Why Living Benefits Are the Foundation of Your Financial Tool Kit

Imagine you woke up today and could no longer go to work.

  • Would you be able to pay your bills?
  • What if you are diagnosed with cancer and must travel for treatments?
  • Could you afford to lose your income and pay for healthcare expenses?  

For most Canadians, the answer is no.  A survey conducted by RBC found that 50% of Canadians could not afford to take time off work if needed.  Luckily, there is a solution available.

Many years ago, life insurance was the most necessary safeguard for families.  If people became seriously ill, the chances of them surviving were slim and life insurance provided income replacement for their families.  While life insurance is still an essential financial tool, dying is no longer the biggest risk Canadians are facing.  Surviving an illness is.  Modern medicine has worked miracles on the rates of surviving serious illness and disability. This is, of course, a wonderful thing. However, because of this, there is a gap in people’s financial plans where surviving is not being accounted for.  This is where living benefits come into play.

What You Need to Know

Living benefits are insurance products that protect you in the event you become ill or disabled.  There are three main living benefit products: Disability insurance, Critical Illness Insurance, and Long-Term Care Insurance.

  1. Disability insurance is designed to help you and your family cope financially if you become disabled and are unable to work.  Disability insurance works as an income replacement tool.  In the event you become disabled, your disability insurance will pay you an agreed upon monthly amount.  This payment lasts for either the duration of your disability or the period agreed upon in the contract at underwriting; whichever comes first.
  2. Critical illness insurance offers a lump sum payout in the event you become critically ill. At the time of application, you make an agreement with the insurance company that if you become ill with one of the covered illnesses, they will pay you your benefit.  This can give you the resources you may need to take time off work to recover, seek alternative treatments, or you can use it in any other way you see fit.
  3. Long Term Care insurance provides the insured with a monthly benefit that they can use to pay for care if they lose two of their executive daily functions.  Long term care benefits can be used to modify your house to accommodate aging, to pay for in home care, to pay for a retirement home, or to pay for a loved one to look after you.  There are no stipulations on how the benefit is used once an insured claim is approved.

So, who needs this type of insurance?

Simply put: Everyone.

Securing disability and critical illness insurance is the single most effective protection for your family, retirement plan, and your investments. If you have living expenses, you should have living benefits.

Many employers offer some level of insurance to their employees, but the coverage is often limited. Most people need to top up this coverage with an individual plan. Group benefits are a fantastic tool, but they are reliant on two things: 1) that your employer continues to offer the coverage and 2) that you remain employed. If you leave your place of employment, you will not be able to take the benefits with you.  This leaves you vulnerable as individual benefits require extensive underwriting and your health can change quickly as you age, which may mean you are not eligible for insurance when the time comes.

Below are two scenarios that illustrate the power of living benefit insurance products.

Scenario #1

John is a 40-year-old carpenter who was recently diagnosed with bone cancer in his arm and is worried about the financial strain that treating his illness may cause.  He has no individual insurance and has no benefits at work.  While John expects to be able to work full time during his treatments, he will have to drive two hours every week to the nearest city to receive treatments where he will have to stay in a hotel overnight.  John and his wife do not see any room in their budget for meals, gas, and a hotel every week.  They have resorted to withdrawing money from their RRSP which will be heavily taxed and will seriously derail their retirement plans.

How Insurance Could Have Helped…

Five years ago, John purchased a Critical Illness policy with a benefit of $100,000. When he was diagnosed with cancer, John was able to claim on his policy and received a cheque for $100,000.  There will be no need for John and his wife to dip into their retirement savings.  In fact, John will now be able to take some time off work to focus on his treatments without causing his family financial strain. 

Scenario #2

Johns’ cancer progressed and his doctors have recommended John to have his arm amputated to stop the spread of the cancer.  As a carpenter, John requires use of both his arms to complete his daily tasks and thus has had to stop working.  John has no disability insurance and has been forced to draw down his investments to cover his costs of living.  This has caused major financial distress to John and his family as not only can they no longer afford to contribute to their retirement accounts, they are also drawing them down 25 years earlier than expected.  John worries that they will run out of money in the next 5 years.

How Insurance Could Have Helped…

When John purchased his critical illness insurance, he also purchased a disability insurance policy to protect his income.  When John found out that he would need to have his arm amputated, he submitted a claim to his insurer.  After the 90-day waiting period, John will start receiving a tax-free monthly disability benefit that will replace 75% of his pre-disability income.  He will receive this benefit until he is 65 years old, and the family can avoid drawing down their investments.

The Bottom Line

Protecting your income should be a top priority and is the foundation of every financial plan. If you would like to have a personal consultation, please contact Winnie at winnie@leoganda.com for an appointment.

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This information is designed to educate and inform you of financial strategies and products currently available. As each individual’s circumstances differ, it is important to review the suitability of these concepts for your particular needs with a Qualified Financial Advisor.