, you must make sure that you pay for your disability premiums with personal tax dollars. Otherwise you would have the same issue of taxable income versus tax-free income if you went on claim.
So, here are the stats for Canada. One in 3 people, that’s 33%, will at some point become disabled during their working years. Also, 50% of all mortgage foreclosures can be traced back to the person not having a disability policy. This is real. So you have to take Disability Insurance coverage very seriously, because it is the most important insurance coverage to protect your current and future paycheques.
When designing a disability policy, you have to look at certain features that are “must haves” in order to fully protect yourself.
The 1st feature is called “Own Occupation”. If you don’t have this feature, then 2 years into the disability benefits, the insurance company can force you to do any other job that you are capable of doing. But if you have the “own occupation” feature in your plan, then the insurance company can’t force you to do any other job than the job you were doing the day before you became disabled.
This is the flaw I mentioned earlier with Group Disability plans. Every group disability plan in Canada only has “own occupation” for the first 2 years and then after the 2-year time period, the definition in the policy gets changed to “any occupation” – so after 2 years, the insurance company could force you to do any other job that you are capable of doing. And the pay that you would receive from that job would be subtracted from the benefit that the insurance company owes you.
Now here is how we fix that problem with your group plan. You can purchase a “cheap and cheerful” individual disability policy…however, I would include a 2 year waiting period before the benefit kicks in….so your group plan would cover you for the first 2 years and then when the definition changes in the group plan, we turn on your individual disability insurance plan with “own occupation” to solve this problem. This is very cost effective because of the 2-year waiting period.
Now back to designing your own individual plan. In addition to “own occupation” you should also have a feature called Cost of Living or COLA – because if you went on claim, you want to make sure that your monthly benefit is keeping up with inflation.
And the 3rd feature you should look at is FIO or Future Income Option. This feature allows you to purchase additional monthly benefit, as long as your income has gone up, but you do not need to undergo any future medical underwriting. This feature can be exercised every year on the policy anniversary. If you choose not to take the benefit increase, then the amount is carried forward to the next policy anniversary.
The final feature we should look at is called the Return of Premium or ROP. You should do a calculation as to the cost of this feature versus the payback. How this works: every 7 years like clockwork, if you haven’t filed a disability claim, then you get 50% of the premiums back that you paid and you receive this money tax-free. So, either you get a disability and you receive the monthly benefit or you get 50% of your money back.
Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.
Want to learn more about Disability Insurance? Already decided that you need to get the coverage in place? Contact me at the coordinates below to apply to become my client.
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