Why Your Group or Association Disability Insurance May Simply Not be Enough
Millions of Canadians are insured through their employer with group disability insurance policies. Thousands more opt to take coverage through their association plans, such as the Ontario Medical Insurance (OMA insurance) or Lawyers Financial (previously known as The Canadian Bar Insurance Association or CBIA). The question most are not able to unequivocally answer is “If I get sick or are injured will my group or association disability policy pay?”
Group disability insurance and many association sponsored disability policies should be similarly viewed to taking travel insurance with your credit card; while something is certainly better than nothing, in order to ensure comprehensive and total coverage an independent policy is recommended.
Various studies have shown that there is nearly a 1 in 3 chance of becoming disabled for more than 90 days before age 65. Some of these disabilities can last months or even years. This makes ensuring you have the correct policy vitally more important.
Below are possible reasons to consider having an independent policy:
1. Coverage cannot be Cancelled (ie Cancelable policy vs Non-Cancelable Policy)
Just a few short years ago, lawyers with group disability insurance with the CBIA were surprised to learn they no longer had coverage with their previous insurer (in this case Sun Life Financial). Thankfully for them, Manulife Financial opted to provide a continuation of coverage. This however highlights a major concern with group or association coverage. If the insurer deems the risk of a group too high they can opt to cancel coverage or reduce benefits. An individual policy which is non-cancellable ensures that coverage will always be there, provided premiums are paid. The insurance company cannot cancel coverage or reduce the benefit, no matter what the reason.
2. Premiums are guaranteed
Whether it is a group insurance plan offered through an employer or an association plan, group disability coverage premiums generally renew every few years. While the insurer may continue the coverage, they may opt to significantly increase the renewal premium. This can make coverage significantly more expensive and create cost uncertainty for the future. With an independent policy your premium can be secure without risk of ever increasing for the same amount of coverage.
3. Disability definitions far more extensive
Generally a personally owned disability insurance policy will have far more generous definitions as it relates to a disability. What a group policy defines as a “disability” can be far different than an individually owned, comprehensive disability insurance policy. This can be vitally important if one is sick or injured and unable to work. Often with a group plan you are required to be 100% disabled and unable to work your specific job, whereas an individual plan will often pay a percentage of a disability.
4. Ability to include “Own Occupation” rider clause
Many group plans will stop paying after a certain amount of time has lapsed even if the employee is unable to work in their previous occupation. Individual plans with the “own occupation” rider/benefit (aka “own-occ”) ensures that the policy will continue to pay if you are disabled and unable to work in your previous occupation, but able to work in another. Note, most association plans do include this benefit as well.
A recent study showed a worker is projected to have 10 different jobs before the age of 40 with the expectation that this number will grow further. With so many job changes, coverage can be drastically different from one employer to the other, with some employers not offering any coverage at all. Similarly, an association plan may require an active member to continue coverage. An independently owned policy is 100% portable independent of current job.
Given group and association disability policies are based on the collective risk of the group, this risk and the costs associated can significantly increase in time. Furthermore, due to the tiered cost structure of many group and association policies, premiums which can be lower in earlier years can be much higher in later years. This is similar to group life insurance which has 5 year age bands, with costs long term much higher than an independent policy. For example, the OMA insurance mentioned above offers insurance policies with 5 year cost guaranteed bands and return on premium. At first a doctor may believe this to be the most cost effective solution, however on further review they often realize an individually owned policy not only has far greater benefits, but actually is significantly less expensive long term.
7. Ability to add additional riders/benefits
Beyond the own occupation rider, individual plans allow one to add several optional benefits to enhance the coverage. While some association plans will allow some of these riders to also be included, an individual policy is typically far more extensive in the options available. This includes a return of premium rider which will refund 50% of premium paid if no claim is made after a specific amount of time. Some other benefits include future purchase option (or Guaranteed Insurability Option aka GIA) which allows one to purchase additional disability insurance in future, Cost of Living Adjustments (COLA) which provides an annual increase to the disability benefit (typically based on inflation) and Life Insurance and Critical Illness insurance riders which allows adding additional insurance coverage to a disability policy.
8. Taxation of benefits
In the case of group insurance, if your employer pays the premium on your group disability policy, your benefit is taxable when you receive them. Alternatively if you group policy is paid pre-tax dollars the benefit is similarly taxable. An individual policy paid with after tax dollars provides a benefit that is also tax free. Note most association plans are similarly paid with after tax dollars and would also provide a tax free benefit.
These are some of the points of consideration when looking at complimenting a group or association disability insurance policy with independently owned coverage or replacing it outright. There are many factors to consider and individual needs vary.
It is best to contact a disability illness insurance broker to learn your about your options and design a plan that best suits your needs.
For all financial planning and insurance related matters, contact Protect Your Wealth today to learn more! We proudly service clients in Ancaster, Burlington, Dundas, Hamilton, Oakville, Waterdown and the surrounding areas.