Monday, 28 July 2014

Sickness, Injury and Death – Are you ready? Part 1

I apologize for not posting anything for months.  Let’s just call it an unplanned sabbatical.

During my last posting “New Year Resolution: Stop Over-Thinking Your Money!”, I did a book review that talked about some simple financial rules to follow.  

Rule#1 was “Disaster-proof your life” or getting straight to the point – “Sickness, Injury and Death – Are you ready?”  This post is the first in a series on financial protection for the unexpected that for most comes in the form of “insurance”.  If you’re like a lot of people, talking about insurance is about as exciting as watching paint peel.  It lacks the sexiness of investments and is not even as exciting as saving which at least you can measure how you’re doing and have an end goal.  Insurance has a totally different sort of objective.  It’s about protecting yourself “just in case” something happens but hoping nothing does.  Kind of the reverse of winning the lottery because if you win, you lose and we want to make the amount you lose smaller.

I’m going to discuss the different types of insurance including some observations plus at the same time doing a review of the current insurance for my wife and I.  The last time we did any changes was 2009 so we’re due for a review.  This is a large topic so I’ll need a few posts to cover it.  All of these posts will be from a Canadian point of view but for any of you in other countries it would be worth checking if you have   comparable insurance.

Let’s get started with Disability insurance.  This is insurance to replace your income if you become disabled.  A payment is made to an insurer for coverage (“the premium”) and then if you become disabled, you get a monthly payment to replace a portion of your income.  With this insurance, there is normally a “wait period” or “elimination period” until your first payment.  This type of insurance can come from individual insurance plans, group insurance plans, special purpose plans or government plans.  Let’s talk a bit about each one.

Government Plans.   Here is a summary of three government plans you might be covered under:

Canada Pension Plan (CPP) Disability Benefit.  This is coverage if you are disabled and unable to work for a long period of time.  For this benefit, you must meet the following 3 conditions. 
  • have a severe and prolonged disability
  • be under the age of 65
  • meet the CPP contribution requirements.
There is an approximately four month period for the government to decide if you get coverage and the maximum monthly amount for 2013 was $1,212.90 or $14,554.80 annually.    It’s good this coverage exists but it doesn’t help the majority of people needing assistance with a lessor disability, there’s the 4 month gap in wages you’ll need to make up while you are waiting and most likely the total amount paid will be significantly less than your original pay.  It’s good to have additional coverage to cover the “buts”.  Benefits may also be available for your children if you’re receiving this benefit.   If you work in Quebec, there are similar benefits under the Quebec Pension Plan.
Employment Insurance Sickness Benefits.  This is coverage if you are “unable to work because of sickness, injury, or quarantine” and provides up to 15 weeks of coverage.  A summary of the conditions to be met are:
  • Employed in insurable employment (i.e. you are paying EI)
  • If not for the sickness, injury or quarantine you’d be able to work
  • Your weekly earning are reduced by > 40%
  • You have worked for a minimum number of hours before the claim

If you’re eligible, you should get your first payment within 28 days of your application but there is a 2 week waiting period for this benefit to start when you wouldn’t be paid.  As of January 1, 2014, the maximum weekly amount is $514 or $7,710 for the maximum 15 week period.  There are lots of rules and conditions for this coverage so I recommend going to the website link to read more.  For those of you covered by a group plan, most likely your coverage would be partially or totally covered through the short-term disability (STD) benefit.  

Workers Compensation Insurance.  This is coverage, if you are injured while at work. Each province and territory has its own Workers’ Compensation Board with slightly different rules and guidelines.  I could spend a whole posting just talking about this one type of insurance but for our discussion here I’ll try to summarize the key points.
  • Compensation starts after the injury occurs and most boards don’t have a waiting period.
  • The benefits received could be affected if you are getting disability benefits from CPP or QPP
  • Benefits cover income loss, as you’d expect, but also things like health care benefits and compensation due to permanent impairment

Group Plans.   If your employer provides a group plan, you could have coverage for short-term (STD) and/or long-term disability (LTD) insurance.  My employer provides both.  Here is what my coverage looks like:
  •  66.7% of earnings, up to a maximum benefit of $1,350/week for up to 17 weeks.  Waiting period is 0 days for hospitalization and accident related disability and 15 days for illness.
  • 66.7% of first $3,000 of base salary, plus 45% of any excess amount beginning after 17 weeks of disability, to monthly maximum of $10,000.

So if I was getting paid $1000/week, after my accident I would get $667/week for both the short-term (0-17 weeks) and the long-term (after 17 weeks).  For the STD or LTD insurance, you may be paying for this through a deduction on your paycheque.  This isn’t necessarily a bad thing.  If your employer paid for this, it would be considered a taxable benefit and you’d have to pay tax on either the premium they pay for you or on the amount paid to you if you need to use this benefit.   Some other variations, you could see in your coverage:
  • Integration with Employment Insurance (EI) benefits:
    • The plan is comparable to Employment Insurance (EI) benefits so the employer gets a reduction in their EI premium since you won’t be applying for EI. 
    • The plan covers the periods before and after the EI benefits and may or may not cover the EI benefit period if EI declines to pay you benefits.
  • Different percentage paid out (e.g. 70%)
  • Different periods of payment (e.g. 15, 17, or 26 weeks)
  • Different waiting or elimination period (e.g. > 0 days for accident and hospitalization )
  • Taxable status.    If the employer pays any portion of the premium, the entire benefit is taxable.
  • See here for more on this. 

Individual or Special Plans.   Individual plans are offered by a lot of insurance companies and may be worth looking into if your employer doesn’t offer a group plan or you are self-employed.  You may also have coverage via other plans like auto insurance or creditor insurance.  A guide to disability insurance by the Canadian Life and Health Insurance Association provides a good overview of disability insurance and some useful worksheets to determine if you have enough coverage.

Okay.  I think this is enough for now.  We still have to talk about Critical Illness insurance but that can wait for another posting.   As for my own coverage, both my wife and I are covered by group plans and have a low amount of debt and no other special needs so we have enough for now.  I’d recommend trying the worksheet in the guide I mention above to assess your own coverage. 

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