In order to be as competitive as possible, along with high salaries, companies more so than ever need to also offer competitive benefits. Group RRSP plans, health care for the employee and their family, and various insurance coverages, help position employers to prospectus applicants.
Insurance coverage that employers offer is fairly standard. They include disability insurance, life insurance, and critical illness insurance. Although you might have coverage for them, chances are you have no idea what coverage you have, if it’s enough, or how it actually helps you. So let’s dive in and take a look!
Disability Insurance
Disability Insurance (or DI) is the most common and comparable insurance coverage I would say. DI pays out a tax-free benefit if you are unable to work because of an accident, an illness, or both.
It is usually capped at two-thirds of your pre-tax income, so even though you don’t pay taxes on your DI benefit, it’s meant to be the same as your take-home pay if you were still working. This can be a huge disadvantage to people who work a lot of overtime because DI is typically based on 40 hour work weeks. So even if you’re receiving your maximum benefit, it could be a lot less than what you’re used to earning.
In addition to your work provided DI coverage, you can purchase additional coverage in a retirement savings protector. It’s a tax-free benefit that is aimed at being the additional income you would set aside to be saved and invested for retirement. You can also look into it and ensure your plan does provide you with the maximum DI benefit you’re eligible for. Some plans are capped at either two-thirds or a dollar amount (whichever is lower), so high-income earners could receive quite a bit less than they are used to, depending on the fine print.
Life Insurance
The Life Insurance benefit varies the most from what I’ve seen in my time in the industry and even in my own policies I’ve had. It can range from anywhere from about $10,000 to a multiple of your salary. At the minimum, a payout of around $10,000 would be expected to barely cover funeral expenses, if at all.
Life insurance is where the biggest discrepancy of need between fellow employees is too. There are a lot of factors that help determine how much life insurance you need—things like current debt, expected future debt, number of dependants, expected working years, and charitable donations. The list goes on and on.
If two people make the same salary, but one is single with no dependents, no debt, and no obligations, they wouldn’t need the same amount of life insurance as someone who is married, with children, a mortgage, saving for their children’s university, plus the financial obligation to raise them (to raise a child to age 18, on average costs about $250,000 here in Canada).
Critical Illness Insurance
Critical Illness (CI) is the one I see left off employer plans most frequently. CI can cover a wide range of common illnesses that prevent people from working and provide a huge financial burden. The benefit is tax-free and can be used for anything the beneficiary wants.
If diagnosed with a life-threatening illness, this can provide people with living the remainder of their life how they want, ensuring that they have any loose ends tied up or have the financial flexibility to pursue the best care available.
An aspect of a life-threatening diagnosis that is often overlooked is the impact on the spouse or family. The spouse is often put in a tough position and has to take time away from work to help out with everyday tasks and drive to the hospital for routine treatment, plus the stress and anxiety on top of that. So even though DI coverage should kick in, an additional CI benefit can really go a long way, especially if you have children or future financial commitments you’d like to keep.
Common Issues
Some issues employer benefits have are obviously what happens if you leave the employer? Whether you see your job as a short-term or a forever type of job, things happen. You might leave your employer because you want to or because you have to.
When someone leaves, they may have the option to convert their coverage to a personal plan, but it could be really expensive. Insurance premiums are based on coverage amount, age, smoking status, and gender. Even if you have coverage through your employer, it’s always a great idea to have some coverage in a personal plan.
Plans through an employer can change, and because you don’t personally own the policy, those changes might not be in your favor. Premiums could increase or coverage could decrease, resulting in a disadvantage to you.
The Bottom Line
No matter where you stand, you should be fully aware of the coverage you have. This can help you (or an advisor) determine if you have sufficient coverage and how to get the coverage you need if you’re lacking.
If you have benefits through your employer, don’t just assume that it is the correct amount of coverage for you. There are so many different factors that determine what amount of coverage everyone needs, no two people can easily and accurately be thrown into a ‘one size fits all’ plan and have the correct coverage.
You owe it to yourself and your loved ones to ensure that if anything were to happen, you would be okay and so would they.
Frequently Asked Questions
What happens to my group insurance when I leave my job?
Employer group life, disability, and health coverage usually ends when you leave the company. Many group life plans include a conversion privilege that lets you convert to an individual policy without medical underwriting, but the window is short, often 31 days after coverage ends, and the converted policy can be expensive. Check your benefits booklet before you leave so you know your deadlines and options.
Are disability insurance benefits taxable in Canada?
It depends on who pays the premiums. If your employer pays the premiums for a group disability plan, the benefits you receive are generally taxable income. If you pay the premiums yourself with after-tax dollars, the benefits are generally not taxable, so it is worth checking how your plan is funded when estimating what you would actually receive.
How much life insurance do I need beyond my employer coverage?
Group life coverage is often a flat amount or a small multiple of salary, which may not match your family’s needs. A common way to estimate need is to add up debts such as the mortgage, years of income your family would need to replace, future costs such as children’s education, and final expenses, then subtract savings and existing coverage. A financial advisor can help you run the numbers and decide how much personal coverage to hold on top of your workplace plan.
Why should I own personal insurance if my employer already covers me?
Employer coverage is tied to your job and controlled by your employer, who can change the plan, reduce benefits, or raise costs. A personal policy stays with you if you change jobs, become self-employed, or retire, and premiums are based on your age and health when you buy it. Buying while you are younger and healthy can lock in coverage that might be harder or more expensive to get later.
About the author
Contributing Writer, Wealthtender
Derek Condon is a Certified Financial Planner and Mortgage Advisor specializing in financial planning, investments, wealth-preserving insurance, mortgages, and others.
Derek helps his clients with a variety of goals. From someone who is just starting their investing journey to a retiree managing their wealth. From a first-time home buyer to someone refinancing to get their very best mortgage. And everywhere in between.