Does your disability insurance cover your greatest asset? Is your house or your earning power your greatest asset?
Yes, if you live in Toronto, Vancouver or another major urban centre in Canada, you might consider your house your greatest asset. However, earning power and protecting your ability to cover the mortgage payments and other related expenses are just as important, if not more important than your house. Having the right amount of disability insurance and critical illness coverage can help you reduce the risk of not being able to meet your financial demands should you become disabled or ill. These types of benefits are called “living benefits”. Unlike life insurance which pays a benefit to your survivors after your death, living benefits pay you a benefit while you are still alive. Let’s look at how these disability insurance and critical illness policies can help you manage risk.
A disability insurance policy pays you a monthly benefit if you become disabled and are unable to work for a period of time. The policy normally pays you tax free about 60% of your employment income (for business owners that don’t get a salary, this would be 60% of your draws) . When you have disability insurance and can’t work, you are not forced to liquidate any/all of your savings or investments in TFSAs or RRSPs to cover expenses.
Please also remember that if you are redeeming all or part of an RRSP, you would have to pay tax on the withdrawal –this amount is deducted at source (20% to 30% withholding tax on all amounts over $5,000. It is only 10% if the amounts are less than $5,000). This may also impact your standard of living during a disability. If you have a spouse or children who rely on you to pay the bills, the payout from the disability insurance plan can help you maintain more consistent cash flow levels. Inasmuch as government plans have eligibility and benefit limitations, it is well worth considering having your own disability insurance policy.
Critical illness insurance protects you if you are diagnosed with one of several conditions such as cancer, heart attack and stroke Manulife’s Lifecheque policy covers 24 conditions). While you recover from the illness, it is likely that you will not be able to work for some time. It is also probable that you will have extra expenses for medication, assistance at home or travel for special treatments. Having coverage for these unplanned expenses relieves some of the stress of the illness and you can focus on getting well instead of paying the bills. Critical illness insurance helps you to continue your lifestyle after you recover without taking on extra debt or depleting your savings.
Couples with mortgages should also have Life insurance. It is best to insure the lives of both spouses so that if one passes away, there is enough money to pay off the mortgage and keep the family home. At the time of loss of one spouse, having to give up the home can be disastrous for the remaining partner and children. Life insurance to cover the debt to the bank will protect the family home. However, beware of the insurance offered by your bank when you take out the mortgage it is quite restrictive and only lasts as long as the mortgage. Moreover, the bank (not you or your spouse) is the beneficiary and the policy itself can be changed or cancelled at any time.
Often for the same or even less money, you can purchase your own life insurance policy as well as set the parameters. As an added benefit, when you own your own policy, it continues in effect after the mortgage is paid off and can then be used for other purposes whereas as noted above, mortgage insurance sold by the bank expires at the end of the mortgage. If you want to replace the bank mortgage insurance at that point, because you are older, the premiums will certainly be significantly higher.
Life is unpredictable. Even if you have disability insurance coverage through group plans, a review of this plan might reveal that you don’t have enough protection and/or what you have is limited. Whether you are self-employed or work for someone else, you can protect yourself and your loved ones with the right type and amount of disability insurance. You shelter your savings by ensuring that a disability or critical illness doesn’t cause you to use them up. You protect the stability of your family by having enough life insurance to pay off your mortgage.
As with saving and investing, when purchasing insurance it is always wise to start young. Call me and I will work with you to determine the best coverage for you, find extra funds in your monthly cash flow to cover these protections and determine the best plan(s) for you and your family. Protect your greatest asset.
It’s just good advice!