Why your group disability coverage may not work for you

Erin McKee
Insurance Columnist

You’ve heard it before and it remains true here, the best ideas are often the simplest.

In this article, I will lay out what disability coverage you’re already paying for at work and why you should try to qualify for an individual disability policy if you’re an executive or dealer principal.

If you do it right, you can upgrade for little extra cost.

Before going into the pros and cons of group disability coverage, it is important to understand how a group policy works.

The Basics
Group LTD policies use the pool of employees to spread the risk over a large number of people (your staff). Using this method, group LTD plans typically offer between $3,500 and $10,000 (to the owner/executive classes) monthly income benefit with no medical questions.

This is an advantage to individuals who have a medical history that would otherwise result in a decline of individual coverage. However, if you’re able to medically qualify for an individual policy, it’s certainly worth looking into.

An estimated 3.8 million adult Canadians reported being limited in their daily activities due to a disability in 2012. This represents 13.7 per cent of the adult population. One in three people, on average, will be disabled for 90 days or longer at least once before age 65. The average length of a disability that lasts over 90 days is 2.9 years.

More than half of Ontario dealerships have LTD in their group benefits package at work. They are meant to cover you in the face of a serious illness or disability.

The premium for group LTD is different than the rest of your benefits, most of the time it comes out of your pocket rather than the companies. This is your money and it should be spent wisely.

You’ve worked hard to grow and maintain the dealership. You have a substantial salary and a family or lifestyle that requires that salary to continue.

If you made a claim, would your LTD max cover 60 per cent of your salary? Most plans will not.

Under the “any-occupation rider” and “total disability rider,” the contract definitions used in almost all group plans, if you can push a broom or answer a phone, you will not be paid.  

It will not matter that you can no longer perform the tasks required to perform your typical job. I’m sure you agree this isn’t the kind of plan suitable for a dealer principal or an executive within a dealership.

The coverage is not high enough and will not pay it out like you think it will. So what is the alternative?

Strategies
A knowledgeable broker should make suggestions to improve your programs exponentially. Basically, you can get a credit for the standard plan premium and use it toward a plan suited to your needs. In short, this keeps you properly covered.

What you will be looking to replace your group LTD with is an individual disability insurance policy. Of course, you must keep the former in force until the latter has been approved and is in force, before surrendering it to ensure no lapse in coverage.

Apply with a carrier who has the most generous definitions on their riders.

As an executive at a higher income level than most, you need the “own occupation rider,” “coverage to age 65” and the “residual disability rider.”

A popular optional rider that high earners like to add to their own DI policy is called the “return of premium rider” (RoP). This rider gives you 50 per cent of the premium back every seven years.

Since it’s an insurance product, it comes to you tax-free and even generates an average equivalent of 10 per cent in interest. As we all know, 10 per cent guaranteed interest in today’s market is an incredible deal.

The fact that it’s paid out to you tax-free only makes it a logical addition to your policy.

Let’s compare a group LTD policy to an individual DI policy. The insured in this case study is the dealer principal of a group of dealerships and earns an annual salary of $400,000. They are 50-years-old, healthy and a non-smoker.

 

Should they ever face a serious illness or disability, the monthly income they would have to replace would be $33,333 of which a maximum of $20,000 can be insured.

The dealer principal is highly underinsured in the group LTD scenario. They could not be on claim unless they were completely unable to do any work at all.

They could not receive any benefit until after waiting four months and would only stay on for two years.

Should the dealer principal carve themselves out of the group LTD, they would be able to take that $4,100 and put it toward their annual premium of $21,776, only needing to pay $17,676 towards the premium.

They would receive the exceptional definitions of coverage, which I have detailed below, and stay on claim until age 65. If a claim were never made, they would get back 50 per cent of the premiums.

The riders that should be included for an executive, like a general manager or dealer principal, whom I’ve included in the summary above are:

Own Occupation Rider: A total disability claim can be based on you either having a loss of income or an inability to perform the important duties of your own regular occupation. You will be considered to be totally disabled even if you engage in any other gainful occupation, as long as it’s not the same as before.

Residual Disability: A claim can be made even if you’re not totally disabled. The claim is based on your loss of earning power. Your benefit is proportionate to the earning power you've lost regardless of how many hours you work. For example, if you suffer a 70 per cent loss of pre-disability income, you'll receive 70 per cent of your total disability benefit for as long as you are disabled (up to the maximum benefit period specified in the policy).

50% Return of Premium: You have the opportunity to receive a benefit whether or not you suffer a disability. This rider provides for the return of up to 50 per cent of the yearly eligible premium paid or waived under your policy if you are not disabled or claims have been minimal.  Return periods are non-overlapping seven consecutive policy years where conditions have been met. Returns in this scenario will earn a 10.2 per cent tax-free, guaranteed, rate of return.

As an intricate part of a company, your inability to perform your job is the largest threat that faces your business. People may often think they have lots of money and don’t need to worry about insurance.

But if the worst scenario happened, why use your money when you could use the insurance company’s money for pennies on the dollar?

This article is not meant to discredit this coverage for your employees, as the group LTD coverage and definitions will suffice their needs as much as possible at a premium that remains affordable. If you’re reading this as a GM, C-level employee or are a dealer principal, ask your HR department what you’re paying for your LTD.

Find out what definitions are attached to the coverage. Then, get in touch with an insurance broker who brings you good ideas and knows your industry and ask what those funds can buy you in the individual insurance market.

Erin McKee, business manager of Firstbrook Insurance Group, is an insurance broker and manages all individual life and disability insurance clients in the firm. She has extensive experience working directly with dealer principals and their families. Reach her at 416-486-1617 or erin@firstbrook-insurance.com