Category Archives: Insurance

EI for the Self Employed

Well finally the government did something reasonable and extended Employment Insurance (EI) to self employed people.  You would think this would be a great thing, but it may not really be for everyone.

There are a few requirements you should be aware of if you are thinking about this:

  • The program states that you must pay in for a full year prior to making your first claim at the regular employee rate (1.73% of earning in 2010 up to $747.36 a year).
  • If you ever make a claim you must continue to pay into the program as long as you are self employed.  If you don’t make a claim you can stop paying in (no refunds).
  • You can only qualify for special benefits such as maternity, parental, sickness and compassion care leave.  Since you can’t lose your job (in the traditional sense), you can’t claim regular benefits.
  • You must make at least $6000/year of self employed income to be part of the program.

So in reality you would only really pay into EI if you planned on using maternity (max 15 weeks) or parental leave benefits (max 35 weeks), otherwise it would be somewhat wasteful to pay that much money in only to occasionally claim sickness (max 15 weeks) or compassion care (max 6 weeks).  I’ve never claimed sickness or compassion care leave myself yet.  Keep in mind too that the maximum you can get from EI is about $1600/month.  So its not a lot of money.

So what’s the break even point of this program?  Well if you claimed the full 50 weeks of maternity or parental leave at the maximum rate you would get about $20,000 for the year.  So divide that by the max contribution rate of $747.36, you need to pay in for 26 years to be even.  So if you have more than one child this program is likely a good deal or  you could be ok with a child if you are older (30+) and plan to retire early you could do well at least for right now.

You have to recall that the EI program is currently under a rate freeze but you can expect a sharp increase right after 2011 so that will change these numbers a fair bit.

So is getting EI a good idea for a self employed person?  If you plan on two kids or more and will be taking the majority of the maternity and parental leave, then likely yes it is a good idea.  If you only have one kid, you might want to think about.  If you aren’t planning on kids, skip it.

Guest Post: Disability Insurance

This is a guest post from Brian over at Disability Insurance Quotes.

From The Wealthy Barber: “Disability insurance is the most neglected of all forms of insurance, yet for many people, it’s the most critical insurance need…. A thirty year old has a one in four chance of becoming disabled for one year or more at some point in his or her life…When people are disabled, they don’t just cease to be an asset to their families…they become a liability.”

When I review benefit hand books, many of my clients are surprised to learn the details of the actual coverage that they carry. Most disability benefits only cover 60% of the employee’s salary and exclude bonuses. Many plans will only cover the first five years of disability and most plans are not indexed to inflation. Many clients are unaware that their disability benefits are not portable and a move to a new company results in a different benefit plan.

As the working population ages and companies are more cognizant of expenses, there is a growing trend for employers to offer “flex dollars” benefits. With this plan the employee is given an allotted sum of dollars from which he must choose from a shopping list of benefits (health, dental, life, short term disability, long term disability, critical illness insurance). While the employee can top up each element of coverage, in general, as the employee gets older, the same dollar allotment buys fewer benefits

The Disability Contract

When you pay for the premium out of pocket there is no tax-deduction, but you receive the benefits tax free. This compares to a company paid policy where you are taxed on the benefits.

A personally owned non-cancellable disability insurance policy is a contract between the individual and the insurance company. As long as the premiums are paid, the policy cannot be cancelled or altered in any way without the individual’s consent.

There are three common clauses used to determine the criteria and length of time for which an insurance company is obliged to pay a claim if you become disabled. This determines whether you can be forced to work, even in some other field at a reduced level of income. These clauses are known as:

    Any occupation” requires that you must be unable to work in any occupation, regardless of the change in duties or income.
    Regular Occupation” clause states you must be unable to perform the important duties of your own occupation and not working in any other gainful occupation.
    Own Occupation” is the most complete yet most expensive clause as it permits you to receive full benefits if you are totally disabled not working in your field but choose to work in another field.

Ask yourself “How likely is it that I could be totally disabled out of my specialty and still be able to work in another?”

Additional contract terms to know:

Elimination Period (waiting period)

This is the length of time that must elapse after the onset of the accident or sickness before the insured becomes eligible to receive disability benefits. The typical elimination period for private coverage is 90 days.

Non-Cancellable Contract

Under the provisions of this contract, as long as the premiums are paid, the insurance carrier cannot:

    Cancel the policy
    Change any provisions or add restrictions
    Increase the premiums or add any changes to the existing policies

Features of Disability Insurance

Waiver of Premium

It is important to continue premium payments even after you become disabled especially since you may not receive benefits for 90 days. Many insurers take over paying future premiums while the insured is receiving a disability benefit and some will refund the premiums that were paid during the elimination period.

Future Increase Option

This benefit allows one to increase the benefit by a certain amount at specified intervals without providing evidence of health. You only need to prove earnings. This may be of interest to those who want a robust policy now but to keep premiums low, they take the lowest coverage and enhance the coverage at later time. A chartered accountant, who buys disability insurance and later becomes a roofer, would be an extreme example.

Cost-of-Living Benefit

This benefit ensures that while on claim, the purchasing power of your benefit dollar is increased at specific periods (every 6 or 12 months). There are two formulas which can generally be utilized when applying for coverage:

    CPI index (with or without minimums and maximums)
    Simple interest

Portability

As a general rule, you want the plan to remain as unrestrictive as possible so that future changes in your status or location can be accommodated. An example would be an oil engineer who moves to Saudi Arabia but owns disability insurance purchased 10 years before. Only private plans offer this feature without restriction.

Like all insurance, disability insurance is not well understood by most people. The old adage is true “you get what you pay for”, so do your research.

Level of Benefit

Residual Benefit

A residual benefit is payable if the person is able to work on a limited or reduced basis.  For example, an individual with back pain may only be able to tolerate sitting at a desk for 2 hours per day.  The level of payout is based on the proportion of lost income relative to the time lost.  This provision is essential since most individuals make claims for partial rather than full disability.

Partial Benefit

A partial benefit is also payable if you are working at a reduce level.  However, the payout is based on the amount of lost time and duties and there is no requirement to show a loss of income.  This is an attractive clause for those who are newly employed and show limited prior earnings (e.g. a new graduate doctor).

Paying for the policy

Why should I pay for a policy when I can just contribute to my RRSPs or savings and hope that I will have enough money should I become disabled?  Consider this.  If you are forced to withdraw from your RRSPs you will have to pay taxes.  A withdrawal of $5,000 could be as little as $2,600 in the end depending on your tax bracket.  Additionally, if you are forced to withdraw during a bear market, such as we are currently experiencing, you will be forced to withdraw more units from your mutual funds and potentially at a loss.

If you own an individual disability insurance policy paid from your cash, any claims payment come to you tax free once you have satisfied the waiting period or other contract requirements.  This will apply even if you are currently unemployed.

The insurance company could be on the hook for hundreds of thousands of dollars depending on the age and income to be paid out over a lifetime…hence the time needed to underwrite this policies. Courts usually favour the client in times of claims vs. any dispute with the insurance companies

In summary, disability insurance is only one element in the “Risk Management Strategy”.  Is it worth spending less than 3% of your gross income to protect your greatest asset, the ability to earn a steady income?  Other coverage’s to consider include Life insurance, Critical Illness insurance and Long Term Care insurance.  Visit my website:http://www.disability-insurance-quotes.ca/

You Are Dying, So Plan For It

Right now you are slowly dying.  The key word in that sentence is: slowly.  Death is something people shy away from but when it comes to personal finance and retirement planning facing certain realities is a good idea.

Life insurance is not a fun topic to discuss with anyone, but the question becomes do you want to die without it?  If you are single and have no debt, then the reality is you likely don’t need much if any life insurance.  If, on the other hand, you have a few kids and/or a spouse who partly depends on your income you will want to consider having some life insurance to protect them in case your life is suddenly cut short.

Generally speaking term life insurance is the best bang for your buck for the majority of people.  Shop around for prices as they can vary by a lot.  Also consider dumping your mortgage insurance from your bank if you have it.  My experience has been that it is expensive coverage compared to what you can find elsewhere.

How much you need is highly dependent on your lifestyle (spending), what you want your kids to do (ie: post secondary education), and what your spouse and you have for income and what other coverage you already have.

For example, with my wife and I we decided to take the difference between my wife’s daycare income and our spending and times it over 18 years and then times it out to get a rough estimate.  Since our spending also contains an amount for RESP contributions we decided that was enough for the boys education.  Then we deducted what I already have for coverage and bought insurance for the remaining amount.  Then for my wife we just made that amount equal to my coverage to give me the option of working part time while the kids were young if she died.

In retirement planning you do need an estimate of your death, unless you are planning to leave a large pool of money to your kids.  If that is the case you might not actually need an end date to do a plan since you can just plan to live off the interest and dividends and not touch the capital.

For everyone else you do need to pick a death year to plan how long your money should last.  That year is often based on either a wild guess on the conservative side, typically age 95 or even 100.  Or you can do a bit more research into when you expect to die and try to come up with a better estimate.  After all there is an entire science to planning when people are going to die, how else do you think insurance companies issue annuities?

The trade off of picking a conservative date versus a bit more detail is the standard one.  If you lean to the conservative side you have to save more and work longer than actually required.  If you lean too far to the other side you can run out of money or have to face a reduced standard of living if you live past your planned death year.

So what did you pick for your death year in your retirement plan?  I picked 95, but I’m in good health, don’t smoke and my grandparents all lived well into their 80’s.