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Executive Summary

Disability Insurance, which provides income replacement when an individual is unable to work, is one of the most unappreciated offerings of the Financial Services industry. Most people believe that a debilitating disease or injury won’t happen to them, and if it does, they can handle it, or deal with it “then”.

The first step to avoiding that potentially disastrous course of action is to understand the difference sources of coverage, and how they differ.

Once a basic level of understanding is reached, most people also understand that forgoing disability insurance is an unnecessary risk.

Most people utilize life insurance easily within their financial plan. The fact that 100% of us will die must be the driving force.

What you need to know

Someone who is unable to work, for whatever reason, typically needs between 50% and 80% of their earnings to pay their bills and meet their financial obligations. This income can be replaced with:

Government Sickness Benefits from ServiceCanada

Up to 15 weeks of benefits for those who have had their earnings reduced by 40% or more, as of January 1, 2016 the maximum benefit is $537 per week for those making “insurable earnings of $50,800 or more” according to ServiceCanada.com

Workers’ Compensation Boards

Limited to workers who are injured on-the-job are eligible for benefits

Individual Benefits

This is the most flexible option, and can be tailored to unique situations by licensed insurance agents:

Time Frame – lifetime, duration of disability or until age 65, or a specified time-frame, usually 5 years

Premium payments are waived while on a claim

Group Benefits

Typically offered as part of a compensation package, or at least the opportunity to buy disability benefits is offered at a group rate. Company paid premiums deliver disability benefits that are taxable, so most employers include discounted rates as a non-paid benefit to lower their costs and increase after-tax benefits

Often a mix of the following types of benefits

Sick days

Paid or unpaid days away from work for parts of days or only a few consecutive days

Short Term Disability

Usually coordinated with ServiceCanada sickness benefits, starting after fifteen weeks and ending after six or twelve months

Long Term Disability (LTD)

LTD replaces about two-thirds of a person’s income, usually after all other disability and sickness benefits have expired

LTD lasts for two years, and after two years you have to be disabled from performing any occupation for LTD payments to continue

LTD benefits are often reduced by any disability payments provided from other sources like ServiceCanada and Workers’ Compensation

LTD gets a claimant to the agreed level, but will take advantage of other sources, too
Association Plans

Association Plans function like Group Plans, but instead of the “group” being employees, they are part of an affinity group like a professional association (Canadian Institute of Chartered Accountants, for example), alumni of a university or college or member organization like Canadian Federation of Independent Business (CFIB).

Additional steps and medical information may be required to enroll, unlike an employer-sponsored group plan, but are typically much easier and cheaper than individual plans

Administration Only Plans

Some large employers self-insure by hiring insurance companies to administer disability insurance (enroll employers, manage coverage and options, process claims and payments) while the employers fund the administrative and claims cost directly without the benefit of underwriting the expected claims.

Bottom Line

When it comes to Disability Insurance, the steps to proceed are simple, but committing to an issue that “will never happen to me” can prove difficult. The preferred course of action is to gather the necessary information and documents from personal and company plans, and then:
1. Assess coverage and coverage type
2. Assess overall risk for each investor
3. Determine the appropriate next steps based on the information and insights gathered in steps 1 and 2 (above)