Executive Disability Insurance Top-Ups in Canada
You don’t have to be an executive of a business to want to get your disability insurance topped up. You could also be a high paid sales person, engineer on bonuses, manager with performance incentive pay, etc. The reasons for a disability insurance top up come down to two main issues:
- Less than 100% of your total earned income is insured due to group insurance maximums and/or a large portion of your income is bonus, commission or other incentive pay not included in the base salary which is insured.
- You are only insured for your “regular” occupation for 24 months. After that you are re-evaluated as able to work in “any” occupation, and if so your benefits will cease.
A disability insurance top-up can be designed to solve both of these issues.
A Group Disability Insurance Plan Does Not Cover Total Income
Group Disability Insurance Maximums
Very often a company will limit the maximum amount of group disability insurance benefit allowable among group members to control costs. For the majority of middle income earners in the group this is adequate. However, for the top earners in the company this level of coverage is far too low, and if disability did occur, the severely decreased level of income could dramatically alter the person’s lifestyle.
For example, a company has a maximum monthly benefit of $7,500 on their group insurance plan. This is based on 65% of earned income. Therefore, the maximum claim amount would be $90,000 of tax free income (most group disability insurance plans are designed to pay employees tax free if and when a claim occurs), on a gross annual income of $138,460. Very often the executives, managers, and key employees makes much more than this amount annually. They would be taking a major pay cut while on disability, and might not be able to meet their monthly bills.
Uninsured Earnings as Bonuses Above Base Salary
It is very common today that a large portion of an individual’s annual income is in the form of a bonus or other type of incentive pay. These bonuses are often very predictable at a stable level and can be very high in a good year. An employee’s personal budget might include receiving the bonus each year (using a conservative annual estimate) when planning their income and expenses. The bonus income, if it has been consistent over the years, can even be used to qualify for things like a larger mortgage.
You might think that this stable source of annual income is included in your group disability insurance plan. You would be wrong! Group disability insurance only covers the base salary or hourly wages of the employee. All forms of incentive pay (bonuses, profit sharing, commissions above a base salary, etc.) are not included in the calculation for your disability claim. To properly insure this level of income you can buy personal disability insurance to top up your group disability insurance policy. The insurance company offering the disability insurance top up will look at the average level of bonus paid in the last 2 or 3 years to underwrite the amount of coverage they are willing to offer.
Regular Occupation Definition for 24 Months, Then Any Occupation
Another big concern with group disability insurance plans is the definition of disability. If you are an accountant, the definition of “regular” occupation would mean the regular duties of an accountant, both mentally and physically in the workplace. All group insurance plans offer the regular occupation definition for the first 24 months of claim. After 24 months on claim the definition changes to “any” occupation. This means if you are capable of re-entering the workforce in any type of job you are fit for based on education, prior experience and capability, the insurance company will expect you to go back to work, and stop your benefits.
Especially if you are a highly skilled worker who has spent years getting education and certification in your field, would you really want to be cut off from your benefits and forced back into a career you never wanted to do in the first place? Most people would like the option to remain on claim until they are fit to go back to their chosen career, and not be forced into re-education and pushed into a new, unrelated work environment.
If you purchased a disability insurance top-up, you could guarantee your benefits would continue even after 24 months. This is done by owning a policy that gives you total insurance coverage starting after 2 years with the “regular” occupation definition in place until age 65. Therefore, if your group disability insurance plan wanted to cut you off, the personal disability insurance plan would take over and keep your disability income stable while you are recovering to resume your previous career.
Total Disability vs. Partial and Residual Disability Insurance
Another thing about group disability insurance policies is they only cover total disability. If you were to return to work for partial days or only two days per week, you could lose 100% of your disability benefit. That is why when you are on claim it is imperative to have your doctor keep you on total disability until you are fit to return to work 100%.
With a personally owned policy, there are options to have partial or residual disability insurance. When you are not capable of working full time, but can either still work on a part-time basis or can perform some of the major functions of your job, but not all, you can return to work and still receive some of your monthly disability insurance benefit. Partial disability insurance provides 50% of your monthly insurance benefit amount while residual disability insurance tops up the percentage of income loss you have based on prior earnings. This allows you to still be somewhat productive and not stay home when you want to try getting back to work as quickly as possible.
Executive Disability Insurance Carve Out
For all the reasons above, and to stabilize and guarantee disability insurance premiums long-term, some businesses even opt to exclude their leadership teams and top earners from the group disability insurance plan. Instead they insure this group of key employees under individual disability insurance contracts. Even though the cost for this coverage may be higher today, the guarantee of locked in premiums until age 65 could cost less over time as the executive and leadership team ages, and where their group disability insurance would have increased every year. Thereby the members of the leadership team will all have proper coverage for their total income, regular occupation definition to age 65, and the ability to come back to work part-time to still contribute and still retain a portion of their disability income benefit.
For more information about how an Executive Disability Insurance Top-Up might benefit you, or if you would like to look at an Executive Disability Insurance Carve Out, please feel free to contact Life Guard Insurance.