Group Insurance: Are You Really Protected?

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When it comes to disability insurance, many employees think they are well covered by their group benefits at work. A closer look reveals just how insufficient some of these plans really are.
Recently, in an interview with one of our newest clients, the question of income protection and disability insurance came up. In typical fashion, the client said “Oh yes, I have that at work.” We suggested that he bring in a copy of the benefits plan, which he did. At the next meeting, to the client’s surprise (but not ours), their group plan only covered accidental life insurance — not disability.
Generally, when new employees are hired by an organization, they receive a booklet from the company’s group insurance carrier, delivered by the human resources person. Unfortunately, most HR managers do not go into great lengths to explain the benefits, nor are they qualified to do so. The employee is left figuring out the coverage on his or her own. In many cases, this leads to a potentially dangerous misunderstanding of the benefits.
Group Disability Misconceptions
Group disability coverage is probably one of the most important benefits — and it’s the most difficult to understand. Disability insurance is there to protect the most important asset you have: your ability to earn an income. For example, a 35-year-old employee earning $50,000 a year to the age of 65 can expect to earn $2.194 million (assumes wage growth of 2.5 per cent per annum). In general, this far surpasses the combined value of most Canadians’ cars, RRSP and houses. Statistically speaking, 40 per cent of all wage earners between the ages of 35 and 65 will suffer a disability lasting at least 90 days prior to retirement. The average duration of a disability is 3.1 years.
Some group plans do not include disability insurance, but if you do have group disability coverage in your plan, the coverage on average is approximately 67 per cent of your gross income. There are several advantages to these plans. First, you are not required to submit any medical evidence of health. Second, the premiums are quite affordable because all employees of the plan share the cost. But that is where the advantages usually end.
Problems arise because group disability coverage only benefits you in the event of a total disability. There are no benefits paid for a partial loss of pre-disability income. The coverage seldom includes inflation indexing while on claim.
The most significant drawback is the limitation of the benefit coverage to two years under one’s “own occupation” definition, after which the definition to qualify for benefits falls under the “any occupation” criterion; otherwise, benefits cease.
For example, if you were an electrician and lost the use of a hand, group disability would provide coverage for only two years. After those two years, if the group carrier can prove that you can work answering a telephone with a headset, then group disability payments would stop.
Insurers usually interpret this to mean that you will receive policy benefits only if you are unable to carry out any occupation at all. It is a high threshold to pass, since few people are so disabled that they cannot carry out any occupation at all ever again.
Boosting Your Protection
Is there a solution? Yes. Individual disability insurance coverage can supplement and wrap around the group coverage to enhance or replace benefits not covered in a group plan. This individual coverage may:
› extend the “own occupation” coverage definition beyond two years to age 65;
› add partial benefit coverage to cover partial loss of income due to accident or illness;
› add inflation indexing benefits to keep the benefit from falling below the cost of living.
A big advantage is that, while group premiums can increase, individual coverage has level cost premiums. Also, group coverage is not portable should you change occupation or employment, whereas individual coverage is portable once in force. And some individual plans allow you to receive a portion of your premiums back if you don’t make a claim.
It’s important to point out that individual coverage will cost more than group coverage. However, if it ends up costing only a few dollars a day to protect your income, it’s a small price to pay. In addition, while the premiums paid for individual disability coverage are usually not tax deductible, the benefit payments while on claim are tax free.
Group contracts may be different. For example, under some group policies, the employer may pay a portion of the costs, in which case the disability payments become a taxable benefit. In addition, it is important to note that most group plans only cover base salaries and do not include commissions, profit sharing or bonuses, whereas an individual plan can include these. Group insurance contracts vary from organization to organization and so do the coverage benefits, so for the safety of you and your family, it is critical that you seek out a qualified insurance professional who is well versed in group and individual contracts.
The Gamble of Not Knowing
When it comes to insurance, ignorance is not bliss, as evidenced by our client mentioned on the previous page — the one who thought he had disability coverage from his group plan when in fact he had none at all. Fortunately, he and his family are now fully protected and he was grateful that he spoke with us. Without a professional review you could be gambling with your most important asset — you.
Steve Bokor, CFA is a licensed portfolio manager and Ian David Clark is a certified financial planner with PI Financial Corp, a member of CIPF.