7 Ways that Income Replacement Insurance Protects the Family

November 1, 2016

By paying the premiums from after-tax personal income, the disability income benefits, plus any death benefit rider benefit are paid out tax-free.

Seniors (38)

When disabled you want to know how your income will get paid. An Income Replacement Insurance policy can solve that problem. Here are seven things you should know about this financial planning tool designed to protect your income.

1. It’s all about creating income if you’re disabled. Don’t disregard the need for this insurance coverage. If you were to become disabled, and your paycheque stopped, how would you pay for your monthly expenses for your family? If your cash flow stopped, would you need to tap into your RRSP early? Would your expenses such as mortgage and property tax payments or car leases need to continue? Or would you, without an income source, be forced into bankruptcy?

2. Couples can coordinate some components of their group coverage. Working couples can have equivalent coverage, say for dental expenses on both employers’ policies that will cover each other. Thus they may not be able to collect dental benefits under one of these policies. Both will not necessarily have income replacement coverage. See if your employers’ programs offer flexibility and optional provisions of selecting or substituting coverages. If one is self-employed or unable to obtain sufficient group coverage, purchasing a personal plan to replace income may make sense.

3. We can help you compare the various plans available. All insurance products that provide disability income are not the same. The costs, benefit periods, restrictions and renewal guarantees vary among policies and companies.

4. Usually more premium buys better coverage. Look for value, not just the cost. Read the contract and look at the dynamics of coverage and for how long, and compare one plan to another. Are there noteworthy restrictions on one policy but not on another? How long must you wait for payments?

5. Some plans have important financial riders available. Inflation should be considered, increasing your coverage over time to meet growing expenses. In some cases, this can be achieved using an inflation rider. There are many more optional riders offered by various companies offering disability plans, such as coverage for prescription drugs, dental care, key man insurance providing lump sum payouts to companies, and death benefits.

6. Your personally owned policy is portable, and you control it. If you lose a contract or a job, you can continue to own your income replacement policy. If you had an employer’s group coverage, you would lose that coverage if you lost your job, moved to a new employer, or started a new business.

7. Benefits are tax-free. Expensing premiums from after-tax personal income, allows the disability income benefits to be paid out tax-free. And all death benefit riders are paid out tax-free which do not impact estate planning.

 

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