Insurance plays a crucial role in our lives. In fact, the vast majority of us would not dream of going without car, house, or mortgage insurance. However, sometimes a crucial component of our insurance portfolio is overlooked: disability insurance.
According to the Canadian Bar Insurance Association, the chance of becoming disabled for more than 30 days is much greater than getting in a serious car accident, suffering a house fire, or dying prematurely. If you are unable to work because of illness or injury, having disability insurance coverage will help you meet your financial obligations while you recover.
Associates with national firms and medium to large boutiques tend to have disability insurance coverage through group insurance plans. If your firm does not have a group insurance plan, you can obtain coverage from an outside source. Don’t expect the government to provide much in the way of disability insurance benefits. The Canada Pension Plan disability benefit maxes out at about $1,000 per month, and only applies to individuals with “severe and prolonged” disabilities.
It is important to ensure that your disability insurance plan is tailored to your needs. Most plans cover up to a maximum of 70 per cent of income. As long as disability insurance premiums are not tax-deducted, the benefits are paid out tax-free. Adding riders, or options, to a disability insurance policy tailors it to meet your specific needs. Riders that should be considered are:
1. Own occupation: This provision stipulates that if you become disabled and cannot perform the duties of your specific occupation, you will still be eligible for benefits.
2. Cost of living adjustment (COLA): This option ensures benefit payments increase in line with increases in the Consumer Price Index.
3. Future insurability option (FIO): As disability insurance eligibility is determined by current earnings, associates will want to ensure that as income increases, they can get higher coverage without evidence of insurability.
4. Retirement protector: This rider ensures payment into a retirement fund in the event of a disability.
5. Return of premium: With this rider, premiums are returned if no claims are made.
Extending the elimination period (the time lapse before benefits begin) on your disability insurance policy will reduce the cost of the policy. A 90-day elimination period tends to be suitable for most people. However, it is recommended that if you have a 90-day elimination period, you have at least three months' expenses on hand. Disability insurance coverage should be obtained until at least age 65 to protect against a prolonged disability.
If you plan to leave your firm and become a sole practitioner, you will also want to consider office overhead insurance, also known as Professional Office Overhead. A POE policy will continue to pay office expenses, such as rent and administrative assistant salaries, for a stipulated period of time while you recover.
If you do not currently have a disability insurance policy, you need one. Look at it this way: your disability insurance is the insurance that will pay your other insurance premiums if you can’t work. Don’t get caught short. Review your insurance portfolio to ensure that you have proper disability insurance coverage. Disability insurance protects your most valuable asset: your future earning potential.
Alan Acton is a financial adviser in Ottawa and can be reached at alan.acton@
raymondjames.ca. The opinions expressed are those of Alan Acton and not necessarily those of Raymond James Ltd. Statistics. Data and other information are from sources believed to be reliable but their accuracy cannot be guaranteed. This document has been prepared to assist individuals with financial concepts and is for informational purposes only.