Being disabled or critically ill can really de-rail & drain your retirement fund if you don’t have that risk properly covered.  Unfortunately, most people don’t because they rely blindly on their work disability coverage, which is almost always, never enough.

A 2015 study by the Ontario Securities Commission (the Financial Life Stages of Canadians) revealed 2 major findings:

  • Unexpected financial crises that disrupt savings and planned retirement spending are far more common that anticipated, especially in the pre-retirement years.
  • The financial ramifications of personal health become increasingly important as Canadians age.

Taking money out of your RRSP to cover additional medical & non-medical costs can also leave you paying more taxes. It’s therefore extremely important that you understand the tax implications of your options, and find tax-free or tax-efficient solutions where possible.

What you need to know about your Group Long Term Disability

Having a source to replace your earned income in the event of an illness or accident is vital considering that on average, 1 in 3 Canadians will become disabled for a period of more than 90 days at least once before the age of 65. For those that are disabled for more than 90 days the average length of that disability is 2.9 years.

If you are one of the approximately 10 million Canadians covered under a group Long Term Disability plan (LTD) it’s important to understand what your coverage provides. Don’t wait until after you’re disabled to read the employee handbook, because you could have a few surprises!

How much coverage do I really have?

  • Generally, employee benefit LTD plans are designed to replace 65%- 85% of your pre-disability after tax income.
  • The amount of your benefit is determined by formula. These formulas vary so it’s a good idea to know what yours is.
  • Many plans also have a maximum amount and a maximum coverage period (e.g. 2 years).

When do I start getting benefits?

  • Usually, you are eligible for benefits to commence after being disabled for a period of 90 or 120 days.

Is this benefit taxable to me?

  • If the LTD premium is paid by you personally then the benefit will be received tax free.
  • In groups where the employer pays the LTD premium, then the benefit when received will be taxable.
    • Should this be the case, make sure you discuss with your employer or insurer what your options are for having tax withheld if disabled so there will be no nasty surprises come tax time.

What else do I need to know when I enroll in an LTD plan?

  • Pay attention to the Non-Evidence Maximum (NEM). This is the maximum amount of disability benefit you would be entitled to without providing medical evidence. You may be eligible to receive higher coverage if you take a medical examination.
  • You should also be aware that LTD benefits are usually offset (reduced), by any disability benefits you might receive from CPP, EI or WCB.
  • Any benefits paid as a result of an accident from an automobile insurance plan may also reduce your LTD benefits.
  • Most group plans have a waiting period, usually three to six months, before a new employee is eligible to join the plan.
  • If you were formerly a member of a plan at another employer, request that your new employer waive the waiting period.
  • If you’re an employee who was actively recruited or is considered a valuable addition, you should also make this request.

Are there other options?

  • All of the above could certainly result in you receiving less disability income than you thought you were entitled to. If this is the case, consider purchasing an individual disability policy to “top up” your coverage.
  • Credit or Mortgage disability insurance can also “top up” your coverage (without being offset against your group income replacement disability income), and can benefit you most when you purchase it on your own.  These gives more benefit and flexibility compared to purchasing it with your mortgage lender/bank.

Please call me if you would like to discuss your personal situation or feel free to use the social sharing buttons below to share this article with a friend or family member you think might find this information of value.

Source: CLHIA