No one likes to think of a worst-case scenario. But the reality is that no matter how much we take care of ourselves, our health can be compromised out of the blue. When this happens, employees appreciate the financial security and peace of mind that comes along with disability benefits. These benefits allow employees to focus on their recovery while still being able to maintain their lifestyles and provide for their family.
In the last two articles, I talked about both short-term disability and long-term disability (LTD) for group benefits plans. I discussed why it’s important for companies to consider adding these benefits to their plans and explained what employers and employees can expect. While I touched on individual disability insurance in the article titled “Getting Familiar with Long-Term Disability Benefits”, this article will provide greater insight into these benefits that cater to high-earners and specialized professionals.
Who Should Seek Individual Disability Benefits?
Generally, high-earners such as corporate executives or specialized professionals such as surgeons, doctors, dentists, lawyers, accountants, engineers, and other similar experts should consider getting individual disability insurance plans. The fact is that they are trained, and experienced to fulfill a specialized role or profession. If anything happens, the likelihood of them seeking another career or taking on a lesser-paying job is low. They need to protect their ability to earn income at the same level that their years of experience and expertise compensate today.
While group long-term disability benefits might be available, it is important to source extra protection through an individual disability insurance plan. Individual disability insurance offers extended protection, covering OWN occupation, sometimes up until the age of 71. What does this mean? Unlike group LTD plans, after 2 years, the insurance provider cannot come back and request that the insured individual find ANY occupation in the event they still cannot fulfill their own pre-impairment duties. Essentially, it protects highly-skilled professionals from having to consider lesser-skilled or lower-paying occupations, if they are unable to carry out their previous employment.
Are T5 Earnings Insured under Individual Disability Coverage?
The simple answer is yes. One of the most important distinctions between group and individual disability coverage is the definition of earnings. Most group contracts cover T4 income only, or in the case of sales staff where income is based off commissions and considered irregular, the insurer will calculate an average of 2 years of income.
Individual disability coverage is more comprehensive in terms of how a professional or business owner receives compensation. For instance, most professionals, such as lawyers or doctors, are incorporated. As such, they may not pay themselves via employment income, but rather, would draw dividends (T5 earnings). While most group disability contracts excludes earnings derived on T5 as dividends, individual disability contracts include T5 dividend income as insurable.
What Does the Application Process and Coverage Entail?
Because the individual disability insurance benefits offer much more comprehensive coverage, insurance companies require a full and intensive medical assessment as part of the application process. The cost is usually covered in full by the insurance provider. Once everything checks out as required, and a good bill of health is granted, then the individual is eligible for the coverage. However, it’s important to note that not everyone qualifies for individual disability coverage. In certain cases, a medical assessment can identify previously unknown or ongoing health concerns. The insurance company can then either reject the application because the risk is deemed too high or they can raise the cost of the plan.
In certain cases, if this occurs, the individual has the option to set a budget and accept lesser coverage at the set premium. For instance, typically an LTD plan will cover 2/3 of the pre-disability salary up to a maximum dollar value. An individual on a budget can accept a lesser payout amount in order to keep premium costs down.
The good news is that once accepted, disability claims are processed quite efficiently. Since there is such an extensive medical exam upfront, decisions on the claim happen faster than group plans.
Some individual disability plans also include partial disability coverage. This means that if a professional has been diagnosed with a physical or mental impairment by a medical professional and it’s recommended that they only work two days a week instead of full time, the individual will still receive the full monthly income replacement.
5 Options to Consider with Individual Disability Insurance Plans
With every individual disability plan, there are some added options, or ‘riders’ that can be purchased. In order or popularity, here are the top five add-on options
1. Future Increase Option – This protects professionals who are climbing the financial ladder. At the time of policy signing, the individual might be earning and insured for a specific amount of income. Ten years later, if that income rises considerably and they would like to re-adjust the policy to reflect their new earnings, they would need to re-apply for additional amounts of disability coverage which involves another full medical assessment. By choosing this option, there is no need for re-application or a medical exam. They would simply advise the insurance company of their increased salary (prior to any claims) with proof of income and the coverage will be adjusted. It’s an important feature that most professionals consider, especially since it typically costs an additional 8-10% over the base premium.
2. Own Occupation – Typically LTD plans come with ‘regular occupation’ coverage. This means if an individual is a litigation lawyer, but they are no longer able to work in court, the insurance company will consider if they can do something else related to law, such as teach in law school. While it’s not like the ANY occupation disclaimer, it’s still very broad. In our experience, we usually always recommend disability plans to professionals with the OWN occupation coverage option. As mentioned above, it’s peace of mind for professionals who do not want to be subject to other occupations or salaries.
3. Cost of Living Adjustment – This is another popular option that factors in an increase in the consumer price index, AFTER a claim has been submitted and paid out. For instance, if a disability claim has been approved and paid to an individual who is unable to carry out their occupation, and over the course of their recovery, the general cost of living rises, their salary payout will reflect the level of inflation if this option is chosen.
4. Return of Premium – This option is the least common, but can be a great investment for those who don’t mind the increased premium (up to 25% increase in premium). Here’s how it works—if a professional does not claim any disability insurance benefits for 10 consecutive years (depending on the contract), the insurance company rewards the individual by sending them a cheque for an amount equivalent to 50% of paid premiums during that time frame. While there is an additional cost to the premium, this option could pay off in the long-run and be a smart financial investment.
5. Level versus Step Rates – This is an option that affects premium costs. At the time of signing up for the plan, the individual can choose between a ‘Level Rate’ which ensures the rate remains consistent over the duration of the contract or a ‘Step Rate’ which allows the insurance company to reassess the premium every few years, depending on the contract, generally five. Usually, younger professionals or those who want to keep their costs down opt for the Step Rate. Otherwise, those who don’t want the hassle or surprises of rising premiums can opt for a Level Rate.
Work with an Experienced Benefits Consultant to Enhance Your Long-Term Disability Coverage
There are a few more points to cover on this topic, so keep an eye out for the next article on individual disability insurance which will answer some more commonly asked questions such as ‘what happens if a professional loses their job?’ and ‘what are the benefits of disability insurance within industry or professional associations plan?’ In the meantime, if some of these concepts are new to you and you want to re-evaluate your long-term disability coverage, reach out to the BenefitDeck team. We are always happy to answer your questions.
Whether you are with a business, association, or owner operator, we have the solution for your needs.