Life & Disability Insurance
from Ralph Vandervoort
Comprehensive Financial Planning means an individual taking a multi-period approach to their financial situation, looking at cash flows and consumption patterns. Life insurance protects your estate and beneficiaries when you die while disability insurance maintains your financial independence should you become disabled for an extended period of time. Recently Critical Illness plans were developed to protect the area of life that falls between these two extremes.
Life insurance is one piece of the financial planning puzzle. These will be required, at least initially to meet burial expenses and income tax considerations that will arise. Beyond this it will assist family members and others who will suffer a serious loss due to death of the insured such as business partners.
Life insurance policies fall into two main groups: temporary and permanent. Temporary (term) is cheaper at first but becomes more expensive over time and designed to terminate prior to when you do (expires before your life expectancy). It is like paying rent on a house and having no equity. Permanent insurance is like buying the house outright, you have it forever. It costs more but in the end you own something of value with a savings component you can draw upon or use for collateral.
Benefits paid are tax free and, if arranged properly, are exempt from probate and creditors.
Disability insurance is another piece of the financial planning puzzle. For those covered under a group plan the premium can be as much as 75% less than for individual plans. However understand the limitations: the coverage may not be portable, the premium (often subsidized by employer) is not guaranteed and may increase, the contract may not be renewed, and the definition of disability may change in 2 years making it more difficult to collect. If you have a group plan consider a supplemental individual plan that can give you more options at a difficult time.
Here are some contract issues in income maintenance plans:
- Future Insurability Option: as disability insurance is hard to qualify for, this allows you to buy future insurance at standard rates, regardless of your health (but you need the income to support it).
- Cost of Living: benefit increases based on the Consumer Price Index to prevent inflation from eroding your income.
- Retirement Income Protector: as most plans stop paying benefits at age 65, what happens then? Arrange for funds to supplement your retirement income. When you are disabled you have no earned income, therefore any RRSP contributions are gone!
- Definition of Disability: is it based on your 'own occupation', or 'any occupation'?
Tax status depends upon how the premium payments have been made. If you paid the premium personally with after tax dollars, the benefits are also tax free.
New Hybrid Contracts
A couple of insurance companies have recently introduced contracts that change into Long Term Care ( LTC) coverage as a person approaches retirement. The logic behind this is that at retirement your need for disability income is gone ( as you no longer earn income), and your need for life insurance may be reduced as dependants are now independent and debts are low or gone. The LTC contract now helps protect your life style and assets that you've worked hard to accumulate.