A man considering how much disability insurance he needs

Group Disability Insurance; How Much is Enough?

A Question of Financial Security

Bob is a contented guy. He's got a good job that pays the bills which he actually enjoys going to every day. His job as a Widget Flange Service Tech may never make him rich but he lives fairly comfortably. Sometimes, like many of us, he has too much month at the end of his money but his paycheque generally covers all his financial commitments; food, shelter, utilities, his cell phone plan and even an occasional case of beer.

Bob, being the careful sort, was more than happy to sign up for his company's group disability insurance plan. Bob knew that in the event of a tragic accident or illness that could jeopardize his employment, he would still need income to keep the wolves away from his front door and cable on his TV. Once Bob signed on the dotted line, he returned to his contented ways, confidant he would be covered if he somehow lost the ability to work due to a non-job-related injury or sickness.

Unfortunately, Bob's contentment may have been misplaced. Being a typical male, Bob resisted reading the disability manual completely and failed to understand some of the terms and conditions he had signed up for. He figured once he had the company plan in place, he didn't need to look at the issue of disability management ever again.
And then he hurt his back during a curling bonspiel.

Bob's First Mistake


Unfortunately for Bob, he failed to learn the lesson of one of the oldest chestnuts in the bin; make sure to read the fine print. If he had, he would have realized a number of limitations of the policy he had with the Insurer.

Concern Number One

Since Bob failed to read his disability handbook, he was not aware that if he was hurt and unable to work, his disability payments would be capped at 60% of his paycheque. This is the most widely used percentage, although some plans do go as high as 70%. For higher income earners, there is a flat cap system, too; often set at $5000 per month irrespective of what percentage of the injured employee's lost wages it might be. For Bob, though, 60% of his pay would not be enough to cover his monthly expenses, even factoring in savings from not going to work. Another limitation of the company's policy is that benefits would only be paid for two years, no matter how long he was disabled for.

What He Should Have Done

If Bob had read the manual, he may have realized that 60% of his regular paycheque would not be adequate for his needs and that he should also sign up for the extra insurance coverage offered by the disability carrier to top up the payment. Being already on the employer's policy, the extra insurance would have been quite reasonable to purchase; costing only the price of one of his cases of beer. He could even have opted to receive coverage until he was 65, rather than just the two years of payments the company's plan offered.

Concern Number Two

Bob was also unaware that the policy his bosses were providing had a rather black and white definition of what a disability is. His coverage was for total disablement only, which ceased completely once he returned to work to perform light duties for just a few hours a day. There was no option for partial disability so any work he was cleared to do ended his disability payments. The part-time hours his doctors had allowed him would not come close to paying his bills.

What He Should Have Done

Instead of being satisfied with assuming he had coverage come what may, Bob might have picked up on the fact that the policy which his employer subscribed to did not include the concept of "partial disability". Bob could have reacted by opting for an expanded policy, paying the premiums himself, that would have taken care of him whether he was working part-time or no-time.

Concern Number Three

When Bob found he could not return to his old job, he decided to go into business for himself as a Widget Flange Consultant. That way he could work as much or as little as he wanted. Unfortunately for Bob, however, because the company paid his premiums as part of his wage packet, and Bob neglected to avail himself of top-up coverage on his own account, Bob lost all coverage when he changed jobs. He was surprised how expensive it was for his own policy compared to how much his employer had paid for the same coverage.

What He Should Have Done

If Bob had signed up for extra coverage when he had the chance, through his old company's insurance provider, the Insurer would have had to continue to offer Bob the same policy at the same price as he was used to. Since Bob didn't bother to get his own policy, there was nothing connecting him to the insurance provider once the ties to his old company were severed.


Concern Number Four

When it came time to file his income taxes, Bob had a big surprise in store. There were taxes owing on the disability payments he received. Bob had thought that all disability payments were tax-free but such was not the reality in Bob's case.

What He Should Have Done

The reason Bob had taxes to pay on his disability payments was because his employer was the one that paid the premiums for him. If Bob had paid the premium himself, as some employers require, he would not have had a tax obligation to deal with. Although Bob could not be faulted for allowing his employer to pay his premiums; in fact, it was a perk that he really appreciated, he should have been aware of the tax implications and saved accordingly. There are, after all, few things worse than a surprise tax bill.


At the End of the Day


If you depend on your own resources to make ends meet, having adequate disability insurance is crucial. If you have coverage through your company, it is absolutely vital you read and understand the policy and what it provides in the event of a claim. If the payout would not be enough to meet your financial commitments, topping up the policy would be the smart thing to do. Also, make sure that if an injury occurs and you must begin receiving disability payments, to be aware of any taxes that must be paid as a result. It's better to know what to expect ahead of time rather than receive a nasty surprise should you have a work-ending injury.

Author: Dennis Chamney

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Dennis Chamney has been in the financial services industry since 1987 and associated with the Chambers Plan since 1988. He has spent 8 years on the board of various Chambers of Commerce in his marketing area. Dennis Chamney Insurance Services Inc. specializes in customized group benefit plans for small to medium size businesses, as well as financial planning for business owners.

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