Tuesday, February 27, 2018
Could You Survive on Less Than Half Your Income?
Everything is more and more expensive all the time. It seems as if our paycheques are constantly struggling to keep up with the cost of living. In situations like this, it becomes more and more important to protect the money that we make. I see it every day. Workers coming into work sick or injured because they cannot afford to take a day off. It can be very scary knowing that if you miss a week of work you won’t be able to pay your bills. What is even scarier is wondering what would happen should you get very sick and not be able to work for a long time, or ever. The financial consequences of injury or illness are almost as great as the emotional and psychological ones. One major problem with protecting our income is that it can be confusing. Today I will go over some of the questions surrounding income protection insurance. Hopefully, it will clear the air and help you discover what is important to you and your family.
Disability Insurance
What is Disability Insurance?
Disability Insurance (DI) provides you with a monthly income should you get hurt or fall ill. The duration of payments is a set amount of time and begins after a standard waiting period. The most coverage you can receive is 85% of your earnings. This is so that the option of working is always more rewarding than being on a disability claim. You can have coverage from multiple sources include your employer, the government, and personal coverage. In order to qualify, you must have documented proof of your ailments. There are different definitions of coverage. Some allow you to claim benefits if you cannot perform your specific job. Most only allow you to claim benefits if you cannot perform any job period. DI coverage is extremely important because while your income may stop, your monthly expenses certainly do not. Understanding your current situation is very important.
Why should I get DI?
Missing work is a very expensive issue, especially when you have people that depend on your income. Protecting your income is important because most people either go into debt or deplete assets when they have no income coming in. This could mean not achieving your goals in life like education for your children, home ownership, and even retirement. Losing retirement funds is extremely detrimental because of the tax implications and extended time it may take to achieve that goal. Another reason why personal DI coverage is important is the fact that government and workplace benefits often fall short. Employment Insurance (EI), only covers you for 15 weeks and is at most 55% of your income. Worker’s compensation only covers you if the injury occurs on the job. CPP-Disability will only cover you if the injury or illness fits the definition of “severe and prolonged,” so your ailment more than likely won’t fit into that class. All of these forms of coverage are usually far less than it would take to meet monthly expenses. The same is true with workplace coverage. It often falls into the 50-65% range of income, creating a huge gap. That is if your workplace offers coverage at all.
Why shouldn’t I get DI?
In my mind, there are only 3 reasons not to get personal disability insurance coverage.
1) You do not qualify
If you are unable to get personal disability coverage because you are already sick or injured then that is definitely a reason.
2) Your workplace covers you adequately
This is rare, but some workplaces can cover you for a large amount of your income. If you have determined that the amount of coverage they offer is enough for you and your family to achieve its goals should the worst happen, then getting personal coverage may not be necessary. One thing to think about is if you were to leave that workplace, that the coverage would not go with you.
3) You cannot afford it
If your budget is stretched too thin as it is, personal disability coverage may not be a priority. I think it would be worth looking into to see if it is something that you can pursue in the future.
Is it worth it?
This answer is different for everyone, but, yes, it is. A major reason people do not reach their retirement goals is that they have experienced a traumatic injury or illness in their lifetime. Having this form of coverage does not make you rich and it is not for those wishing to milk the insurance company. It is there so you can continue along with your financial goals, even if something goes wrong. Much like life insurance, the peace of mind alone will often make it worth it.
Disability insurance: Preparing for the worst – Money Sense
Critical Illness
What is Critical Illness Insurance?
Critical Illness (CI), is a form of coverage that pays you a lump sum should you contract a serious illness. The 3 conditions it covers are heart attack, cancer or stroke. You can also add additional benefits to cover over 20 more conditions. CI was invented as a form of insurance to provide a benefit to those wishing to alleviate the financial burdens that occur when contracting these conditions. The lump sum payment is paid out if you survive for 30 days after contracting the illness. Unlike DI, the amount of coverage you have can be any amount you wish. Obviously, the premiums are higher should you wish to have more coverage.
Why should I get CI?
The costs associated with contracting a serious illness are greater than you would imagine. Although we have universal healthcare in Canada, much of what is needed during treatment is not provided. These costs include experimental medication, travel costs, lodging, and of course missed work. It is also important to understand that CI pays out before any other form of insurance. For CI you only must wait only 30 days for payment whereas with an employer or government DI plan you must wait anywhere from 90-120 days for payment. The use of experimental drugs and treatments are the real scary one to me. Given the choice of traditional methods with little success or experimental methods with possibly greater success, I would opt for the latter. The problem is that many non-traditional methods of care are not covered by our health care system. This could be devastating for those who cannot afford the treatments that may save their lives. CI also can fill the gap of DI coverage. As mentioned, DI can only cover you up to a maximum of 85% of your income. CI is a great tool for filling that void.
Why shouldn’t I get CI?
There are only a few reasons not to get CI in my opinion. The first, like with DI, is if you do not medically qualify. If that is the case, then there is not much you can do. The second would be if you have an extensive amount of emergency savings, separate from your retirement and investment accounts. Even in that case, you would have to weigh the usefulness of depleting emergency savings versus the small cost of a monthly CI premium. The last reason would be that you simply cannot afford the premium for CI coverage. Like DI, I would still find out where I stand with a needs analysis and then see if I can fit in some super cheap coverage until I can afford the amount I need.
Is it worth it?
In my opinion, yes. Knowing that you can cover your expenses should you get seriously ill is huge in my mind. 1 in 3 people will contract a critical illness in their lifetime. Those are not good odds. We all know someone touched by cancer and the outcome is often devastating. The good news is that more people are surviving the diagnosis of a critical illness, about 4 in 5. The bad news is that the financial impact is often just as devastating of the condition itself. Getting a lump sum of money to seek treatment, relax and recover, or simply cover expenses is a huge lift during that scary time.
Critically Uncovered – YouTube
I preach a lot about saving and investing. The reason I do is that it is impossible to achieve goals unless you save your money and invest for the future. The sad thing is that none of that matters should you become seriously ill. That is where these forms of coverage come into play. They both provide you with income when you need it most. I certainly would rather focus on my health when I get ill than having to focus on my monthly bills.
Thank you for tuning in today as we continue Insurance Week at Budget Boss. Don’t forget to join us tomorrow when I discuss Travel and Health Insurance. If you would like an income protection analysis, please do not hesitate to contact me at joe@budgetboss.ca. Have a great day Bosses!
“The foundation of success in life is good health: that is the substratum fortune; it is also the basis of happiness. A person cannot accumulate a fortune very well when he is sick.” – P. T. Barnum
Email – joe@budgetboss.ca
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