Many Canadians rely on insurance coverage through their employer for personal health and income replacement needs, but sometimes additional coverage is required. Understanding the benefits available through your employer is vitally important to ensure your household’s financial goals are not sidelined due to illness, injury or premature death. This article will help you understand if you’re truly covered.
You probably need more life insurance than your group plan offers
While 62% of Canadians have life insurance through their employer-sponsored group insurance plan, 53% of Canadians between ages 30 to 50 have no additional life insurance coverage beyond their group plan.1
Most group life insurance policies are based on one to two times your salary. Rarely is incentive compensation such as bonuses or other compensation such as overtime, included in the formula.
For many households, a year’s or two years’ salary would not sustain them for long. Take housing as an example. According to the Canada Mortgage and Housing Corporation (CMHC), the average value of new mortgages in Alberta as of October 2022 was $339,860.2 And when people take out loans or mortgages jointly, each borrower is liable for the total amount of debt outstanding. So upon the death of a co-borrower, the survivor is still responsible for the full remaining balance. For working Canadians, a year or two of salary may not be enough to ensure their estate can pay out their liabilities, which often includes a mortgage.
Are your loved ones covered if your income is lost?
Coverage may be needed to provide your family with income replacement exceeding the one-to-two years’ salary offered under a basic group plan. Determining how many years requires a deeper dive into your household’s particular lifestyle and lump sum needs. A couple of questions to consider may be:
- Do you have dependent children? If so, how many years are they expected to be financially dependent on you?
- What is your partner's current income and future earning potential? If your household has significant income disparity, your partner may never be able to replace your lost income with their own earned income.
- Are there lump sum expenses in the near future that would normally have been funded out of your earned income?
Disability coverage is just as important as life insurance
Statistics show survivable illnesses are more likely to occur than death during our working years. Here’s a look at the average age of onset for some common disabilities.
Making sure you have sufficient disability coverage
Illness or medical problems are listed as one of the top five causes of bankruptcy in Canada.3 If you are underinsured, the combination of loss or reduction in income and increased medical expenses not covered by public health care may leave your household unable to pay for basic living expenses, as well as ongoing medical needs.
Many employer-sponsored plans are based on a percentage of salary or base wage, often 60% to 70%. Benefits are also usually capped to a maximum benefit payable under the plan. This means workers who fall into the following categories may not be well covered by their employer plan:
- High-income earners
- Individuals who earn significant incentive compensation
- Those who are paid for overtime regularly
Additionally, it is important to understand how your disability benefits will be taxed should you make a claim. If your employer pays the insurance premiums for disability coverage then any benefits you receive in the future are considered taxable income. If employees pay their own premiums then benefits are received tax free. Review your benefits booklet or connect with your benefits administrator to learn more about your coverage maximums and who pays for your disability insurance premiums at work.
Critical illness coverage adds one more layer of protection
Critical illnesses are generally considered life-altering illnesses such as cancer, heart attack and stroke, amongst many others. Disability coverage as discussed above, is considered income replacement coverage, which may not be sufficient if you or a member of your household suffers a critical illness.
What is critical illness insurance?
Critical illness pays out a lump sum benefit upon diagnosis of a covered condition. Some policies may cover up to 26 illnesses. Benefits are paid out tax free and can be used for any purpose. As critical illnesses are generally prolonged and severe, the financial impact on a household is not limited to the loss or reduction of income for the affected individual. You can use benefits for things such as:
- Replacing lost income.
- Paying for non-covered treatments.
- Paying off/down debt.
- Hiring a caregiver.
- Buying specialized equipment.
- Replacing lost income for partner.
Why you should you consider topping up or purchasing your own critical illness policy
Group coverage in this area is generally designed to provide basic coverage with minimal medical underwriting. As a result, the covered conditions may be limited and the total amount of coverage may be small in proportion to your earned income. Check your group benefits booklet to determine what coverage is available.
A personally owned policy gives you more flexibility in choosing the right amount of coverage and the conditions covered. Some policies may include extra services such as medical expert referrals to assist you in understanding your medical condition, explain treatment options and help navigating the health care system.
You can customize your personally owned policy with options called riders such as return of premium benefits, conversion options, and premium waivers due to disability. Most importantly if you leave your employer, your coverage continues.
Global news, December 3 2021, More than half of Canadians with group life insurance have no other coverage: survey, About the survey: The poll was conducted by PolicyMe from August 12 to August 16, 2020 with a representative sample of 1,001 online Canadians with life insurance who are members of the Angus Reid Forum. The survey was conducted in English and French.
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