Logic and statistics tells us that the chances of becoming disabled far out strip the chances of passing away.
Disability insurance is too often overlooked by self employed individuals.
There are many shapes and sizes of disability plans on the market today, your advisor will be able to assist you with selecting the right plan for your circumstances.
I will give you a brief outline of what a typical plan looks like. Firstly let me point out that it is very important for you to personally pay the premiums on your disability plan, this will allow your disability payments to be tax free.
If your business pays the premium without accounting this as a taxable benefit to you then the disability payments become taxable in your hands. The most common plan is one that covers you for 66 per cent of your gross income. Remember that this 66 per cent will be tax free if set up correctly. 66% is the maximum benefit that you can purchase as this will get you close to your net income level prior to disability.
The reason the insurance companies have this restriction is that if your disability payments are more than your net income prior to disability then there would probably be no incentive for you to get healthy and get back to work.
Most clients select a 90-day elimination period which means that disability payments only commence 90 days after disability occurs. The shorter the elimination period the more expensive the plan and visa versa. Most plans are purchased to provide disability payments to age 65.
One of the most valuable riders to add to a disability policy is a cost of living rider. This means that your disability benefits are increased every year to take care of inflation thereby maintaining the purchasing power of your income. Another rider to consider is premium refund, meaning that a portion of your premium can be refunded to you if you do not claim on the policy. Some plans will also waive your premiums during disability.
One of the questions I often ask working clients is “what is your most valuable asset?”
The most common answer I get is “my home” or my “RSP”, when actually the most valuable asset in your working life is your ability to earn income. Disability insurance will go a long way to protect you and your family from financial disaster in the unfortunate event of you ever becoming disabled.
Remember to always consult your advisor before taking any action.
Stuart Kirk is a Wealth Advisor with Precision Wealth Management Ltd and an Investment Funds Advisor with Manulife Securities Investment Services Inc. The opinions expressed are those of the author and may not necessarily reflect those of Precision Wealth Management Ltd or Manulife Securities Investment Services Inc. For comments or questions Stuart can be reached at stuart@precisionwealth.ca or 250-954-0247. Website www.precisionwealth.ca
