Wealth Insights - March 2016

Wealth Insights

March 2016

Injury and Illness: Surviving the Financial Fallout

It's wise to consider disability and critical illness protection – just in case.

No one likes to think about it, but disability and serious illness are a fact of life. The numbers speak for themselves. According to figures from Sun Life, 45% of Canadians have experienced a serious health issue or accident. Of those, half report feeling the impact financially.

If you can't work or run into sudden medical bills, it can take a drastic toll on your income, savings and ability to meet your obligations. Even with medical advances, you could face a lengthy recovery or have to deal with the lingering effects of illness and injury.

When misfortune strikes, long-term disability and critical illness protection can mean the difference between protecting your financial health and losing it altogether.

How long-term disability protection replaces lost income

Long-term disability protection is designed to replace lost earnings if you can't work. It pays a monthly benefit limited to a percentage of your paycheque. Normally, that portion ranges from 60% to as much as 85%, depending on the policy.

A key point is how disability is defined. Definitions vary by policy and help determine whether you’ll be able to collect benefits.

Generally, disability coverage breaks down into two categories. Usually the cheapest, and least charitable, is any occupation coverage. This definition considers you disabled if you can't work at any job for which you’re qualified by education, training and experience. Those terms cast a wide net. For example, if you're an office manager but still able to perform clerical duties, you might not receive benefits.

It can be worth the higher cost to go with a regular occupation definition (also called own occupation), which allows you to collect if you're unable to substantially perform your normal duties. So, if you can't run a busy office as you did before, you would be deemed disabled and eligible for disability payments.

Another factor affecting premiums is the elimination period: how long you'll have to wait for benefits to begin. Instead of the usual 90 days, if you can afford to hold off receiving your initial payment, say for 180 days, you can lower your insurance costs.

Critical illness protection: peace of mind when ailments strike

Disability protection benefits provide regular income. A critical illness policy works differently. It hands over a one-time lump sum if you're diagnosed with a qualifying medical condition.

Comprehensive plans cover as many as two dozen ailments, including cancer, heart attack and stroke. You can normally apply for coverage until age 65.

You're not restricted in how you spend the policy proceeds. For instance, you may use the money to pay for treatment or care, pay off debt, or cover living expenses so your spouse can take time off work to be with you.

Disability protection is only available to business owners and the employed. That means if you're a stay-at-home parent, disability protection isn't an option - despite the possible repercussions for your family if you get sick. Critical illness protection, on the other hand, isn't linked to having a paycheque, so it's an option for those both in and outside the workforce.

Long-term disability and critical illness policies offer a variety of flexible features to let you create the protection you want, including return-of-premium options, cost of living adjustments and partial disability benefits to name a few. These add-ons come at a cost. Your advisor can help you decide where they make sense and how your funds are best spent.

The good news is if you – not your employer or another party – pay your insurance premiums, your benefit is tax-free.

Which should you choose?

Both long-term disability and critical illness plans insure against health risks. So which should you choose? Each has pros and cons. Often, disability and critical illness protection work best when they work together, which is why it can be worthwhile to have both in your corner. Here are some key issues to review before deciding.

Meeting up-front expenses

While a long-term disability policy can pay out a significant amount of cash over time, it won't help you when you need a sizeable sum up-front for medical treatment or to deal with urgent bills.

Without appropriate protection you could wind up depleting your savings and investments, or have to take on extra debt to pay for everything. A critical illness policy can provide needed funds in as few as 30 days.

Delivering steady income

Disability protection is the only choice if you want regular income. And, it can provide that income each and every month for years, even decades. For less than $60 in monthly premiums, a 30-year-old man earning $60,000 annually could receive $3,300 per month in benefits, or as much as $1.4 million by age 651.

With a critical illness policy, you have to be especially careful not to mismanage your lump-sum benefit, because once it's gone – it's gone.

Bridging an income gap

Disability protection won't cover all of your lost income. You'll still see a drop of 20%, 30% or more. That said, if you have a critical illness policy and you're afflicted with a qualifying medical condition, the proceeds will help close the gap.

Which risks worry you most?

Critical illness policies only cover what they're intended to, which could leave you exposed.

To start with, if you're disabled due to injury or accident you're out of luck. Then, there are simple critical illness policies which only insure you against three or four conditions. What's more, critical illness plans can have very specific requirements that must be satisfied before they'll pay a dime. What you believe to be a heart attack may not meet the definition spelled out in the policy.

The advantage of disability protection is it pays if you're unable to work. Period.

The Trouble with Group Protection

If you're an employee, there’s a good chance you have group insurance as part of your benefits package, including long-term disability or critical illness coverage. While it's better than nothing at all, group protection has its drawbacks. Relying on it as your sole source of protection is dicey. Here are three reasons why:

  1. Your employer owns the policy, not you. The terms of your policy can change, your premiums raised, or worse yet, your coverage could be cancelled altogether. And, because you're not the owner of the policy, if you leave your job you might be left without protection.
  2. You could be forced back to work prematurely. Group disability plans typically offer only two years of regular occupation coverage. At that point the disability definition is likely to shift to any occupation. When that happens you risk losing your benefits.
  3. Your benefit may be capped. Most times the share of income covered by a group disability plan will be modest, a situation made worse if a plan caps benefits. That can be especially challenging for high income earners. Say your group disability policy covers 60% of your working income to a maximum of $2,500 per month. Translation? If you earn more than $50,000, you'll receive less - perhaps far less – than 60% of your wages. In this scenario, only 30% of a $100,000 annual salary would be covered.

Having an individual policy to supplement your group plan puts you in control. It stays with you if you change jobs. Plus, you have the flexibility to customize your protection to fit your needs and budget best. Ask your advisor to explain all the advantages.

Get the right advice

How would you manage financially if the unexpected happens?

It's smart to be prepared. To learn more about how disability and critical illness protection can help, talk to us. Your Westminster Savings financial planner will clearly explain your options, then work with you to build a safety net you and your loved ones can count on.

Call us at 604-517-0100 or send us your question online and we'll respond to you within one business day.

1Long-term disability policy (Manulife) for a 30-year-old male, non-smoker, using a 90-day elimination period. Monthly premium of $58.75. Maximum payout of $1,376,100 assumes insured becomes totally disabled at age 30 and remains disabled to age 65. Based on office administration career.


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