Human capital and disability insurance

Disability insurance can replace income in the event of an inability to work, but there are also complementary solutions. (Photo: 123RF)

GUEST EXPERT. Most people know the importance of protecting their income in the event of disability. Disability insurance replaces income in the event of an inability to work.

Obviously, we would like to replace 100% of net income, but insurers limit us to 70% of employment income because of moral hazard (it could be tempting to try to stay off work if we had the same income as while working), and to encourage the return to work.

If the protection is not sufficient for the needs, there are complementary solutions such as disability savings-retirement insurance and disability-loan insurance.

retirement savings disability insurance

Retirement savings disability insurance is insurance that pays a monthly benefit into a trust account in the event of the insured person’s disability. It only covers total invalidity and the benefits are not indexed. Payments usually begin after a 90-day elimination period, and continue for the duration of the disability, under certain conditions.

Benefits are capitalized in this trust account until the end of the disability period or at the latest at age 65. If the Insured Person has RRSP rights available, the Trustee may transfer the monies to an RRSP in the Insured Person’s name, as instructed. In addition, the insurer manages the account according to the policyholder’s investment instructions. Investment income is taxable annually, unless it is in an RRSP.

As a general rule, no money can be withdrawn before the age of 65 (except for the payment of taxes on the investment income generated by the trust). At age 65, the sums accumulated in the trust account are available in full.

This product is intended for people who wish to supplement their disability insurance protection and circumvent the limits imposed by insurers. By purchasing retirement savings disability insurance protection, workers can better protect their overall compensation.

Disability-loan insurance

Disability-loan insurance is a complement to good disability insurance. As its name suggests, it is used to cover regular loan payments in the event of disability. However, the definition of disability is generally more restrictive for loan disability insurance than for retirement savings insurance.

When the loan disability insurance is taken out directly with the financial institution that granted the loan, the latter is the holder and beneficiary of the contract. The benefit is then used to make the loan payments.

In addition, it is possible to take out individual disability-loan coverage where the insured is the contract holder. The benefit is paid on the condition, among other things, that the disabled insured makes periodic repayments of a claim. The advantage of such a policy is that the client can use his income replacement indemnities for other purposes. In return, no compensation is paid when all debts are repaid. In addition, this type of insurance does not provide any indexation of payments or an investment component.

Human capital is your most important asset. Why not protect yourself?

David Truong, CIWM, Pl. Fin., M. Fisc.


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