Law firm employees

What are my choices for long term disability insurance?

There are several types of long term disability insurance. All have their advantages and disadvantages. The following is a breakdown of the major categories:

 

Employer Group Long Term Disability

Most employer provided disability plans are designed to provide employees with a very basic level of protection at a low cost. A small amount of coverage may be offered without proof of good health.

To keep costs down and allow the insurer to offer benefits without evidence of good health, these plans can often be very restrictive in the total amount of benefit they offer. If you are relying on employer group long term disability protection as your sole source of insurance protection, you need to be aware of the shortcomings inherent in these plans. Here are some of the important things you need to know if you rely on this type of insurance contract.

Is the benefit amount enough?

First, open your employee booklet and take a good look at what you’ve got. Many group benefits state that your benefit is based on 66.67% of net earnings up to a maximum and then a smaller percentage, say 50% of the balance, to an overall maximum. However, most employer provided plans put a cap on the maximum benefit available, which is lower than most high-income earners may otherwise be eligible for.

You should also look for wording that describes “eligible income” for the purpose of determining your benefit. You may be surprised to learn that some contracts will only insure your regular salary. Income from bonus payments, for example, may not qualify. Net income is often defined in group policies as “income after taxes and other deductions such as Canada Pension Plan”. You are advised to do the math. The amount you are actually entitled to receive may be a great deal less than you need if you are in a higher income tax bracket.

Offsets

Look for “Direct Offsets” and “Indirect Offsets” in your employee booklet. Should you go on claim, these items, if applicable, will be deducted from your monthly benefit.

All Source Maximums

While on claim, your benefit will be subject to an “all source maximum”. This is a cap on the amount of benefit you are entitled to receive from all sources of income. If you have a non-taxable plan, most plans will reduce your monthly benefit by the amount, if any, by which the total monthly income from all sources exceeds 85% of net monthly earnings prior to being disabled. Better plans offer a 100% all source maximum.

Definition of Disability in Group Plans

You should be aware that most group policies contain two definitions of disability. For the first two years the policy will pay benefits if you can’t perform the regular duties of your own job. It may be described as “own” occupation. After two years on claim, the policy will continue to pay benefits only if you are unable to perform any job. This is known as an “Any” occupation definition and is the most restrictive definition of an eligible disability.

Requiring you to prove you are disabled for Any Occupation after two years of disability is intended to keep costs down by reducing the number of eligible claims. In theory, you could be re-trained during those initial two years and be ready to re-enter the job market to perform any job for which you are reasonably trained and educated. While it is an exaggeration to say that Any Occupation means “if you can sell pencils on a street corner, you will lose your benefits”, the definition does offer the insurer significantly more opportunities to take you off claim.

Control

Your coverage is controlled by your employer and the insurer, not by you. Benefits can be reduced or even cancelled without your permission. Should you leave your job, in most cases, you will not be able to take your group disability insurance with you. The result is that you could suddenly be left without any disability protection if your health prevents you from buying new coverage elsewhere.

Conclusion

While group disability insurance has several drawbacks, it’s not entirely bad. It is a great tool for employers to reward and retain employees. It also offers a level of protection for people who might not otherwise have the resources or the good health to buy disability insurance on their own. However, if you are covered by one of these plans and can afford it, it may be wise to consider a purchase of additional disability insurance on your own.

 

Association Plans

Many professional associations offer a group disability insurance plan exclusively to their members. This is often the result of a negotiated arrangement between the association and an insurance company. While many association plans are essentially the same as an employer group sponsored plan (please read above) coverage is sold to individuals and enrolment is voluntary.

As a rule, insurance plans offered by associations are negotiated by a board of volunteers and the insurer is responsible for all aspects of plan design, pricing and marketing. Members receive a special rate and in exchange for an endorsement by the association, the insurer pays a percentage of every premium dollar collected back to the association.

While many association offerings suffer from the same shortcomings of an employer plan, there are some significant exceptions to this rule that represent excellent value and protection.

The Canadian Bar Insurance Association (CBIA) is one such example of an organization that is significantly different from most other association programs. The CBIA blends the best contractual protection of an individually owned insurance policy with the lower price of an association group plan.

To learn more about the CBIA Disability Income Insurance Plan, please click here.

 

Individual Plans

Individual plans, as the name implies are disability insurance policies that you purchase on your own. Like an association plan, enrolment is voluntary and subject to proof of good health.

There are three main types of Individual Disability Insurance plans, Non-Cancellable, Guaranteed Renewable, and Conditionally Renewable.

Non-Cancellable

The non-cancellable plan is the most beneficial for the insured, the most strictly underwritten, and the most expensive. Non-cancellable disability policies put the most control in the Insured’s hands. As long as the insured pays the premiums as they come due, the insurance company:

  • Cannot cancel the policy, regardless of changes in the insured’s occupation or health. In essence, the insured owns the contract and has the unilateral right to cancel it.
  • Cannot change any provision or add any restriction to the policy. If the company changes the provisions for its policy in the future, it cannot go back to existing policies and make any changes to policies in force without the agreement of the policyowner.
  • Cannot increase the premium or add any additional charge for the policy, without the agreement of the policyowner.

Because the insurance company cannot modify a non-cancellable policy after issue, it is reasonable to assume that they will be very careful during the pricing and the underwriting processes. Any mistakes made at the time of sale may obligate a company for the duration of the contract.

The non-cancellable provision is probably the most important advantage offered by individual policies in comparison to Group Long-Term Disability plans.

Guaranteed Renewable

A disability insurance policy that has a guaranteed renewable provision offers the same first two guarantees that a non-cancellable contract offers. That is, the insurance company cannot cancel the policy and it cannot change any provision or add any restriction, providing the premiums are paid on a timely basis. However, the company does reserve the right to change the premium for the policy.

Unless provided for in the policy, the company cannot normally single out an individual policyholder and raise only his/her premium. The company can only change the premium for all insureds of a specific class who own the specific contract that is being changed.

Classes could be specified by a number of criteria, such as: age, gender, specific waiting periods, benefit periods or policy type to name a few.

The guaranteed renewable contract offers the insurance company some flexibility. It may increase the premium if it is suffering from poor claims experience. As as result, the company is generally less restrictive in its underwriting (sometimes offering policies to individuals who do not qualify for non-cancellable coverage) and usually charges a slightly lower premium since it can raise the rates at a later date.

Conditionally Renewable

Conditionally renewable policies give the insurance company the most flexibility in making changes to policies in force. The policy usually does not provide for any premium or policy provision guarantees and, in fact, does not guarantee the actual continuation of the policy. As with guaranteed renewable, any changes or cancellation that the insurance company initiates would have to be done by class in most cases.

Conditionally renewable policies are often used as a last resort for people who cannot qualify for non-cancellable or guaranteed renewable policies due to poor health or working in a high risk occupation.