If the income earner in the household became disabled, it would become very difficult to meet already high mortgage payments. (Photo: 123RF)
GUEST EXPERT. Buying a property these days is quite a challenge, especially for a single person or a couple with a single income. Home prices are at record highs and mortgage payments are higher than they were a few years ago, due to higher interest rates.
If the income earner in the household became disabled, it would become very difficult to meet already high payments. Add to that the other bills, which are also increasing due to inflation, and retirement savings could well be put aside… It’s a trap we don’t want to fall into.
Let’s take the example of an employee who has an annual employment income of $100,000. She has no other income and has a group insurance plan with her employer. Let’s see the situation when this plan includes and does not include disability insurance:
| In the presence of group insurance for which the employer pays the premiums | Sans assurance collective | |
| Income before taxes | 100 000 $ (brut) | 100 000 $ (brut) |
| Group insurance (assumption of coverage at 70% of income) | 70 000 $ (brut) | 0 $ |
| Need before tax | 30 000 $ (brut) | 100 000 $ (brut) |
| Income after tax (assumption of a marginal rate of 40%) and social charges | 12 731 $ (net) | 67 731 $ (net) |
| Need for additional disability insurance | $1,061 net/month | $5,644 net/month |
Generally speaking, people without group insurance at work should take out personal disability insurance corresponding to their income after tax and social charges. We subtract the latter, because insurance benefits would not be subject to them.
Some additional things to consider
| Impact on the need for disability insurance | |
| Contributing less to the Quebec Pension Plan (QPP) could result in a shortfall in retirement, depending on the duration of the disability. | Increase |
| Group insurance does not cover annual bonus amounts or overtime. This should be taken into account if a person relies on them to pay their bills. | Increase |
| In our example, there would be no earned income for RRSP purposes, so no RRSP contributions possible, nor tax savings in this regard. | Increases, but the person can save an equivalent smaller amount in TFSA as an alternative. |
| If the person has a retirement plan with their employer, you must check whether their contributions and those of their employer are exempt during their disability. | Decreases if contributions are exempt. |
Why include retirement savings in a disability needs analysis? Since disability insurance benefits generally stop at age 65, if there are no accumulated savings at the time of retirement, the person will only be able to rely on government pensions to live on, for example those from the SAAQ, CNESST or RRQ. The QPP can pay a disability pension, under certain conditions, but it is only payable up to age 65. Then, it is replaced by the QPP retirement pension, which could also be reduced, because disability insurance benefits are not eligible earnings for the purposes of the QPP retirement pension. Thus, in disability insurance, we aim to replace not only the cost of living, but also retirement savings.
Ultimately, even with disability coverage at work, the person in our example ends up with $1,000 net less per month. Would she be able to live well and save with this less amount? There is room for doubt, especially with the current situation. Fortunately, there are a few options for managing this risk.
Generally speaking, the most personalized protection is likely to be that purchased individually. It may include clauses specific to the person, such as the definition of disability (the choice will depend on the person’s profession), partial disability (if for example you lose 20% of your income while not being totally disabled), the future insurance option (increasing your protection without providing proof of good health), indexation to the cost of living during disability, etc.
A person who needs additional disability protection could also turn to disability insurance on the mortgage loan. For example, this person could cover half of their mortgage payment, at a higher interest rate. Its main advantage is generally the absence of coordination with the employee’s group plan according to its definition. This means that the total benefits the disabled person receives may exceed a pre-established percentage of their income without taking into account the disability benefits from the group plan. However, the person must generally also take out life insurance, even though they do not necessarily need it (or prefer to fill their need with personal life insurance).
Ultimately, disability insurance is the most important protection: it protects your greatest asset, your ability to generate income! This is even more important in the case of a single-income household. However, this protection can be difficult to obtain if you have already had a health problem, because be aware that even if you exclude the problem in question from the protection, the insurer can still refuse you! In any case, do not wait until you have a mental or physical health problem before consult a financial planner to do a complete analysis of your insurance needs.
Charles Hunter-Villeneuve, M. Fisc., Pl. Fin., TEP
2023-09-15 16:15:14
#Disability #insurance #important #protection
