Whereas vision care and dental care benefits are always appreciated by employees, the disability component of group insurance plans sometimes goes unnoticed. Yet, it is often said that disability coverage, and especially the long-term disability benefit, is the most important part of your group insurance plan.
Because it is difficult to foresee the occurrence of an injury or an illness that could force an employee to miss work and suffer a loss of income for an indefinite period. Your disability coverage is your employees’ source of financial security. It acts as a parachute, airbag and life jacket. What do these three things have in common with your disability coverage? They must not let your employees down when they need them.
Four major aspects must be considered:
- Scope of coverage
Some plans offer long-term disability (LTD) coverage only, whereas others only feature short-term disability (STD). These are two separate benefits that don’t necessarily go hand in hand. If STD is not included in your contract, the government Employment Insurance (EI) program can provide temporary income replacement for a maximum of 15 weeks of illness (providing the employee is eligible for these benefits, of course).
Once this period has elapsed, if your plan does not have LTD, things get more complicated. A disability pension application can be made to the RRQ, but eligibility criteria are very strict. For benefits to be payable, employees must have a severe and permanent condition that prevents them from engaging in any truly gainful occupation. Conclusion: LTD coverage is a must and should not be ignored.
- Benefit formula
Both STD and LTD benefits are generally calculated according to a percentage of the pre-disability salary, which varies based on the contract. Benefits thus calculated can be taxable or non-taxable. The combination of these variables makes all the difference in the net income replacement provided by your plan in the event of disability.
For example, consider an employee earning $50,000 annually (with an average tax rate of about 25%) whose disability benefits are calculated based on 60% of the pre-disability salary. The employee’s net income replacement would be around 81% with non-taxable disability benefits, but would drop to approximately 71% if the benefits were taxable.
As we have a progressive tiered tax system, these percentages vary considerably from one person to the next depending on their annual salary. It is therefore important to carefully select the right benefit formula and tax status based on your group profile. Your AGA Advisor can help you determine the best approach for your company and your employees.
- Maximum benefit payable
Every contract is unique, but there is always a clause limiting the amount that can be paid by the insurer. In all likelihood, most of your employees will not be penalized by this maximum, but your highest paid staff members could be impacted. For example, if your LTD coverage provides for a maximum of $3,000 per month, a disabled employee could not receive more than $36,000 annually. For a senior employee normally earning $100,000+, this may not be enough to make ends meet.
- Fine print
Beyond payable benefit calculations, your contract includes a series of clauses governing the assessment of disability cases by the insurer when a claim is filed. Although such clauses are often overlooked, they play a decisive role. They deal with such matters as the definition of a disability, benefit coordination and integration, pre-existing conditions, waiver of premiums, indexation, etc. These unfamiliar provisions can nonetheless sway the insurer’s decision to accept or deny the claim.
Are you well protected?
Our lifestyle is directly related to our income and some expenses are hard to cut, such as mortgage payments, rent, daycare, hydro bills, etc. Therefore, we seek to secure disability benefits that will enable a disabled employee to continue making such payments as assiduously as possible.
Ideally, your disability coverage should provide net income replacement ranging between 80% and 85% of the salary earned while on active employment. Is your plan adequate? Should it be reviewed? A benefit diagnosis would enable you to find out. Contact an AGA Advisor to get a precise idea of where you stand.
Diplômée en mathématiques, Annie Robichaud a été recrutée par une firme d’actuaire-conseil avant de se joindre à l’équipe d’AGA Assurances Collectives en 2015. Ces expériences lui ont permis de se familiariser avec la réalité d’employeurs de divers secteurs d’industrie et de tailles variées. Au sein d’AGA, elle est principalement responsable d’effectuer des analyses financières personnalisées pour la clientèle des grandes entreprises et met à contribution son esprit analytique en apportant un soutien technique dans les dossiers complexes.
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