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While reviewing the financial documents during a meeting with a couple in their forties who wished to create a retirement plan, I didn’t see any disability insurance for one of the spouses.
He had a group disability policy with work, but she was self-employed and didn’t have one. She mentioned they had examined a disability insurance policy in the past, but it was too expensive.
Yes, disability insurance policies can be expensive, as all insurance can be. I have disability policies myself, and Sandi has a group policy at work.
Why should they obtain a disability policy on the uninsured spouse?
In the article ‘No Portfolio is an Island, A Total Wealth Approach to Asset Allocation’ by David Blanchette and Philip Straehl of Morningstar, they reviewed a holistic view of Total Economic Wealth. It is broken down into four key areas as follows:
- Financial Capital: investments, RRSPs, TFSAs, and savings
- House Wealth: your home
- Pension Wealth: pension plans and CPP
- Human Capital: your ability to earn income
Typically during their working years, people will transfer their Human capital via savings and investing to the other three categories, Financial Capital, House Wealth and Pension Wealth, so at some time in the future, they can make work optional.
How does Disability Insurance fit in?
So, at age 40, if she is earning $150,000/year and plans to work for 20 more years, the value of her Human Capital could be $3,000,000 today. For this couple, it is their largest asset.
We could craft the best financial savings and investment plan ever. However, if she is unable to work their financial goals would be derailed. So how can disability insurance fit into your financial plan?
Excerpts from Preserving Wealth:
“How about disability insurance?” Alice asked. “Do you think we need any on David, or are we okay now that we have his inheritance?”
“You’re getting too sharp for the rest of us,” Uncle Wayne replied. “I almost forgot about that, along with most of the rest of the population.”
Sally perked up and once again displayed her considerable knowledge on the subject. “Everyone should have disability insurance. If you can’t perform your job due to an accident or illness, it pays you up to 65% or 70% of your regular income. Most people who work for large companies may have some disability coverage through group plans, but the coverage may be limited, and you might want to consider an individual plan custom-tailored to your needs.”
“Well now,” I said, “what does our insurance expert have to say about Employment Insurance and the Workers’ Compensation Plan?”
“These are very basic plans, Jack. A pay-out from EI only lasts from about fourteen weeks to a maximum of forty-five weeks, depending on where you live, while Workers’ Compensation only covers on-the-job accidents, and besides, when you look at the deficits so many governments are racking up, do you really think you can rely on them to take care of you?”
“I wouldn’t,” I laughed, “unless of course I was a Member of Parliament and could give myself an indexed pension, where I get a lifetime guaranteed income that can increase every year with inflation when I retire.”
“Do you think I need disability insurance?” Mark asked.
Sally was starting to run out of patience. “If you couldn’t do your job, a disability policy would pay you a monthly income so you could cover your bills, buy food, and put gas in the boat. Perhaps you’d rather use your inheritance to pay for those things and risk the comfortable retirement you had planned while leaving behind less money for your kids. It’s your choice.”
“Okay then,” Mark asked, “under what circumstances would I not need disability insurance?”
“You could forgo a disability policy if your financial assets would produce approximately the same income that you earn on the job. Your ability to earn an income over the years is really your largest asset, and it should be insured. By the way, at your age, you have a greater chance of becoming disabled than you do of dropping dead.”
“Isn’t that a lovely thought,” I said.
“What about our policies through work?” asked Sandra.
Uncle Wayne handled this one. “If I were you, I would find out what the monthly benefit would be, and how the policy defines the word ‘disability.’ If the policy doesn’t provide about 65% of your current income, you should at least investigate buying an individual plan to top it up. Assuris protection provides guarantees for disability policies, but only up to $2,000 per month per payment. So as we discussed in the case of life insurance, you should not only look at the premiums but the strength of the insurance company.”
Sally grabbed another cup of coffee and asked Uncle Wayne, “What do you think about critical illness insurance? My friend mentioned it to me.”
“Well Sally, critical illness insurance pays out a lump sum if you have a heart attack, stroke, or develop cancer, as well as covering some of the other medical issues, depending on the company. I’ve had a few friends who had prostate cancer and it has paid out, which was valuable as it covered the short time they were off work. It’s something that I think you all should review with your financial advisor and see how it could fit into your plans.”
For more information, you can refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing, and transferring wealth by Jack Lumsden, MBA, CFP®
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Jack Lumsden, MBA, CFP® Financial Advisor, Assante Financial Management Ltd.
This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see me for individual financial advice based on your personal circumstances. The information provided is for illustrative purposes only. Commissions, trailing commissions, management fees and expenses, may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Please read the Fund Facts and consult your Assante Advisor before investing.
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