Where the premiums are paid from after-tax personal income, the disability income benefits are paid out tax-free. And all death benefit riders are paid out tax-free.
If you were to become disabled, perish the thought, where would your income come from? An Income Replacement Insurance policy can solve that problem. Here are 7 things you should know about this financial planning tool.
1. It's all about creating income if you're disabled.
Don't disregard the need for this insurance coverage. If you were to become disabled, and your paycheque stopped, how would you pay for your monthly expenses? If your cash flow stopped, would you need to tap into your RRSP early? Would your expenses such as mortgage and property tax payments or car leases need to continue? Or would you, without an income source, be forced into bankruptcy?
2. Couples can possibly coordinate some components of their group coverage.
Working couples can have equivalent coverage, say for dental expenses on both employers' policies that will cover each other. Thus they may not be able to collect dental benefits under one of these policies. Yet both will not necessarily have income replacement coverage. Check out your employers' programs to see whether flexibility is provided in selecting or substituting coverages. If one is self-employed or unable to obtain sufficient group coverage, a personal plan to replace income should be purchased.
3. We can help you compare the various plans available.
All insurance products that provide disability income are not the same. The costs, benefit periods, restrictions and renewal guarantees vary among policies and companies.
4. You get what you pay for.
Look for value, not just the cost. Read the contract and look at the dynamics of what is actually covered and for how long, and compare one plan to another. Are there noteworthy restrictions on one policy but not on another? How long is the waiting period before a benefit is paid?
5. Some plans have important financial riders available.
Is inflation considered, increasing your coverage over time to meet growing expenses? In some cases this can be achieved using an inflation rider. There are many more optional riders offered by various companies such as coverage for prescription drugs, dental care, key man insurance for lump sum payouts for companies, and death benefits.
6. Your personally owned policy is portable and you control it.
If you lose a contract or a job, and you own your own income replacement policy, you can continue to own it. If you had an employer's group coverage, you would lose that coverage if you lost your job, moved to a new employer, or started a new business.
7. Benefits are tax-free.
Where the premiums are paid from after-tax personal income, the disability income benefits are paid out tax-free. And all death benefit riders are paid out tax-free.
