Do you really need income protection insurance?

If you ask anyone about the different types of insurance they have, they will likely answer that they have home insurance and car insurance. They may even say they have life insurance. That’s because most of us don’t think twice when it comes to insuring our homes and our cars, and we appreciate the value and security that life insurance provides.

But when it comes to income protection, many of us think, “Do I really need it?”

Why protecting your income is a necessity

The importance of income protection insurance is often underestimated. But, in many ways, it’s more important than the need for life insurance. Although life insurance is an indispensable and fundamental part of every sound financial plan, the risk of becoming disabled before the age of 65 is considerably higher than the risk of dying. A typical 30-year-old has a four times greater chance of becoming disabled than dying before the age of 65. And one in six Canadians will be disabled for three months or more before the age of 50.

If you’re injured – say, in a fall down your own front stairs – and are suddenly unable to work for an extended period of time, who will pay your bills, support your family and maintain your standard of living? And, if you’re no longer able to work, are you prepared to sell your home in the event of financial difficulty?

If you answered “I don’t know” to the first three questions and “no” to the last question, then you need income protection insurance.

Do you need income protection insurance if you work for a large company?

If you work for a large company, then you may be covered under your company’s benefit plan. But don’t assume that the coverage offered is sufficient. It’s worth exploring additional coverage, because, for example, how long does your company’s coverage extend should you have to permanently leave your job due to your injury?

Do you need income protection insurance if you’re self-employed?

If you’re self-employed, income protection insurance is a must. Because if you can no longer perform the job that you alone do, where will your income come from? And how will you cover the overhead costs of your business while you recover?

Having income protection insurance means the payments you receive will allow you to concentrate on your recovery and rehabilitation. They will allow you to live your life without worrying about where the money will come from for your daily living expenses.

Should a company pay income protection/disability insurance?

Minimizing the claims experience of an employee on long-term disability Health and Dental benefits is a critical piece of many employee compensation packages. But if an employee does need to go on long-term disability (DI), should a company have to continue to pay for his or her group health and dental benefits?

If these benefits are continued during the long-term disability leave, any amount claimed by the employee impacts insurance renewal costs and would likely result in a hefty premium increase for the whole group based on the claims experience.

For example: A founding member of a law firm required a liver transplant. He was placed on long term DI and because of his long-standing position with the firm, group health and dental benefits continued. He had successful surgery and now needed to take medications, which amounted to approximately $4,000 a month ($48,000 a year). Based on this claim experience, renewal costs increased, resulting in higher contributions for the rest of the group. Is this fair, or unfair?

How a company can protect itself regarding its income protection/ long-term disability insurance plan

To protect the integrity of its group insurance plan, there are a number of options a company can take:

Create an employment policy that clearly states for each employee and employee class if, for how long and for how much health and dental benefits will be maintained if the employee is placed on long-term DI.
Investigate individual health and dental programs, such as Manulife’s Follow Me, to which the employee on long-term DI can switch without having to undergo a medical exam. Programs such as this one can be paid for in whole or split between the company and the individual. Again, this switch in programs should be part of an employment policy so that all employees know exactly how a long-term DI situation will play out.
Institute a stop loss level. Any claims that fall below that level are added to the claims experience. Any claims that are above that level are paid by stop loss insurance and are therefore not part of the claims experience.

I am currently dealing with two cases, both of which could have been avoided had these steps been taken.

In one, a trusted, long-term employee is on DI insurance because of a muscle problem. The company has been paying this person’s group health and dental benefits for the past two years and, because of this, premiums went up 15% upon renewal.

In the other case, a hardworking relative of the company’s owner has been on longterm DI for two years while the company continues to pay for this person’s benefits.

Both companies had no policy in place to deal with such cases and are working through this issue for the first time. As such, in the first case, the company has decided to cease paying the employee’s health and dental benefits this summer. In the second case, no final decision has been reached. In both cases however, whatever management decides is precedent-setting. These companies will now be bound by these decisions in the future, rather than by a definitive company policy.

Create your company’s long-term income protection/disability insurance plan before it’s needed

In summary, create your employment policy before it’s needed so that disabled employees can be removed from the group health and dental benefits and onto individual insurance as quickly as possible. This will minimize the effect on the group’s claims experience and on future premiums.