The More Someone Earns, The More They Are At Risk

Authored By: Chris Carr | Publish Date: December 13, 2018

Whether you’re a professional athlete, a musician touring to support your chart-topping album, an IT consultant who regularly travels to war-torn countries or a high-level executive, having disability insurance in place is a wise thing to do.

For high income earners it’s especially important since, in most cases, the long-term disability insurance they may have through their company group plan likely won’t provide enough coverage. Here’s why.

Group long-term disability insurance policies limit how much they will pay out each month to an employee, usually capping the limit at $5,000 to $10,000 a month.

Generally, the higher a person’s income, the smaller the percentage of income a group disability benefit will cover. This can leave a high-earning employee with a large deficit in monthly income. In other words, the more someone earns the more they are at risk.

Here’s a scenario to illustrate this point.

Tom is a 45 year old executive, married with two children.

What He Has: Annual income is $300,000 and his LTD group plan has a maximum issue limit of $10,000 per month.

Problem: This covers about 40 per cent of his pre-disability take home income, which is insufficient to cover his mortgage and other living expenses.

What He Needs: $16,250 to bring his benefits up to 65 per cent of his income.

Solution: Tom needs to purchase an additional $6,250 of monthly benefit to ‘top up’ his underlying group plan.

As this scenario illustrates, group disability insurance falls short for high income earners. As a result, in all likelihood, the insurance payout won’t be enough to cover regular monthly expenses without depleting savings and investments; which in turn can put someone’s credit rating, lifestyle and family’s future at risk.

How High Income Earners Can Protect Themselves

The gap left by a company’s long-term disability policy can be closed by adding a high limit disability policy to a person’s insurance portfolio.

Disability insurance helps protect an insured person’s financial security from significant loss of income. Some, like Sutton Special Risk’s high limit disability coverage, offer industry-leading high sums insured (any amount that’s financially justified) and broad coverage, including special hazards such as high risk occupations, out of country exposures and war risk & terrorism.

A top-up disability insurance policy works in conjunction with a person’s group long-term disability coverage to make up the percentage their group plan doesn’t cover–up to a maximum of 70 per cent of their earnings (even as high as 75 per cent under certain circumstances). With both plans in place, the insured has the appropriate level of coverage to help with day-to-day expenses.

For individuals who don’t have disability insurance because their employer doesn’t offer it or they are self-employed, disability coverage can be purchased on an individual basis, such as in the scenario below:

Samir is a 57-year-old self-employed contractor with annual earnings of $800,000.

Problem: He is not eligible under a group plan.

What He Needs: He needs ground-up coverage to replace 65 per cent of his income.

Solution: Individual, non-taxable coverage with a monthly benefit of $43,333 is purchased.

High limit disability coverage is structured as a combination of monthly Temporary Total Disability (TTD) benefit payments (from 12 months up to 10 years), followed by a lump sum Permanent Total Disability (PTD) benefit, should the insured continue to be disabled. The lump sum payment can be used however the insured wishes, giving them greater control of their financial future. Both TTD and PTD can be purchased on a stand-alone basis.

But What Are The Chances Of Becoming Disabled?

Based on a 2018 study performed by the Counsel for Disability Awareness, 64 per cent of North Americans believe they have a two per cent or less chance of becoming disabled for three months or more during their working career. In reality, the chances of becoming disabled are higher than most people think. A 2012 Statistics Canada survey revealed that about 3.8 million people, or 13.7 per cent of Canadians aged 15 and older, reported being limited in their daily activities because of a disability.

Perhaps the general public assumes the chances of becoming disabled are so slight because they associate becoming ‘disabled’ with having an accident? If they do, they would be wrong because the leading causes of disabilities in Canada are common, chronic conditions. In fact, chronic conditions are six times more likely to cause disabilities than accidents.

According to Statistics Canada there are four leading causes of disability in Canada. They are:

  • Mental illness
  • Cancers
  • Cardiovascular disease
  • Musculoskeletal disease such as arthritis

A life-changing disability can impact not only a family, but a business partnership as well. Say for example one partner becomes disabled and is no longer able to participate in the operation of the business. With a High Limit Disability Insurance plan in place, the partners can use their coverage to resolve this matter:

Carmen and Ivy are partners with equal ownership in their company.

Problem: Carmen becomes disabled and is no longer able to work.

Solution: Each partner had previously purchased a $3 million buy-sell disability policy that pays out after a 12-month waiting period. Ivy uses the benefit payment to purchase Carmen’s share in the company.

What If Someone Already Has Disability Insurance?

Any time there is a change in someone’s life or career it’s a good idea to review the disability coverage they have in place and make changes if necessary. Here are some examples of when this may be the case:

  • if their earnings have increased (e.g. a promotion, become partner, secure a large new contract, a growing business), their current disability coverage may no longer be enough
  • due to budget cutbacks and reorganization, the person’s employer has decided to reduce or eliminate their group disability insurance coverage
  • if they have started a new job, the new employer’s group disability insurance coverage may be capped at a lower amount than their previous employer
  • if high earning professionals or independent contractors renegotiate their business contracts

High Limit Disability Insurance is also ideal for:

  • a law firm looking for additional group coverage for its lawyers to adequately protect their earnings
  • the musician who can’t sign her dream record deal until she’s insured against becoming sick or injured
  • the professional athlete who has just signed a five-year, $40-million contract who purchases coverage to protect the balance of his contract
  • A 23-year-old top level athlete in the last year of his first professional contract who needs 24-hour PTD coverage to protect his future value

Chris Carr is vice-president, special risk , at Sutton Special Risk (Sutton Special Risk).

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