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Financial Planning > Disability

Disability Insurance

Overview

Do I Need Disability Insurance?

Have You Considered The Probability of a Disabling Life Event?
Some frightening facts to consider:

  • 1 in 4 Canadians will be disabled at some point during their lifetime
  • Less than 15% of Canadian workers have appropriate disability coverage
  • The odds of becoming disabled for 3 months or longer are 50% at age 35 and 40% at age 45
  • Nearly half (48%) of all mortgage foreclosures in the US are caused as a result of a disability, whereas only 3% are a result of death. The statistics in Canada are similar.

WHAT IS YOUR MOST VALUABLE ASSET?

When asked this question, there is an automatic tendency for people to consider their house or portfolio investment to be their most valuable asset.

What most people do not realize is, that during their “working years” their most important and valuable asset from a financial perspective is their ability to generate an income. For example, a 30 year old has the ability to earn between $1m and $1.5m over the next 30 years.

Disability Insurance

Disability Insurance provides a monthly income to make up for lost wages should an accident, sickness or injury prevent you from working at your regular occupation. Benefits are generally received tax-free.

Most of us are aware of the need for medical coverage, but we often neglect disability when determining our insurance needs. Disability insurance helps replace income lost because of an accident or illness. Few of us would have an adequate “war chest” for an extended battle with a loss of income.

Unfortunately, many of us will need disability income protection some time before we die. For people aged 45, two out of five will be disabled for more than 90 days before they reach age 65.1 without disability insurance protection, a disability could spell financial disaster.
Disability at any age can disrupt income while medical expenses deplete your savings. Unless you have a battle plan, the effects of even a short-term disability can be financially and emotionally devastating.

Disability Protection

Disability Insurance is a product designed to provide or replace all or part of your income should you become unable to work at your regular employment or business activity due to illness or injury. Disability insurance provides a financial safety net. In the event you experience a disability, the benefits provided by disability insurance effectively replace a portion of your earned income. Disability coverage can prove to be invaluable. And in many cases, disability insurance should be considered before taking steps to achieve other financial goals. The benefits paid to you under a disability policy are received in the form of a monthly “income” payment. If you pay the premium for the disability insurance yourself the monthly benefit is tax-free.If your employer pays the premiums for your policy then the monthly benefit is taxable.

Alternative Funding Options should you become disabled:

• Savings
You savings may be limited – 1 year of disability typically wipes out 10 years of savings

• Borrow from a Financial Institution
Financial Institutions will not lend money to the “unemployed” or “unemployable”

• Borrow from Relatives
Your relatives may have limited or no resources to help you

• Collapse your RRSP’s
This depletes your retirement fund

• Mortgage your house
Provided you have room left and at what cost

• Live on your Spouse’s income
In the majority of cases, the Spouse’s income will not be sufficient to support both of you

• Utilize your Sick Leave Plan
A sick leave plan usually only lasts for a very short period of time

• Government benefits
Government benefits include WCB, EI, CPP – however not all individuals qualify and funds are usually limited

Concepts

• Return of Premium
• Carve out
• Executive Top Up

Strategies

• Do I need Disability Insurance?
• What type of disability is best for me?
• How much disability do I need?
• Deductibility of Premiums

Designing a Disability Protection Plan

Appropriate disability coverage depends on your particular situation. However, there are a few issues you may want to consider.

First, consider carrying enough coverage to replace at least 60 percent of your earnings. Many companies limit benefits to between 50 percent and 80 percent from all sources of disability income prior to the disability, private disability benefits are usually tax-free.

Consider extending the time between when the disability occurs and when you start receiving benefits. Choosing a 90- or 180-day waiting period instead of a 30-day waiting period can lower your cost substantially. Be sure to compare and review policy benefits carefully.

Tools

1. Group LTD Plans
2. Grouped Health Plans
3. Personally Owned Insurance Plans
4. Funding Alternatives

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