Can you afford to rely on Employer Benefits alone?
During client meetings, I often hear people say they don’t need to discuss insurance, as they have coverage through their work. And I get it – employer coverage is great, and honestly almost always cheaper than what you will be able to purchase for yourself, so why wouldn’t you take this cheap coverage being offered? Save your hard earned dollars for a date night, or something for your kids?
However, any planner worth the time you’re giving them shouldn’t just check a box and move on from there. There are important distinctions between employer and personally owned coverage, some of which have been exposed by the recent global pandemic, that necessitate a further discussion of your employer coverage to make sure you really are fully covered. Having a 30-minute conversation upfront can make sure you and your family are adequately protected in the event of an unexpected injury or illness. Unfortunately not having that discussion may mean you find out too late that your coverage isn’t as broad as you thought.
Who owns it?
If you buy an insurance contract you own it, but your employer owns your group benefits contract. Why does this matter? As countless people have seen during the pandemic, their coverage relies on them having full time employment. If you are laid off, your benefits end (although some employers will extend them, and they are included in severance packages); typically at a time you need them more than ever. Even if you keep your job, when times are lean employers may look at rising benefits costs (the average benefits plan increases by 6-8% per year, compared to overall inflation of 1-2%)[1] and start reducing benefits. This isn’t to say that your employer plan isn’t great, and that your employer doesn’t have the best of intentions when offering your plan. However, when you are looking at your coverage you are looking at your needs versus your premiums. When a company is looking at a plan they are looking at the needs of all employees, plus their other compensation costs, plus their profitability, plus managing how one segment of employees will value the plan versus another, etc. The end result is that while they are a great base, almost no one will have a perfect plan for them, and individual employees do not have the ability to change that.
Who is actually covered?
Knowing who is covered for which of your benefits is important. While your spouse and children are likely covered for your health and dental benefits, they may not be covered for life insurance and they are almost never covered by your disability and critical illness benefits. This is the biggest thing to be aware of if one half of your partnership doesn’t have their own benefits – one of the most heartbreaking calls I’ve received when I worked for a carrier was a woman calling because her partner was off work pending back surgery, and they just realized he wasn’t covered under her insurance for disability benefits, and they were struggling to pay their bills without his income. I’m sure you can guess how many carriers are willing to insure someone for disability that is already away from work due to a disability… unfortunately at that point it was too late to provide that protection for them, and is why I stress the importance of these reviews with all my clients. There are rare cases where a spouse is covered for some disability, or there is spousal critical illness, but it is far from the norm – having your financial planner review your booklet will let you know for sure.
Administrative Errors
One thing that can be determined by looking at your booklet and a pay stub is whether your benefits are setting you up for unintended tax consequences. Certain benefits need to be paid or taxed a certain way in order to keep them tax free in your hands, and an unintentional error can have far reaching impacts. If your employer is paying for your life, dependent life, accidental death and dismemberment, or critical illness benefits, you should see a taxable benefit for these premium amounts on your pay stubs, to keep the benefits tax free in the event of a claim[2]. If your disability benefit is listed as tax free, you should be paying 100% of the premiums yourself via payroll deduction. Even a partial payment from your employer renders the full monthly benefit taxable on receipt[3]. If you become disabled, the last thing you need to find out is that come tax time the 66.67% of your income that you’ve been paid is actually subject to income tax, that hasn’t been withheld throughout the year (benefits that are listed as taxable in your booklet will have had tax withheld at time of payment). Hopefully you’ve been keeping some aside for the CRA…
My spouse and I both have benefits through work, so we’re definitely fine then?
You are definitely in a better spot, as you don’t have to worry about one party potentially having no coverage, but you still probably want to bust those booklets out. Not all plans are created equally, one may not have disability coverage, or the drug maximum may be $1,000. Rarely is one plan great and the other awful, usually one has better coverage in some areas, and the other is better in others. While having two plans is great, being able to compare the two will let you see which areas can be covered by only plan, which are covered by utilizing both plans, and which still have gaps even despite both plans.
Seeing through the jargon
Insurance is notorious for its TLA’s (three letter acronyms), which if you live, sleep, and breathe insurance are easy enough to navigate. Let’s be honest though, how many people out there really want to be insurance experts? Even though you probably said “not me”, I’m still going to go through the ones that have the potential to really impact your coverage so you can identify them and see if a deeper dive is needed:
NEM (Non Evidence Maximum)
Based on Alberta 2020 marginal tax rates
This is one of the most important and least understood aspects of disability, and to a lesser extent life, insurance – the amount of coverage you get regardless of your health. If you read the summary page of your benefits you might say “great, I have 2x my annual salary for life coverage, and 66.67% of my monthly earnings for disability, tax free – I’m pretty well set up if the worst happens”. But is that what you’re really getting? Say those are your benefits, but you have a 100K NEM for life, and a $2,500 NEM for disability and you earn $75,000 annually (we will assume this is all salary, commissions and bonuses can further complicate these).
Assumes $2,500 monthly Non-Evidence Maximum
Based on the 2x life benefit, you will assume you have $150,000 in life insurance, and based on the 66.67% of monthly earnings for disability you would have $4,167 in monthly tax free earnings if you became disabled – pretty straightforward right? Unfortunately, that is what you are eligible for based on your earnings, but only if you submitted evidence of insurability (a form outlining your health and pre-existing conditions) are were approved by the carrier (and from working for a carrier and being a benefits broker in previous lives, usually only a very small number of employees have done that). If you started your job, signed up for your benefits and never looked back, you did not provide Evidence of Insurability, and are constrained by the Non Evidence maximum, so your actual life benefit is $100,000 and your disability benefit is $2,500 – a loss of a third of your life benefit and 40% of your disability benefits. This can be rectified by filling out an evidence of insurability form, as long as you have no special risks to your health. Unfortunately since group contracts can’t rate or exclude specific conditions, your sore back may mean that you don’t qualify for any additional disability benefits.
ASM (All Source Maximum)
So, you have filled out your evidence of insurability form, you were approved and now you have your full amount of insurance so you are definitely okay, right? Maybe. Hopefully. But let’s look at your all source maximum while we are at it. This applies to disability benefits, and generally says if you are disabled, the insurance company can look at a range of sources that you are receiving income from and reduce your disability benefits to keep you at a maximum benefit level from all sources. This is typically 85% of your net pre-disability earnings for tax free benefits, or 80% of your gross pre-disability earnings for taxable benefits. Items included as sources for this maximum can be CPP/QPP disability benefits, WCB payments, retirement/pension plan benefits, automobile insurance benefits, group / association disability benefits, and pretty well any government plan other than EI.
From our example above, the all source maximum would be $4,159 per month[4] (assuming Alberta tax rates in 2020). Before we’ve even looked at any other source paying benefits, 66.67% you’ve qualified for is above the net of tax maximum. Now, you won’t actually receive $4,167, you will receive $4,159 and any other sources of benefits will only serve to reduce your benefits payable. One thing you will note that is not included in all source maximums is individually owned and paid LTD (Long Term Disability) policies.
Looking at this example - it doesn’t seem like much, you are only insuring $8 per month that you won’t receive, right? I personally am of the opinion that if you are paying for insurance you should be getting what you pay for, regardless of the amount. In addition, because there is a higher tax burden at higher income levels, once your income exceeds a certain point, more of your income will exceed the ASM threshold meaning you will be buying more and more insurance you cannot claim.
For any given income level, the disability benefit payable will be the lower of the red and green bars. This is your income replacement relative to your non-disability income (the blue bars) assuming there are no Non-Evidence Maximums to further restrict benefits. Tax impacts are based on Alberta tax rates in 2020.
DOD (Definition of Disability)
This is probably the number one reason the people who get disability policies with me decide to get them. Regardless of how much or little people know about disability they want to make sure “if I can’t do my job, my family is protected”. The key here is if they can’t do THEIR job. You might think, “of course someone wants to know about if they can’t do their job, who else’s job are they going to do?” But most group disability contracts only protect you if you are unable to do your job for the first 2 years of the contract (some go as far as 5 years, and very rarely you see out to age 65). After the 2 year “own occupation” period, the definition of disability is expanded to “any occupation for which you are reasonably fitted via education, training, or experience”[5]. This means being more knowledgeable, specialized, and senior in your position will actually hurt you – there is a far wider breadth of potential jobs you could do. What that definition doesn’t include is “occupations you want to do”, or “occupations that are currently hiring”, or “occupations at the same salary level”. There is a lot of potential to wind up being told you can do this job that you don’t want, but since you can do it you are no longer disabled and your benefits are stopping. This is not to say this happens in all cases, there are definitely group LTD policies that pay out to age 65 regardless of the definition. However, the majority of claims are musculo-skeletal and mental health claims, which are difficult to suggest would prohibit ANY employment.
When it comes to protecting your future income, the details of the contract can have dramatic impacts on what you are eligible to be paid
Other definitions of disability that are becoming more common in some group contracts are partial / residual disability – essentially what happens if you can do part of but not your entire job. I could write a full separate post on disability definitions and what the differences mean to you, but for the purpose of this post, just know that this is probably the single section of your employee benefits booklet that you should have reviewed by an insurance professional.
What about health and dental?
Health and dental benefits are important and should definitely be included in any review of your benefits booklet, but these benefits are more likely to be comprehensive in a cost effective manner. That’s not to say that you shouldn’t identify if/where a plan is not meeting your needs and see what options are available at what cost (or if you or your spouse are self-employed, if you have an opportunity to include a spending account to cover any missed expenses). However, the myriad of coverage line items in these benefits mean we could spend pages going through it – I will just say that a review of limits, both overall and internally, as well as formularies and co-pays should be reviewed to ensure your most important items are covered.
So, what should I do?
If you only get one thing from this – have your planner review your booklet and outline any areas of concern. This doesn’t bind you any contracts etc. it just makes sure you have the full picture of what coverage you do and do not have so you can determine what next steps to take.
If you get a second thing from this – think about some of the items covered here that are decided by your employer if you rely solely on group benefits and decide if you are comfortable letting your employer be the sole decision maker for you. While group benefits are a great base, it is good to review them periodically as part of your whole plan to make sure they are still working for you.
If you want to review your benefits booklet and see if you have any gaps - feel free to reach out to me here. I love reviewing booklets and translating “insurance carrier speak”.
[1] Benefits Canada “Health Costs Expected to Rise 11.6% in 2019: Report https://www.benefitscanada.com/news/health-costs-expected-to-rise-11-6-in-2019-report-129391
[2] Canada Revenue Agency “Employer’s Guide – Taxable Benefits” https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4130/employers-guide-taxable-benefits-allowances.html#sickness
[3] Groupbenefits.ca “Group Benefit Taxation” https://groupbenefits.ca/group-insurance/group-benefit-taxation
[4] EY “2020 Personal Tax Calculator” https://www.eytaxcalculators.com/en/2020-personal-tax-calculator.html
[5] Marc Whitehead & Associates “Long Term Disability Glossary” https://disabilitydenials.com/long-term/ltd-glossary/
Elyce Harris is a CFA Charterholder working with Cornerstone Investment Counsel, a registered ICPM in Alberta, Canada. She is also a licensed insurance broker in Alberta. While every effort is made to ensure the accuracy of statements, errors may occur. If a specific stat or carrier policy is cited, a source will be provided, however some opinions / generalizations have been provided without a specific source.