Minimizing the Financial Effects of Untimely Disability or Critical Illness
By RossValliant, CFP, EPC
Many people strive toward financial freedom by making tax smart investments; however, prudent people also cover their assets - by managing their risks. Risk Management is the backbone of any successful wealth building program. Wealth building is a process, and risk management is an integral part of that process. Building a comprehensive financial portfolio is like putting together a puzzle; it isn't complete until all the pieces are in place.
There is good news and bad news. Today, more people are surviving what used to be fatal diseases; however, the conditions that used to kill people are now leaving them disabled.
Over 2.1 million working age Canadians are permanently disabled; more than one-half have incomes under $10,000 annually. Statistics show that thirty-five percent of people now age 35 will be unable to work due to sickness or injury, before reaching 65. In recent years stress has been the greatest cause for disability; now to the extent that Canadians are warned that "own occupation" disability insurance may soon be a luxury of the past.
Modern medicine has increased the chance of survival after a critical illness from 10% in 1950 to 70% today.
If you suffer a covered critical illness, and live for a prescribed period of time, generally 31 days, one type of insurance plan will provide a lump sum benefit of up to $1,000,00 tax-free benefit; an alternate type of plan will provide reimbursement of care expenses incurred up to $25,000 for care in Canada or up to 1 million dollars for foreign care. The average age of a claimant is 41.
While you are younger, your most importnat financial asset is your ability to earn an income. Getting a little older, your greatest financial asset should be a nest egg, invested prudently, which will provide you with the income you require in retirement.
Risk management is the process of preventing financial loss or minimizing the negative effects of that loss when an untimely event occurs.
Disability insurance protects you by providing an income in the eent of an untimely sickness or injury.
Important Note: In most group or association disability insurance plans the definition of Long Term Disability (LTD) is generally misunderstood. Qualifying for LTD necessitates that you must be permanently disabled. Permanently disabled means that you cannot work at any "occupation". The meaning of regular occupation in a group plan has a distinctly different meaning that that of regular occupation in a personally owned plan.
Owning a personal disability insurance contract enables you to receive benefits if you are insured for:
- Own Occupation: generally available to those in the top occupational classes. It protects the insured in his or her specialty. The insured could be eligible for benefits while they are working in another occupation.
- Regular Occupation: the insured is deemed to be totally disabled if unable to do the substantial and material duties of their occupation and not working any other reasonable occupation.
Critical illness insurance plans can provide for a lump sum identification benefit or a reimbursement of incurred expenses in the event of, as the name implies, a named critical illness.
In the event of your critical illness you may want to pay off all debts including your mortgage, pay for additional emergency health care expenses you may experience, invest for gains which may replace some or all of your income until retirement (especially important if one does not have disability insurance or if coverage is exempted by the insurance company if you are not considered "totally disabled" ), or afford the financial luxury of a dramatically improved lifestyle during an expected shortened life. Alternatively, or both if you wish, choose to have your health care expenses reimbursed while you seek out the very best care in the world.
Personal insurance substitues certainty for life's beiggest uncertainties. With depressing accuracy actuaries can predict the number of people in each age or job category who will become ill, permanently disabled, or die each year. Only the identities are in doubt - unknown until after the event. Personal insurance is the means by which we can protect against the financial penalties of losing out too early in the game.
It is the financial consideration, not the risk, which determines whether a person should or should not insure.
Some people think that personal insurance is a form of gambling. In truth, personal insurance is the complete opposite of gambling. The person who does not insure is gambling with their, or their family's financial future. The adequately insured person eliminates the uncertainties that a particular event would otherwise create. Protection against creditors is essential.
Most personal insurances are available only to those people who qualify as being in a good state of health.
It is indeed prudent to insure while you are younger and enjoy the good health that you enjoy today. Further, the cost of insurance increases dramatically each year you get older, nearly at double the rate of the average cost of living. Often, the annual cost of insurance can be "locked in for life" at a level premium at the age you are today. Some policies have riders available which provide for 80% of all premiums to be returned to you if you do not make a claim within a prescribed period of time.
In Canada we have, for many illnesses, a good health care system, however, access to that system can also be life devastatingly slow. In most instances the availability of additional financial resources will provide us with the opportunity to seek the best international care immediately.
Nearly 100 percent of people have an enhanced peace of mind knowing that their financial affairs are in order. Having established a solid risk management plan, most people are able to be much more progressive in their investment program.
