Last week, we explained the features of group disability insurance in detail. It is used in conjunction with government programs such as EI or WCB to provide financial support during disabilities. Due to limitations in benefits, there are times when it does not provide sufficient coverage. Let’s go over some of the limitations of group disability insurance and how they may affect you.
Benefit payments from group disability insurance are intended to provide basic financial protection. It replaces a percentage of earnings ranging from 50% to 80% and if paid for by the employer, the benefits are taxable. There is also a cap on the maximum dollar amount of monthly payments in the range of $1,500 to $10,000 monthly. To save on insurance premium, employers have opted for benefits on the lower end of the range, and it’s common to see a benefit percentage of 60% and a maximum of $3,000/month.
For low income earners who are just getting by with their basic income, the low benefit percentage may cause extreme financial hardship. High earners who have their benefits capped at $3,000/month will also realize the income replacement is not enough.
Some group plans may only include base salary in calculating the benefit amount and omit bonuses and commission. Add that to the fact that benefits are taxable if premium is paid by the employer, and you may end up with monthly payments that are much less than half of your original income.
Furthermore, group disability insurance is unlikely to contain the cost of living adjustment option, meaning that benefits resulting from a permanent disability won’t be able to keep up with inflation.
Lack of portability
Job change, whether planned or unplanned, can impact your group insurance plan. Benefits are not portable to a new occupation and generally cannot be converted to an individual plan. Group disability insurance coverage will end and you’ll be left without any coverage. If your health is poor, you risk not being able to replace the coverage, or having to replace it with a severely limited policy.
Those looking to obtain an individual disability insurance policy will find that unemployment poses a challenge. Benefits are based on loss of earnings and if you cannot show earnings due to unemployment, you will not qualify for a standard individual disability insurance policy.
Lack of guarantees and choice
With group disability insurance, premiums are not guaranteed and are adjusted on an yearly basis. A negative claims experience from the insurer’s standpoint will result in higher premium to offset the loss. Your employer may decide to reduce the benefits or cancel it altogether if it finds that premium is becoming too expensive.
The group disability insurance plan is negotiated between the employer and insurance company. It’s designed to meet the basic needs of the average employee. Employees have little input on plan design, which affects features such as benefit amount, waiting period, and more. The lack of choice is especially apparent when compared to an individual disability insurance policy, where everything can be customized by the person purchasing the plan.
An example of the impact a lack of choice can have is with the definition of disability. With a group plan, the employer often chooses two years of regular occupation followed by any occupation thereafter. You may be forced to work after two years in another occupation for which you are qualified, even if you are unable to perform the duties of your original occupation. Benefits will then cease since you are back to work.
Reduction of benefits
Disability insurance payments are subject to an overall maximum amount. The maximum prevents disabled individuals from earning more than they did pre-disability and encourages them to return to work if possible.
For taxable group disability plans, the amount of the taxable benefit will be limited to 85% of the pre-disability gross monthly salary, from all sources. These sources include any government programs like CPP, auto plan benefits and compensation you are entitled to receive from a third party due to income loss.
Benefits from any of these sources are considered paid when you are entitled to them, whether or not it has been received. From that moment, the insurance company will have the right to reduce your monthly benefit.
While employer-sponsored benefits are a valued source of financial protection for millions of Canadians, they often create a false sense of security. When it comes to protecting yourself and your family, you should consider supplementing your group coverage with additional insurance.
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