Disability Protection

The term “disability benefit” is one that makes no sense to me…no one benefits from a disability. However, semantics aside, insurance companies say that one in three of us will become disabled for at least ninety days during our working lives. Most of us could deal with no income with three or four months, but it is a sobering statistic that the average length of disability is two years. So disability protection should be a priority.  

Manulife has an interesting calculator. For example, a 45 year old non-smoking male’s risk of becoming disabled, getting a critical illness or dying before 65 is 31%, 24% and 5% respectively. Of course, this should not be accepted as gospel but it gives you an appreciation of the issue.

The financial fall-out from a disability can be devastating and the importance of planning cannot be overemphasized. Dealing with the situation after the fact will be stressful, but the right plan will help mitigate that. Unfortunately, disability protection is not as easy as spending an evening evaluating coverage and premiums on the Internet. Investigating the details is imperative.  Government plans include Workers’ Compensation, Employment Insurance and Canada Pension Plan. Eligibility and coverage are based on your specific situation and beyond the scope of this article. However, I believe it fair to say that these provide limited coverage and should not be relied on as the sole source of disability protection.  For example, the maximum 2013 CPP disability benefit is $1,212 monthly and is fully taxable.

Those who work for large companies with HR departmentsgenerally should have easier access to an adequate level of disability protection. Group insurance plans are typically provided and include coverage for sick leave, short term and long term disability. However, the coverage obviously varies from employer to employer and the employee has to know the details; you cannot be complacent just because you have employer paid coverage.

Be aware that disability insurance is received tax-free as long as the premiums were not deducted for income tax purposes. This obviously makes a huge difference. You should know the after-tax pay out if you have to collect, the length of time before disability payments kick in and the maximum period for receiving disability payments.  Those of us who are self-employed or work in smaller private companies face even bigger challenges. Basically, we are on our own to provide disability protection for ourselves and our families.

What Types Of Disability Insurance Are Available?

• Individual Plans

These are tailored to your needs but of course, are also expensive. They work for almost one million Canadians who have significant income levels and financial commitments. These plans can be arranged by a life and health insurance agent.

• Association Plans

These are offered by professional associations such as doctors, lawyers, accountants, Boards of Commerce, etc. You choose your own level of coverage and although these are less flexible than the individual plans, they are also less expensive.

Evaluate your personal situation and review the practicality of the above plans and your own risk level. Ask yourself some basic questions. Do you have sources of income outside of your employment? Do you have liquid assets that can provide some protection? Does your partner have income or access to benefits? Do you have significant financial commitments? Do you have a family and/or business to protect? The questions can go on and on…. but the goal is to determine the level of protection you are comfortable with.

At this point, you may want to call in an advisor to help your decision. You will then also hear about special purpose plans such as critical illness or long term care coverage. These can be complicated and expensive but they do offer additional protection. For instance, critical illness provides a lump-sum tax-free payout on diagnosis of a critical illness. This could be crucial to maintain a family business. However, be aware that the definitions of critical illness vary.

Long-term care insurance is often provided to maintain the value of an estate if and when a person has to go in a long-term care facility. In many cases, my take is that saving the premiums and adding to assets can provide an adequate level of protection. However, for those with significant assets and commitments to protect, these plans can be attractive for peace of mind reasons.

Self-insurance is one option that you probably will not read about in any insurance guide but it is something to consider. This can work for those who have built up assets, especially tax-deferred ones in a company or RRSPs.  If you are disabled and not drawing any other income, RRSP or holding company withdrawals can make sense. 

Disability insurance is a vital part of any financial plan and there is no perfect coverage. Start with a risk evaluation and then review benefits and costs before choosing or renewing disability protection. That`s a brief summary of a complex area but hopefully gives readers food for thought in evaluating their disability protection.

David A. Townsend, C.A., C.F.P. has been providing accounting and tax services in Calgary since 1990. Clients include a wide variety of individuals, trusts, estates and private companies. For further information, check out www.datownsend.com