The Financial Advisor Guide to Disability Insurance
Self-Study Course # 8
DISABILITY INSURANCE
INTRODUCTION
If a family were to lose its income due to the death or disability of the principal
earners, it would face financial hardship. While no one can put a monetary value
on human life, one can put a value on his or her earning ability. Life insurance
and disability insurance pay benefits to replace lost earnings due to death or
disability. The premiums for this insurance are based upon statistics for the age,
health, and occupation of the insured, as well as the amount of benefits to be
paid. While both life and disability insurance are available through groups, such
as employer plans, individuals can buy policies tailored to their specific needs.
Life insurance is so versatile that many individuals use it for advanced financial
planning purposes, such as retirement planning and savings, as well as for death
benefits.
Special forms of insurance are available to cover almost any other financial risk
or loss.
For example, there is unemployment insurance or Employment Insurance as we
know it, investment insurance, and Accidental death & dismemberment
insurance (for loss of a body part). Some fashion models are even insured
against loss of income due to loss of their good looks. Premiums for such
insurance are also based upon the likelihood of an event occurring and the
amount of benefits to be paid.
Sometimes having the wrong insurance can be worse than having no insurance.
When a disability leaves your client or prospect unable to work for an extended
length of time, they lose the ability to earn an income- the one thing that they
have always relied on to provide for themselves and their loved ones.
Meanwhile, their living expenses continue-in fact, they're likely to increase for a
number of reasons.
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For example, they could need help around the house or have higher medical
expenses. That’s where disability income insurance (DI) comes in. It's designed
to help them maintain their standard of living when they cannot work. If they
don't have much in the way of assets for a financial cushion, they need enough to
cover costs and supplement any income until they can go back to work.
Disability income insurance is needed by just about everyone who earns a living.
Surprisingly, single people often need it more than married couples because they
don't have a spouse's income to fall back on if they are injured or become too
sick to work. On the other hand, most married people have a hard time
imagining what it would be like to live on one salary when they barely get by on
two. And unfortunately, disability strikes more often than you may think.
Most family providers have life insurance to provide for their families if they die
early. Yet many of those same people don’t have adequate protection to keep
money coming in if they are ill or injured.
THE REALITY OF DISABILITY INSURANCE
Could you continue to pay your bills if you were unable to work for any length of
time because of illness or injury? If you were to become disabled, do you know
how much money would be coming in each month and from what sources?
Some people can rely on disability benefits from their employers and/or the
government. But, for a great many people, income stops when work stops.
Individual disability income insurance is designed to replace income when illness
or injury stands in the way of earning a living.
This course explains the various sources of disability income, what disability
income insurance is, and what it covers. It includes a worksheet you can use to
evaluate personal sources of disability income.
With this information, you’ll be able to determine whether your clients and
prospects need individual disability income insurance and, if so, what features
will be the most important to them.
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The goose that laid the golden egg
Before we get right into the course, let’s look at disability from another
perspective.
Remember the fable about the goose that laid the golden eggs? The story was
about a dilemma – which option to choose: the goose or the golden eggs.
Disability sales can be looked at in the same way.
Most often people insure their “golden eggs” (cars, homes and other valuable
assets) before they insure “the goose” – their income. The fact is that their
earning power is the most valuable asset of all. Without it, your prospects and
clients wouldn’t be able to buy, let alone insure, the simplest of possessions.
Uncovering the need for disability insurance is this easy. By referring to this
time-tested fable, you can be well on your way to providing a prospect or client
with valuable disability protection.
WHAT’S IN IT FOR YOU, YOUR CLIENT’S AND YOUR PROSPECTS?
In today’s tough economic times, it is more important than ever to be able to offer
your clients and prospects a complete portfolio of products and services. Your
clients need a solid foundation. And disability income products are one of the
major bricks in that foundation.
Below are six solid reasons why disability insurance should be a part of your dayto-day sales activity.
SIX REASONS TO MARKET DISABILITY INSURANCE
Disability Sales:
1. Are integral parts of complete financial planning and comprehensive risk
evaluation
2. Will help ward off unnecessary competition
3. Are important because everyone needs to protect his or her income
4. Provide a benefit that prospects and clients can see themselves needing
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5. Increase your commissions and persistency
6. Offer you satisfaction and emotional rewards by ensuring that clients and
prospects become aware of the impact a breadwinner’s disability can have
Finding out who’s a candidate for disability insurance is as simple as looking
down your list of qualified life insurance prospects. Disability can be both a great
door opener and add-on sale.
Don’t Overlook Your Female Clients and Prospects
As we have previously discussed, many people don't have adequate (or any, in
some cases) disability insurance and this applies to females as well as males.
Working women are experiencing serious disabilities at an increasing rate and
much faster than working men. In fact, the rate of disability among working
women has grown almost twice as fast as among working males during the past
decade (more than 60 percent compared to 32 percent respectively).
And although a recent survey conducted by the Council for Disability Awareness
(CDA) revealed the majority of working women are more aware than men of the
threat that disability poses to them, women remain less likely to take the
necessary steps to financially prepare themselves in the event a disability strikes.
According to the survey, nearly half of female workers expressed concern that
they might suffer a disability of three months or longer. However, only 38 percent
of those women surveyed indicated they had discussed how they would
financially manage the onset of an income-limiting disability.
By failing to financially prepare for an income-limiting disability, working women
risk serious financial repercussions down the road, especially as accountability
for personal financial security continues to shift away from social programs and
employers and toward the individual worker.
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It should also be noted that disabilities seemed to increase with age in Canada.
The fact that females live, on average, five years longer than men virtually
guarantees a substantially higher rate of disability.
This situation underscores the critical need to inform working women about the
steps they can take to protect their finances in case a disability occurs.
SO WHAT EXACTLY IS DISABILITY INCOME (DI) INSURANCE?
Disability income insurance provides your clients and prospects with income
should they become sick or injured and unable to work. It helps protect against
family financial catastrophe by giving them an income to meet daily expenses.
Disability income insurance comes in two major forms
1. A variety of employer-paid and government sponsored programs, generally
cost-free to the recipient, covering certain categories of workers.
2. Private policies (paid for by individuals) that protect income when there are no
applicable employer or government programs or when those programs do not
adequately meet income needs.
As with all insurance, disability income insurance operates on the principle that
many people pool small sums of money to benefit those who need help. The
beneficiaries are people who become disabled and who need adequate
replacement income.
HOW LIKELY IS A DISABILITY?
There is a tendency to think that it always happens to the other person – and that
it will never happen to me. You run into this scenario with life sales, too. And,
you already know this couldn’t be further from the truth.
An individual’s chance of becoming disabled for three months or longer before
age 65 is sobering. For example, from a group of four people age 45, there’s a
94% chance that one will suffer a disability before age 65!
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And it is possible that this disability will be long term. And once a disability
reaches long-term status – once they’ve been disabled for 90 days or more – it
could very well last several years. To put it another way, let’s compare the
likelihood of a disability against the chances of dying during the same period.
Once again, you have a natural “hook” between the sale of life insurance and the
sale of disability insurance.
Odds of long-term disability vs. death
Age 27
Age 37
Age 42
Age 47
Age 52
2.7 to 1
3.3 to 1
3.5 to 1
2.8 to 1
2.2 to 1
The following chart points out that becoming disabled prior to age 65 is a very
real possibility for a large percentage of workers.
Lives Disabled in One Year and Length of Disability
Per 100,000 Active Lives Exposed
Age
Disability
Begins
22
27
32
37
42
47
52
57
62
Length of Disability
1 Month
3923
3877
4372
5029
6918
6918
8158
9816
1737
3 Months
664
657
778
981
1257
1676
2239
3110
4427
1 Year
75
74
91
119
172
283
463
842
1491
2 Years
51
52
65
87
129
219
372
707
1286
5 Years
27
29
39
55
85
149
260
501
910
10 Years
16
19
26
38
60
105
178
328
558
Report of the industry Advisory Committee for individual Health Insurance
Policies
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HOW MUCH DISABILITY INCOME WILL YOUR CLIENTS NEED?
Add up all the benefits that they are entitled to under the public and private
programs discussed later in the course, along with the monthly income they
could count on from other sources such as any savings. If the total approaches
their required income after taxes, one can assume that, should total disability
strike, they would be able to pay their day-to-day bills while recuperating.
Your clients and prospects must remember that eligibility for any Government
disability benefits is contingent upon their disability being expected to last for at
certain amount of time, perhaps even leading to their death.
If the total from employer benefits, any Government Benefits, and other programs
along with their own resources will not be close to their pre-disability, after-tax
income and will not be adequate to support their family, then they will want to
consider buying additional disability income insurance to make up the difference.
Remember as well that, the amount of long-term disability benefits they may
receive through any employer’s group plan or any personal insurance benefits
may be reduced by the amount of Government benefits that could be paid to
them.
SO HAVE YOUR CLIENTS ASKED THEMSELVES THIS SIMPLE QUESTION:
Do I Really Need Long Term Disability Insurance?
Despite the grim news in the preceding paragraphs, your clients and prospects
may not need to buy any disability insurance! It depends on:

If they have enough money saved and invested already that their family could
live off of with no more additional income. In other words, if they are
financially independent.

If the other spouse makes enough money to support the whole family.
Although it’s totally conceivable that both spouses in a marriage could end up
disabled (e.g. a joint accident). So even this may not exclude them from the
need for other disability insurance income.
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Remember the spouse could also lose their job at some point, or could have
to quit work to take care of the disabled spouse, or the couple could divorce.

The other case when they may not need disability insurance is if their
employer provides appropriate disability insurance coverage. Many families
need to check with their employer to know for sure. But be careful and ask
lots of questions as many policies covered by employers will only cover their
disability if it is caused by something related to their job. We know this is the
case with Workman’s Compensation Insurance (called different names in
different provinces). And there may be lifetime limits to how much money that
they can get and this may not be enough depending on the disability.
DETERMINING YOUR CLIENTS DISABILITY INSURANCE NEED
So you have established that they have the need for more disability coverage!
Here are questions that they will have about the policies and programs that
you offer:

How is disability defined? Inability to perform their own job? Inability to
perform any job?

Does the policy cover accidents? Illness?

What is an adequate level of benefits, in relation to their present and future
obligations? The maximum benefit will replace what percentage of income?

Are benefits available for total disability? For partial disability? For residual
disability? Only after total disability?

How long of a waiting period should they select to fit their circumstances until
benefits begin?

How long do they want to receive disability income should it become
necessary?

What related benefits, such as partial or residual disability, are available?

Is the policy non-cancellable, guaranteed renewable, or conditionally
renewable?

How much coverage are they eligible for at their present salary?
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
Are full benefits paid, whether or not they are able to work for loss of sight?
Speech? Hearing? Use of limbs?

How long must they be disabled before premiums are waived?

Is there an option to buy additional coverage, without evidence of medical
insurability, at a later date?

Does the policy offer an inflation adjustment feature: If so, what is the rate of
inflation? Is there a maximum?
SOURCES OF DISABILITY INCOME
A) Public Sector Disability Plans

Canada Pension Plan (CPP) Disability Benefits

Employment Insurance Disability Benefits (E.I.)

Workers Compensation Benefits
B) Corporate Sector Disability Plans

Weekly Indemnity (Short Term Disability)

Long Term Disability Plans

Grouped Disability Policies
C) Personal Sector Disability Policies

Commercial (Yearly Renewable Disability Policies)

Guaranteed Renewable Policies

Guaranteed Renewable and Non-Cancellable

Association Disability Policies
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A) OVERVIEW OF PUBLIC SECTOR PLANS
1 (A) Canada Pension Plan Disability Benefits
Who is eligible?
For the payment of a disability pension to a survivor or for payment of benefits for
a child of a disabled pensioner, a contributor must have contributed for:

2 out of the last 3 years of the contributory period or

5 out of the last 10 years of the contributory period

Have not received a CPP / QPP retirement pension benefit for longer than 12
months
For those individuals who have contributed 10 years or more and are under age
65 they must not have received the retirement benefit of longer than 12 months.
A disabled survivor who is eligible for both a survivor’s pension and a disability
pension can receive an amount equal to the maximum retirement pension plus
the higher of the two flat-rate components of the survivor’s and disability
pensions.
The disability for a child of a contributor who becomes disabled will be the same
as for orphans, but the qualifying period is the same as for the disability pension
itself and the benefit commences with the disability pension and ceases with the
disability pension or when a child is no longer a dependant.
Orphan’s benefits are payable to the surviving spouse or guardian if the orphan
is under age 18 and are payable directly to the orphan from age 18.
In cases where both parents are contributors and they die or become disabled, a
dependent child can receive two benefits.
Definition of CPP / QPP Disability
The disability pension is payable to a contributor who satisfies the definition of
“disabled.” Generally, it means physical or mental impairment that is both severe
and prolonged.
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Severe means the inability to pursue any substantially gainful employment, while
prolonged means that the disability is likely to be of indefinite duration or is likely
to result in death.
Under the QPP, the definition is modified in the case of a contributor age 60 or
older. He or she will be deemed to be disabled if unable to pursue, on a
permanent basis, his or her current occupation.
Remarriage does not revoke a surviving spouse’s pension. If the second spouse
dies, the calculation of the pension may be based on the higher of the pensions
that would have been payable to the now-deceased contributors.
This definition is so restrictive, that usually CPP / QPP benefits will not be taken
into account in planning for an unforeseen disability. If you are qualified to
receive CPP /QPP disability benefits, the chances are that you won’t be receiving
them for long… they will eventually become survivor’s benefits.
Benefits
The monthly disability pension is a flat-rate component (subject to review) plus
an earnings-related component equal to 75% of the calculated retirement
pension. It will be payable to age 65 (unless the disability pensioner dies or
recovers) when it will be replaced by the retirement pension.
A spouse already disabled at the contributor’s death is entitled to the full
survivor’s pension at any age under age 65. If the disabled spouse recovers
before attaining age 45 the pension will be reduced by 1/120 th for each month
he or she is under age 45.
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CPP Disability Pension for contributor
Under CPP legislation, your payments
start four months after the date Service
Waiting period
Canada determines that you are
disabled under CPP rules.
Flat rate of $445.50 (indexed) plus 75%
of what remaining benefit would have
Amount
been paid at age 65 (e.g. 2012 $1,185.50)
CPP Disability Pension for qualifying child:
Flat rate (indexed)
Amount
(e.g. 2012 - $224.62)
Taxation of CPP / QPP Benefits
Contributions are tax deductible and benefits taxable when received.
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SELECTED MONTHLY CPP SURVIVOR and DISABILITY BENEFITS
Canada Pension Plan and Quebec Pension Plan - 2012
Type of benefit
Retirement (at age
65)
Disability
New benefits
Maximum rate
2012
Number of
beneficiaries
October 2011
CPP
CPP
QPP
$986.67
QPP
Amounts paid
October 2011
$Millions
CPP
QPP
$986.67 4,024,876 1,464,596 $2,053.0 $669.0
$1,185.50 $1,185.47 326,418
70,264
$267.8
$66.4
Survivors
· under 65
$543.82
$543.82
238,757
76.854
$87.8
$45.8
· 65 and over
$592.00
$592.00
805,895
277,687
$241.5
$86.0
Total
1,044,652 354,541
$329.3 $131.8
Children of
disabled
contributor
$224.62
$71.32
77,129
7,527
$16.9
$0.7
Children of
deceased
contributor
$224.62
$224.62
62,783
15,392
$13.7
$1.1
10,458
3,041
$23.7
$7.4
Death (maximum
lump sum)
$2,500.00 $2,500.00
Total
5,546,316 1,915,361 $2,704.4 $876.4
Combined Benefits
Survivor/Retirement
$986.67
at age 65
Survivor/Disability
Total
14
$1,185.50
$986.67
718,964
225,621
na
14,653
2,530
733,617
228,151
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$522.7 $148.0
$13.9
$2.7
$536.6 $150.7
Disability and Survivor Rates - 2012
EarningsFlat
Benefit
Related
Total
Rate
Portion
CPP disability benefit
$445.50 $740.00
$1,185.50
CPP survivor's pension
$173.82 $370.00
$543.82
under 65
QPP disability benefit
$445.47 $740.00
$1,185.47
QPP survivors - under 45
$484.09
 Not disabled, no child $114.09 $370.00

Not disabled, with
child


Disabled
Age 45 to 64
$413.62 $370.00
$783.62
$445.47 $370.00
$815.47
$445.47 $370.00
$815.47
NOTES FOR THE PREVIOUS TABLES
1. CPP Survivor Benefits are reduced by 1 / 120th for each month the surviving
spouse is under age 45 at the contributor’s death; if the survivor is under age
35 and has no dependent children, no CPP benefits are payable until age 65.
2. All monthly CPP/QPP benefits, except for orphans of contributors or children
of disabled contributors, are based upon AMPE. For 2012, the maximum
AMPE is $3,946.66.
3. The above figures are based upon the maximum Average Monthly
Pensionable Earnings (AMPE), calculated as follows:
AMPE is Average of Year’s Maximum Pensionable Earnings (YMPE) FOR THE
LAST FIVE YEARS (2008 through 2012) divided by 12 months
$44,900 +$46,300 + $47,200 + $48,300 + $50,100 divided by 12 = $3,946.66
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1 (B) Employment Insurance (EI) Benefits
The Employment Insurance Act is a total restructuring of the old Unemployment
Insurance program and was implemented in January 1997. The Act was
designed to help today's labour force, providing assistance where it is most
needed and offering incentives for claimants to return to work.
The Employment Insurance system is based on hours of paid work and adheres
to fluctuations in work situations such as part-time, extended hours and
compressed weeks. The principle of the hour’s system is simple: regardless of
whether you work full-time, part-time, as a seasonal worker or on and off
throughout the year, the hours that you work and for which you are paid are
accumulated toward eligibility for EI benefits. Using hours instead of weeks to
calculate eligibility ensures that you are credited for all your paid work time.
This approach applies to overtime, which is calculated hour for hour no matter
what the rate of pay. As well paid leave of any type is insured for the number of
hours that normally would be worked in that period, regardless of rate of pay.
Many people across Canada must contribute to EI, usually by payroll deductions,
together with the employer’s premiums that are remitted to the Employment
Insurance Commission.
We recognize the main function of EI to provide income to “people who are
unemployed because they can’t find employment.” This is not the only area that
they help Canadians. There are Special Benefits known as Maternity, Parental
and Sickness Benefits. Of course we will deal with the Sickness Benefits in this
module.
Qualifications required to receive EI sickness benefits
These benefits are paid to qualified participants who become unable to work
because of illness, injury or quarantine.
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To be eligible to receive EI sickness benefits, you have to:

Be a covered individual

Have completed 600 hours of insurable employment in the last 52 weeks, or
since the start of your last EI claim. If you are already on claim for reasons
other than illness and while you are on claim you fall ill, then you may qualify
with less than 600 hours.

Your normal earnings must be reduced by more than 40%.

Provide a medical certificate advising the EI Commission how long your
illness is expected to last.
EI Sickness benefits can be paid for a maximum of 15 weeks. The number of
weeks of benefits which may be paid are determined at the start date of the
benefit period, based on the unemployment rate in your region and the amount of
insurable hours you have accumulated in the qualifying period.
Please note that the number of weeks of benefits which may be paid does not
change even if you move in another region after the start date of your claim.
What happens if the client or prospect does not have 600 hours?
They may qualify for sickness benefits even with less than 600 hours as long as
they did not stop working because of illness, injury or quarantine. In fact, if they
are already receiving regular benefits and become ill while they are on that claim,
they may receive the sickness benefits that they are entitled to.
While you should apply for benefits as soon as you stop work, sometimes people
are too ill to apply right away. If this is the case for you, inform the EI
Commission about it and they may be able to backdate your claim to the time
your earnings stopped.
An insured individual can receive sickness benefits in addition to maternity or
parental benefits, but you can't receive more than 50 weeks of maternity,
parental and sickness benefits in one benefit period.
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When do benefits start?
After a two-week waiting period, benefits are paid. There are exceptions:

If you are reopening a claim for benefits in which you have already served the
2 weeks waiting period.

If you receive group insurance payments, you can serve the waiting period for
EI during the last two weeks that these benefits are being paid.

If you get paid leave for sick time, you may not have to wait after your paid
leave runs out.
In some instances, the 2-week waiting period may be waived or deferred, but
only under certain circumstances such as:

If you get paid sick leave pay from your employer following your last day
worked, the waiting period may be waived;

If parental benefits are being shared by the both parents, only one waiting
period needs to be served. For example, if a 2-week waiting period has
already been served for maternity benefits by the first parent, the second
parent claiming parental benefits can have the waiting period deferred.
In the event the second parent subsequently claims regular or sickness
benefits after parental benefits, the 2-week waiting period would then need to
be served.

If you receive group insurance payments, you can serve the 2-week waiting
period during the last two weeks that these insurance payments are being
paid.
When all the paper work is submitted and in order, EI disability benefits should
be sent to your client or prospect by the fourth week (28 days) after applying for
benefits.
The EI Commission will send a notice with your last cheque, saying that you
have received all the sickness benefits to which you are entitled. If you don't
have a job to go back to, you may be able to receive regular EI benefits without a
waiting period.
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How much is the EI disability benefit?
For most people, the basic rate for calculating EI benefits is 55% of your average
insurable weekly earnings, up to a maximum amount. As of January 1, 2012, the
maximum yearly insurable earnings amount is $45,900. This means that you can
receive a maximum amount of $485 per week.
If your clients and prospects are in a low-income family (a net income of less
than $25,921) with children and they receive the Child Tax Benefit (CTB), then
they could receive the EI Family Supplement.
The amount of EI Family Supplement they receive depends on: their net family
income (up to the $25,921 yearly maximum); and the number of children in their
family, and their ages.
The Family Supplement may increase their benefit rate to as high as 80% of
average insurable earnings.
They do not have to apply for the EI family supplement. If they are eligible to
receive it, their entitlement will automatically be added to their EI cheque.
More Information is available on the Service Canada Website.
Some useful information as to how the premiums are arrived at
Premiums are paid on all earnings up to the annual maximum salary of $45,900
(2012). Employees pay $1.83 for every $100 of salary until the $45,900 has
been reached. After that level, there are no more premiums to pay in that year.
The maximum contribution amount is $839.97.
For example, if you earn $60,000 a year you will pay premiums on the first
$45,900. If your earnings are regular weekly amounts of $1,000 per week, you
will pay premiums from January through to the beginning of October but will pay
no premiums for the remainder of the year.
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As for Quebec residents, the EI premium rate is set at $1.47 for every $100 of
salary until $45,900 has been reached. The maximum contribution amount will
be $674.73 for these individuals.
There is no age limit for deducting EI premiums. In fact, if you are working in
insurable employment, your employer deducts from you salary the applicable EI
premiums, whatever your age. Employers must also pay an EI premium on
behalf of their employees. They pay 1.4 times more than the employee pays.
Outside of Quebec, they pay $2.56 per $100 of eligible earnings, up to a
maximum of $1,175.96 annually. Quebec employers pay $2.06 per $100 of
eligible earnings, up to an annual maximum of $944.62.
EI benefits are paid secondary to and reduced or eliminated by:

Any income including wages or commissions from employment.

Any payments in compensation for an accident or work-related illness, such
as workers' compensation for lost wages.

Income from group insurance for sickness or loss of income.

Some accident compensation for loss of wages.

Retirement income from an employment pension, military or police pension,
Canada or Quebec Pension Plan or provincial plan based on employment.
Money received from the following sources, will not affect EI benefits:

Disability pensions

Workers' compensation payments from a permanent settlement

Supplemental insurance benefits under a private plan approved by Human
Resources Development Canada for sickness benefits

Supplemental payments to maternity or parental benefits provided by
employers (as long as the combined income of the benefit and supplement do
not exceed 100% of your normal weekly salary)

Your private sickness or disability wage-loss insurance

Retroactive raises in your wages or salary
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Because EI is considered to be the second payor in the above situations, many
employers have opted out of the EI Sickness Benefit program by providing their
employees with plans, which are at least equal to or better than the EI
Commission.
For employers who exercise this option, the Employment Insurance Act allows
for a premium reduction to employers who have an employee income protection
plan meeting certain standards. These types of plans must be in the form of a
formal commitment from the employer.
The formal commitment could be:

A union or association agreement

An industry-wide welfare trust contract

A private carrier’s insurance policy

An employee’s handbook

A board of director’s minute stating employees’ entitlement to disability
income benefits

A personnel policy bulletin

Any commitment in writing by the employer to the employees
The employer must reapply each year for the premium reduction by certifying
that the plan continues to meet all the above criteria.
As a rule of thumb, the premium reduction to the employer is approximately
$75.00 per year per employee. This may not seem like much, but consider the
company with many employees. This would translate into large savings, and at
the same time provide a superior plan.
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1 (C) Workers Compensation Benefit
There is a strong connection between the health and well-being of people and
their work environments. When people feel valued, respected and satisfied in
their jobs and work in safe, healthy environments, they are more likely to be more
productive and committed to their work. When the workplace is unsafe, stressful
or unhealthy, ultimately both the organization and the employees are hurt.
Everyone can benefit from a healthy workplace.
Healthy Employees + Healthy Organizations = Healthy Workplaces
Bringing Health to Work...helping all to thrive and benefit - employees,
employers, families, communities and governments.
Before we discuss any disability benefit from the different Workers Compensation
Boards in Canada, it is important to know that there is a Government branch or
organization that works in tandem with all the Provincial WCB’s.
The Canadian Centre for Occupational Health and Safety (CCOHS)
Background
The Canadian Centre for Occupational Health and Safety (CCOHS) is a
Canadian federal government agency based in Hamilton, Ontario, which serves
to support the vision of eliminating all Canadian work-related illnesses and
injuries. Established in 1978, CCOHS is a federal departmental corporation
reporting to the Parliament of Canada through the federal Minister of Labour.
The Centre is governed by a Council representing three key stakeholder groups:
government (federal, provincial and territorial), employers, and workers - a
structure that mandates the CCOHS’ impartial approach to information
dissemination.
Their Mission
It is their mission to be the Canadian Centre of Excellence for work-related injury
and illness prevention initiatives and occupational health and safety information,
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To promote health and safety in the workplace in Canada to:

Facilitate

Consultation and cooperation among federal, provincial and territorial
jurisdictions

Participation by labour and management

Assist in the development and maintenance of policies and programs

Serve as a national centre for information relating to occupational health and
safety
Role of CCOHS
On the home front, CCOHS provides Canadians with unbiased, relevant
information and advice that supports responsible decision-making and promotes
safe and healthy working environments. CCOHS makes a vast scope of
occupational health and safety information readily available, in clear language
that is appropriate for all users, from the general public to the health and safety
professional. Internationally, the Centre is renowned as an innovative,
authoritative occupational health and safety resource.
CCOHS partners and collaborates with agencies and organizations from Canada
and around the world to improve the quality and quantity of resources and
programs, as well as expand the breadth of usage of OSH information to many
different segments of society.
What They Offer Canadians
CCOHS fulfills its mandate to promote workplace health and safety, and
encourage attitudes and methods that will lead to improved worker physical and
mental health, through a wide range of products and services. These products
and services are designed in cooperation with national and international
occupational health and safety organizations with an emphasis on preventing
illnesses, injuries and fatalities.
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They provide a variety of both public service initiatives at no charge to the user,
such as OSH Answers, the person-to-person Inquiry Service, the electronic
newsletter, and public presentations. Services for specialty resources provided
on a cost recovery basis include database subscriptions, manuals and training
programs.
HISTORY OF WORKER’S COMPENSATION IN CANADA
The concept of workers' compensation had its origins in Germany, Great Britain
and the United States between the late 1800's and early 1900's.
In Germany, Chancellor Otto Von Bismarck introduced a compulsory state run
accident compensation system between the years 1884-1886. This initial system
was financed by workers and employers.
In the United States, between 1908 & 1915, several states enacted
compensation legislation. The state of Washington enacted an exclusive
mandatory system based on collective liability. As compensation was given state
jurisdiction, the US developed a mixed bag of WCBs, mandatory insurance, selfinsurance and combinations.
Workers' compensation in Canada had its beginnings in the province of Ontario.
In 1910, Mr. Justice William Meredith was appointed to a Royal Commission to
study workers' compensation. His final report, known as the Meredith Report was
produced in 1913.
The Meredith Report outlined a trade-off in which workers' relinquish their right to
sue in exchange for compensation benefits. Meredith advocated for no-fault
insurance, collective liability, independent administration, and exclusive
jurisdiction. The system exists at arms-length from the government and is
shielded from political influence, allowing only limited powers to the Minister
responsible.
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SAME GOALS – DIFFERENT PROVINCIAL NAMES
Alberta
British Columbia
Manitoba
New Brunswick
Newfoundland
Northwest Territories and Nunavut
Nova Scotia
Ontario
Prince Edward Island
Quebec
Saskatchewan
Yukon
Workers' Compensation Board
WorkSafeBC
Workers' Compensation Board
Workplace Health, Safety, and
Compensation Commission (WHSCC)
Workers' Compensation Commission of
Newfoundland and Labrador
Workers' Compensation Board of the
Northwest Territories and Nunavut
Workers' Compensation Board
Workplace Safety and Insurance
Board
Workers' Compensation Board
Commission de la santé et de la
sécurité du travail (CSST)
Workers' Compensation Board
Workers' Compensation, Health and
Safety Board
THE ROLE OF EACH PROVINCIAL WCB
From the moment employees are hired, whether on a part-time or full-time basis,
they are covered by Workers’ Compensation. These plans are provincially run
with different maximum amount of benefits that are available to the employee.
THE BENEFITS
Benefits are paid by provincial WCB boards for employees whose injury or
sickness is job related. Maximums fluctuate between provinces, but they do
have an inflation factor built in them. These plans will usually pay up to 85% of
eligible earnings (insurable earnings) to the employee in the event of a workrelated disability or injury.
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The benefits when received are usually not taken into consideration when
calculating Issue and Participation limits for two reasons:
1. Only work related disabilities qualify and
2. There could be no way of knowing how much benefit might be awarded.
Each Compensation case is looked at individually with regards to: a monthly
income or lump sum, benefits increasing or level and will the disability be
reassessed etc.
Usually benefits are payable for life unless there is a recovery and return to work,
although some benefits can continue on a percentage, even while the employee
returns to work on a full-time basis.
Some of the benefits for work related disabilities are:

Necessary health-care costs resulting from work-related injury or industrial
disease.

Economic and non-economic loss benefits for any workers who may suffer
permanent impairments. The economic loss to take into consideration loss of
future earnings and none economic loss referring to one’s quality of life.

Replacement of lost earnings for time missed from work during the recovery
period.

Necessary medical and vocational rehabilitation programs.

Coverage of costs related to medical treatment and assessment

Personal care allowance

Coverage of travel costs

Wheelchairs
Types of benefits that can be claimed:
Traumatic injuries
These injuries happen quickly, causing trauma to the body. Broken bones,
severe cuts and burns are some examples of traumatic injuries.
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Injuries caused by repeated activities
These injuries include strains or sprains caused by doing the same activity over
and over again. For example, an assembly line worker may develop tendonitis in
his/her wrist as a result of his/her job duties.
Occupational diseases
These diseases are caused by some condition at the work site. For example,
coal miners may develop black lung as a result of their jobs, or a nurse may
become infected with HIV from a contaminated needle.
Re-injury and difficulties with an old work-related injury
Re-injury occurs when you hurt an old workplace injury during work. If you have a
recurrence or trouble working because of an old work-related injury, call the WCB
to find out if you should file a new claim or report the injury as part of your old
claim.
Benefit for Loss of Earnings (LOE) – Varies Province to Province
This benefit starts from the working day after the injury or illness occurred. How
the WCB calculates your loss of earnings benefit depends on the date the injury
occurred.
PROVINCIAL BENEFIT INFORMATION 2011
Jurisdiction
Max. Comp.
Earnings
Benefits based on % Waiting Period
of earnings
Alberta
$82,800
90% net
No
B.C.
$71,700
90% net
No
Manitoba
No Maximum
90% net
No
N.B.
$56,700
85% loss of
earnings
Newfoundland
$51,595
80% net
No
N.T./Nunavut
$75,200
90% net
No
Nova Scotia
$52,000
75% net 1st 26
weeks then 85% net
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3/5ths of weekly
benefits
2/5ths of weekly
benefits
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Ontario
$79,600
P.E.I.
$47,800
Quebec
$64,000
Saskatchewan
$55,000
90% net (for injuries
on or after Sept.
1985)
No
Yukon
$77,920
75% gross
No
85% net
80% net 1st 38
weeks then 85% net
No
3/5ths of weekly
benefits
90% net
No
Benefit for Non-Economic Loss (NEL)
If you suffer permanent impairment from a work-related injury or illness, you may
be paid a non-economic loss benefit to compensate you for the physical,
functional, or psychological loss the impairment causes. This benefit is
determined when your condition has reached a point where no further
improvement can be expected. The amount paid is based on a legislated base
amount times an impairment rating.
Health Care Benefits
In addition to loss of earnings benefits, WCB benefits pay for a number of costs
related to workplace injury and illness, including: Health care, prescription drugs,
special clothing and footwear as well as any transportation costs associated with
work-related injury or illness.
In most cases, WCB will pay the health care provider directly. Your adjudicator,
together with your nurse case manager, will advise you on how to claim for these
benefits and how each benefit is paid. To get paid back for drug expenses of
yours that were directly related to your WCB claim, a WCB Medication
Reimbursement Form has to be filled out completely and submitted with any
receipts.
More information can be found at any WCB Provincial office.
The Occupational Disease and Survivor Benefits Program
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This Program provides specialized services to workers, dependents, and
employers affected by certain serious occupational illnesses such as: Cancer,
Asthma, Asbestosis and Silicosis, Inhalation of substances and fumes as well as
Noise-induced hearing loss.
A worker with one of the above illnesses or conditions, or a survivor of a worker,
who died from such illnesses, will benefit from the expertise offered by this
program's specially trained personnel. Staff includes senior adjudicators,
physicians, an occupational hygienist, and nurse case managers, all of whom are
experienced with the unique circumstances of occupational illnesses.
Survivor Benefits
If you are a spouse or dependent of a worker who died because of a workplace
injury or illness, Survivor benefits are available by contacting the local WCB
Provincial office.
There are three types of benefits to survivors of workers who die because of
workplace illness or injury:
1. Survivor payments (lump sum and monthly benefits)
2. Funeral and Transportation Costs
3. Bereavement Counseling & Rehabilitation in joining the workforce.
1. Survivor payments (lump sum and monthly benefits)
WCB pays a lump sum and monthly payments to survivors and/or dependent
children of workers who die from work-related illness or injury.
2. Funeral and Transportation Costs
WCB will pay reasonable burial and funeral expenses up to a maximum set by
the WCB each year.
These may include transport costs if the survivors live a considerable distance
from the place of death.
3. Bereavement Counseling
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Both the surviving spouse and children are entitled to bereavement counseling,
but must request this counseling within one year of the worker's death.
WCB FUNDING
Workers’ Compensation benefits are funded by employers. Premiums will vary
by industrial sector in each province and by classification or rating group.
Employers pay premiums based on the insurable earnings of their employees, up
to the maximum assessable earning amount (plus coverage, if any).
The cost of coverage is usually per $100 of insurable earnings based on the
average losses in each group, subject to a minimum amount. In some
jurisdictions, premiums are adjusted using an experience rating factor, which
compares an individual employer to the average of other employers in the same
ratings group.
Many think that this system is unfair, as the premium rate within a business for a
person operating a high-risk machine is the same the individual who answers the
phone in the office.
Although all employees must be covered by WCB, there are some provinces that
allow business owners to opt out of WCB, providing they have purchased
individual personal policies to replace the WCB Benefit. This is advantageous if
the owners are performing only the administrative duties of a high-risk business.
TAXATION OF WCB BENEFITS
Premiums are a taxable deduction to the employer, but not a taxable benefit to
the employee. The benefits are non-taxable when received by the employee.
B) OVERVIEW OF CORPORATE SECTOR DISABILITY PLANS
Introduction
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Serious financial consequences can result when one of the owners or key people
of a business become disabled. Most businesses are insured in the event of
death of an owner or employee, yet many have no comparable protection against
the devastating impact of a disability. Without some prior arrangement to keep
the business operating in the event of disability, the business may become a
casualty.
The disability of an owner creates numerous problems for all concerned. Other
employees may have to do extra work, usually without extra compensation.
Additional staff may have to be hired, creditors and customers may lose
confidence, major decisions become more difficult to make. The day-to-day
operations of the business may be affected by both the involvement of the
disabled owner’s spouse or a public trustee and by the disabled owner’s financial
difficulties. There may be high costs to the business, regardless of what
happens to it. If the business is dissolved, it may mean an immediate full or
partial loss of investment. If the business is bought out, the seller may have to
accept a depressed purchase price paid out over several years.
The disability of a key person is one of the most difficult issues shareholders of a
corporation can face. The problems resulting from long-term disability include
the disabled person’s continuing income requirements and other corporate
obligations to that person such as pension costs, the costs of replacing the
person, and the loss of earnings of the corporation while the new employee fully
recovers.
Several solutions may be considered for insurance funding against disability. All
or some of the key person’s income could be replaced in the event of disability.
The person’s interest in the corporation could be bought out after a period of
disability.
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The funds provided could replace the contributions the person makes to the
operation of the company and to pay part of the overhead expenses of the
company.
Where will the money come from to keep a business afloat when an owner or key
person is disabled? Disability income may be the answer. Even the largest of
corporations will find that insurance is financially the most viable way to protect
against disability.
Having some form of disability insurance IS a definite wise business decision.
An insured, disability income continuance plan is certain and relatively
inexpensive as it replaces a potentially costly drain on business assets with a
known business expense.
The sound business management of owners who have had the foresight to plan
and avoid potentially devastating problems will reassure suppliers and creditors.
To ignore this issue could be a costly mistake for the business – the disability of
an owner or key person can destroy a business.
There are two types of disability accident and sickness coverage available
through corporate group disability plans. The first type is short-term disability,
which is also known as Weekly Indemnity Income (WI), and Short Term
Disability. The second type is known as Long Term Disability LTD.
Many Employees’ are covered through either or both of these two types of plans.
Benefits cover disabilities from both accident and sickness. Both types of
coverage’s can be provided separately or joined seamlessly.
The definition of disability for these types of plans can be very restrictive – unable
to work at any occupation.
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If the insured has the option of opting out of the group plan, it may be to his or
her advantage as many of the features and options available in personal policies
are not likely in the group disability program. Many group policies, especially in
smaller groups have maximum coverage limits that may restrict higher paid
employees to a relatively low proportion of coverage to income.
Both group WI and LTD can be, and usually are integrated with EI (UIC) Benefits.
This means that they are not paid at the same time. As discussed earlier, if an
employer has Short Term Disability, their premiums for EI (UIC) are reduced.
WEEKLY INDEMNITY (SHORT TERM DISABILITY) – WI, STD
Weekly indemnity has become the standard alternative to the EI Short Term
Disability Benefit, which began in July of 1971. This plan, to replace any EI (UIC)
short term disability plan must provide benefits that are equivalent to the
minimum EI (UIC) benefits or better.
Waiting Periods
WI can be payable from the first day due to accident and, depending on the type
of group plan, from the 4th, 8th or 15th day due to sickness. The reason for this
is that these programs are not designed to cover the common cold, flu and other
illnesses of only a few days’ in length.
Benefits
Typically, there is a maximum benefit of 70% or Pre-Disability income (66.7%) to
a maximum dollar amount per week. If the benefit is taxable, a lesser amount
will be paid, whereas if the amount is non-taxable, a higher amount will be
received. Currently the most common maximum is $600.00 per week. This
figure can fluctuate as per the design of the plan.
Benefit Period
Payments under the WI plan are made for periods of 13, 26, or 52 weeks and
can often be part of a union contract. The most common benefit period is 17
weeks, to match the EI (UIC) Disability Benefit.
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Both the waiting period and benefit period can be adjusted depending on the type
of group plan. Weekly Indemnity can be written on a non-occupational basis, if
WCB benefits are provided, thereby reducing the premium required.
LONG TERM DISABILITY – LTD
Waiting Period
The waiting period is typically 120 days, however this could be sooner if the
employer wanted it. There is no overlap with EI (UIC) plans.
Benefit
Depending on the group plan, the level of disability income may vary from 60% to
75% of pre-disability income. However, one would not find a group plan, which
will pay a non-taxable income of 75% since such benefits might encourage not
going back to work quickly. There could also be a maximum income attached to
the percentages. For example, a benefit ranging from $2,000 to $10,000 monthly
could be paid.
Benefit Period
These plans pay benefits to age 65. Plans can also be set up to be paid for 1, 2,
5 or 10 years as well.
Many plans contain a Rehabilitation Benefit to encourage workers to enroll in
programs that facilitate their re-entry into the work force on some basis. If the
worker receives an income from such an approved program, the total disability
benefit may be reduced, but usually not by the total of the income received from
the rehabilitation program.
From a definition point of view, total disability can be as restrictive as “unable to
work at any occupation” and as liberal as “unable to work at your regular
occupation.”
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TAXATION OF GROUP DISABILITY PLANS
If the employer (company) pays any portion of a group premium such as longterm disability, those disability benefits are fully taxable.
Group benefits do not have to be taxable. The plans can be set up so that the
employee pays the full cost of the Short Term and the Long-Term Disability
portion of the plan.
It all depends on what the Employer wants to provide his employees.
GROUPED TOGETHER DISABILITY POLICIES
These are individual personal policies applied for, owned and paid by the
employer, with the benefits payable to the employer. According to Revenue
Canada’s Information Bulletin IT85-R2, if a formal “grouped” policy is set up
through a resolution of the Board of Directors, and there are two or more policies
involved then the premiums paid by the employer are tax deductible to the
employer and are not considered a taxable benefit to the employee. Disability
benefits are considered a taxable gain to the employee, and because of this,
company will allow benefits larger than their usual Issue and Participation Limits.
If the Company is not incorporated a Health and Welfare Trust can be set up to
achieve the same results.
Some important points to remember when it comes to Grouped Disability Plans

If employer pays any part of premium, benefit is taxable when received.

Disability definitions can be restrictive. Usually own occupation for 2 years,
then any occupation thereafter.

Maximum Coverage Limits may be punitive for high earners, allowing for
“Top-up” by private plans.
If the benefit is issued under an Association Group, the Coverage is generally
individually underwritten, rates can change or be cancelled and if the member
leaves the amount of coverage is terminated.
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The rates generally are banded into 5-year increases, rising sharply for older
members. This coverage is often more restrictive and has more exclusions than
true group or private plans. Exclusions may cover emotional or mental
occurrences and addictive substances.
Employer Paid Premiums
When an employer pays premiums for Group Sickness or Accident Insurance
Plans or a Private Health Services Plan, the premiums are a deductible expense
for the employer and are not regarded as taxable benefits to the employee.
The Health Insurance Benefits do not become taxable benefits when received by
the employee, nor can they be used as a basis for a deduction.
Premiums for Loss of Income Insurance are a taxable deduction to the employer.
Contributions are not a taxable benefit to the employees, but the benefits when
received by the employee, less any contribution made by the employee towards
the plan are taxable.
INCOME LOSS (ILRP) / WAGE LOSS REPLACEMENT PLANS (WLRP)
Income Loss Replacement Plan, Wage Loss Replacement Plan or Salary
Continuation Plan, are all names for disability income replacement programs set
up by an employer for a group of employees. Unlike group insurance solutions, a
WLRP is comprised of individual disability income protection insurance policies
grouped together under a common plan. For tax purposes a "grouped
arrangement" such as a WLRP is considered to be a group accident or sickness
insurance plan so that the premium becomes a tax-deductible business expense.
A key factor in a WLRP is that it is a “group accident or sickness plan”. In the
context in which we set up this plan, it is a “GROUPED” plan, where individual
disability insurance policies are grouped together.
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Wage-loss replacement plans can be in place of or in addition to selfadministered plans. These sick leave plans are funded by premiums based on
experience rating, or the level of claims against the premium revenues collected.
These plans can be handled internally by the company, i.e. self-insured plans, or
by a third party such as an insurance company. If handled by an outside
insurance company, the employer is responsible for forwarding the required
premiums, usually on a monthly basis, and reporting the names of the employees
covered by the plan. Premiums can be paid by the company, by the employee, or
shared between the two.
In third-party administered plans, the third party paying the benefits is fully
responsible for withholding and remitting taxes and reporting the income at the
end of the year using a T4A form for federal reporting and a RL-1 form for
Quebec employees.
By using a WLRP, we are turning what would normally be a personal expense of
the insured, into an expense deductible by the company. Premiums paid by the
employer are not a taxable benefit to the employee. Using a written plan
agreement, the intention is established by the business to buy insurance
coverage of this nature, for a specified group of employees (must be 2 or more).
The employee’s must be of the same classification, for example, an executive or
management classification, or a clerical classification. An identifiable and
defensible group must be used when creating the WLRP. Without a documented
plan, Revenue Canada may disallow the tax status of the plan if the business is
audited.
As the premiums are tax deductible for the employer, any claim benefits
received from the policies are fully taxable to the disabled individual. There are
certain circumstances where the employer and the employees may wish to share
the cost of the premiums.
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In this case, the claim benefits are taxable with a portion non-taxable. (Benefits
are taxable to the extent they exceed the total premiums (since 1967) paid by the
employee).
The continuation of the WLRP is voluntary by the employer unless protected
under a formal trust agreement by using a Health and Welfare Trust.
Advantages of a Wage Loss Replacement Plan
For the insured individual:

No premiums are paid by the insured individual

Premiums paid by the employer for the employee’s policy are not added back
as taxable income to the employee on their pay cheque or T4.

The claim benefits the insured receives while disable are taxable income.
The claim benefit has been increased to include the effect of any income tax.
RRSP contributions may continue to be made based on the amount of
taxable claim benefits received.

The policy is non-cancellable and guaranteed renewable to age 65.

The ownership of the policy may be transferred to the individual should they
leave the business. This is subject to the rules and limitations set out by the
insurer.
For the Business

The insurer takes over the burden of making continuing payments to a
disabled employee.

The premiums are paid from company funds, and are a tax-deductible
expense to the company.

The minimum number of people in the same class to qualify as “grouped” is
two people.

These policies have the same features as individually owned plans and the
premiums cannot be increased unless additional coverage is applied for,
issued and placed.
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Eligibility for a Wage Loss Replacement Plan
General Requirements

Must be an employee.

The employer named under the WLRP must pay the employee’s salary or
wages.

Must be at least two employees involved in the WLRP. If one employee
leaves the plan, leaving only one in the WLRP, they must be replaced to
retain the income tax status of the plan.

There must be an identifiable group, i.e., the clerical staff or the administrative
staff.
WAGE LOSS REPLACEMENT PLANS HELD WITHIN A CORPORATION
All employees must qualify for a WLRP. Shareholders of a corporation (owners
who are also employees) are eligible provided they receive payments of salary,
and not just dividend income from the company. A mix of salary and dividend
does not disqualify them as employees.
Individuals receiving only dividend income do not qualify, as they receive this by
virtue of their being a shareholder. Therefore, only the amount of salary received
should be insured through the WLRP.
If the shareholder’s ownership interest in the operating company is held through
a holding company, the corporation paying the salary to the insured employee /
shareholder should be the employer named under the WLRP.
WAGE LOSS PLANS IN A PARTNERSHIP OR A SOLE PROPRIETORSHIP
When the business is set up in one of these arrangement (an unincorporated
business), only the employees are eligible for inclusion in a WLRP where the
premiums are tax deductible as a business expense.
The professionals in this arrangement cannot be included in the WLRP, as they
are not deemed ”employees.”
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INCORPORATED PROFESSIONALS AND WAGE LOSS PLANS
Professionals (Doctors, lawyers, dentists, etc.) who incorporate their practices
are eligible for a WLRP. They do not need management companies, because all
of their practice income will be taxed at the lower rate of corporate income tax.
An incorporated professional’s financial statements will be titled “Dr., Ltd., or
Inc.”.
If the professional takes a salary and thus is an employee of the practice (owner /
employee relationship), the professional then qualifies to be included in a WLRP
and deduct his/her premiums as a business expense. There must be a
“grouped” situation of two or more employees to actually qualify as a WLRP.
WLRP TAX STATUS AND OWNERSHIP
Policy Owner
Premium Payer
Employer Premium
Contributions
The Employer
The Employer
Tax deductible by the Employer
Policy Benefits Payable to
The Employee
Taxable income to the Employee which allows
Benefits Received by
him / her to continue to make deposits to his /
Employee at time of claim
her RRSP
More information on WLRPs can be found in Revenue Canada Interpretation
Bulletin #85R2 AND #428.
Since benefits are taxable at claim time, a copy of the ILRP or WLRP Board
Resolution should be attached to each application in order to justify any higher
issue amounts that are requested.
We have included a sample WLRP Board Resolution document that will give you
an idea of what must be set up prior to having any policies issued.
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Sample Wage Loss Replacement Plan (WLRP) Board Resolution
Authorizing Establishment of an Accident and Sickness Insurance Plan
In the common interest of _______________________ (the Corporation) and
certain of its employees, it is deemed that an Accident and Sickness Wage Loss
Replacement Insurance Plan be established to provide periodic payments of
income during disability to the Corporation’s Key employees. This plan will
consist of individual disability Insurance policies that will be grouped to qualify as
a “group” plan.
The names of these employees are:
1.
4.
2.
5.
3.
6.
Upon motion duly made, seconded and carried unanimously IT HAS BEEN
RESOLVED THAT:
Individual Disability Insurance Policies will be purchased or have been purchased
for the covered employees from ______________________ (Ins. Company).
Benefits, as outlined in the policies, will be payable according to the terms of the
policies.
The Corporation will own and pay for the premiums on the policies involved in the
plan, and the benefits in the nature of periodic insurance proceeds will be
payable directly to the employee.
The Corporation shall, on the termination of the employment of the employee
covered under the plan, or the termination of the plan, assign any policy
purchased pursuant to the plan insuring the employee, to the employee. This is
subject to the meeting of the requirements of the Insurer regarding the transfer of
the ownership of the policy to an individual.
CERTIFIED
A true and correct copy of a Resolution passed the ______day of _______2012.
_________________________
Chairman
__________________________
Secretary
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In this day of Company Compliance issues, we have also included a sample
Letter Of Intent that the advisor should submit to protect any future litigation.
LETTER OF INTENT
As a representative of _________________________, I hereby certify that the
individual disability policies which are being purchased (or are currently in force)
are being used to establish a Wage Loss Replacement Plan. (WLRP – see
references listed at the bottom of the page) for the benefit of the following
individuals:
Name
Policy Number
These policies are to be owned and paid for by the employer. In the event of a
claim, taxable benefits in the form of periodic payments will be received directly
by the employee.
I understand that this plan must be formally documented in the Minutes Book of
the business, and must be done during the fiscal year. I understand that it is our
responsibility to document the plan in order to provide evidence of “grouped”
disability insurance to satisfy the taxation authorities. Unless the plan is
documented in this manner, the taxation authorities may disallow the deduction
of the premium for corporate income tax purposes.
Date: ______________________ Signing Officer: _______________________
Witness: _____________________________ Title: ______________________
NOTE: Employees to be covered should be designated by class. The employees
should be listed by name in The Board Resolution. Class is determined by
position in the company.
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CANADA REVENUE AGENCY’S VIEWS ON WAGE LOSS REPLACEMENT
PLANS
Interpretation Bulletin Number: it-428 Dated April 30, 1979
REFERENCE: Paragraph 6(1) (f) (also paragraph 6(1) (a) and section 19 of the
Income Tax Application Rules, 1971)
1. Paragraph 6(1)(f) provides that, for 1972 and subsequent taxation years,
amounts received on a periodic basis by an employee or an ex-employee as
compensation for loss of income from an office or employment, that were
payable under a sickness, accident, disability or income maintenance insurance
plan (in this bulletin referred to as a "wage loss replacement plan") to which the
employer made a contribution, are to be included in income, but subject to a
reduction as specified in that paragraph for contributions made by the employee
to the plan after 1967. Before 1972, such amounts received by a taxpayer were
not included in income.
2. Paragraph 6(1)(f) does not apply to a self-employed person inasmuch as any
amount received by such person in the way of an income maintenance payment
would not be compensation for loss of income from an office or employment.
With regard to "overhead expense insurance" and "income insurance" of a selfemployed person, see Interpretation Bulletin IT-223.
Exemption for Plans Established before June 19, 1971
3. Transitional provisions in section 19 of the Income Tax Application Rules,
1971 stipulate that amounts that would otherwise be included in income under
paragraph 6(1) (f) are to be excluded if they were received pursuant to a plan
that existed on June 18, 1971 and was in consequence of an event that occurred
prior to 1974.
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Comments on these transitional provisions, particularly with regard to admissible
and non-admissible changes in pre-June 19, 1971 plans, appear in IT-54. It is to
be noted that, for 1974 and subsequent taxation years, the exemption in section
19 of the ITAR is applicable only if amounts received by a taxpayer are
attributable to an event occurring before 1974. In this context, the word "event"
has reference to the thing that caused the disability. In the case of an accident,
for example, although the effect on the taxpayer's health may not have become
noticeable or serious until 1974 or a later year, the "event" would have occurred
before 1974 if the accident took place before 1974 and the later disability was
directly attributable to the accident. Similarly, in the case of a degenerative
disease such as muscular dystrophy, the "event" is the onset of the disease
however much later the incapacity occurs. On the other hand, a recurring
disease, such as a seasonal allergy or chronic tonsillitis, would qualify as an
"event" only for the particular period of one attack.
Meaning of a "Wage Loss Replacement Plan"
4. In the Department's view, a plan to which paragraph 6(1)(f) applies is any
arrangement, however it is styled, between an employer and employees, or
between an employer and a group or association of employees, under which
provision is made for indemnification of an employee, by means of benefits
payable on a periodic basis, if an employee suffers a loss of employment income
as a consequence of sickness, maternity or accident. This arrangement may be
formal in nature, as evidenced by a contract negotiated between an employer
and employees, or it may be informal, arising from an understanding on the part
of the employees, that wage loss replacement benefits would be made available
to them by the employer. Where the arrangement involves a contract of
insurance with an insurance company, the insurance contract becomes part of
the plan but does not constitute the plan itself.
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5. Where it is apparent that a plan was instituted with the intention or for the
purpose of providing wage loss replacement benefits, the assumption will be that
it is a plan to which paragraph 6(1) (f) applies unless the contrary can be
established. Such a plan will be considered to exist where, for example,
payments under the plan are to commence only when sick leave credits are
exhausted or where benefits are subject to reduction by the amount of any
wages or wage loss replacement benefits payable under other plans. A
supplementary unemployment benefit plan, as defined in subsection 145(1), is
not considered to be a plan to which paragraph 6(1)(f) applies.
6. A plan for purposes of paragraph 6(1)(f) of the Act and section 19 of the ITAR
must be an "insurance" plan. Those provisions are not applicable, therefore, to
uninsured employee benefits such as continuing wage or salary payments based
on sick leave debits, which payments are included in income under paragraph
6(1)(a). It is to be noted that, while a plan must involve insurance, it is not
necessary that there be a contract of insurance with an insurance company. If,
however, insurance is not provided by an insurance company, the plan must be
one that is based on insurance principles, i.e., funds must be accumulated,
normally in the hands of trustees or in a trust account, that are calculated to be
sufficient to meet anticipated claims. If the arrangement merely consists of an
unfunded contingency reserve on the part of the employer, it would not be an
insurance plan.
7. An employer may contribute to separate plans for different classes or groups
of employees. For example, there may be one plan for clerical staff and another
plan for administrative staff. Each plan will be recognized as a separate plan. In
other circumstances, an employer may have one plan that provides for shortterm sickness benefits and another plan that provides for long-term disability
benefits.
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Each such plan normally would be considered a separate plan for all purposes
but, if desired, they may be treated as one plan provided they comply with the
following conditions:
A) the same classes of employees are entitled to participate in both plans, and
B) the premiums or other cost of each plan is shared in the same ratio by the
employer and the employees.
8. An association of employers, or a health and welfare trust that is organized
and managed by or on behalf of both employers and employees in a certain
industry, may establish a plan with an insurer that is available to all
employer-members. In these circumstances, if there is one insurance contract
between the insurer and the association of employers or the health and welfare
trust and the contract was entered into after June 19, 1971, there is considered
to be one plan. Where employees contribute to the cost of benefits provided by a
health and welfare trust, see paragraph 6 of IT-85R regarding the amount that
may qualify as an employee's contribution for purposes of subparagraph 6(1) (f)
(v). For plans that existed prior to June 19, 1971 see paragraph 7 of IT-54.
9. Where the nature of employment in a particular industry is such that it is usual
for employees to change employers frequently (e.g. the construction industry)
and the continuity of wage loss replacement benefits can be assured only if such
benefits are provided under a plan administered by a union or a similar
association of employees rather than directly by the various employers, the
arrangement between the participating employers and the organization
representing the employees is viewed as a single wage loss replacement plan.
Lump-sum Payments
10. If a lump-sum payment is made in lieu of periodic payments, that amount will
be considered to be income under paragraph 6(1) (f).
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11. Some contracts of employment may provide for payment of periodic benefits
to employees in respect of loss of income due to disability and may also provide
that employees will receive a lump-sum payment on retirement, resignation or
death based on the value of unused sick leave credits accumulated under that
plan.
Even though these separate arrangements may be jointly funded by employeremployee contributions, it is the position of the Department that such lump-sum
payments are not a periodic payment under a wage loss replacement plan to
which paragraph 6(1) (f) applies but are taxable in the employee's hands by
subsections 5(1) and 6(3) as remuneration received by them pursuant to their
contract of employment. To the extent that a part of the lump sum payment has
been funded by employee contributions not deducted by the employee under
subparagraph 6(1) (f) (v) in computing the portion of amounts taxable under
paragraph 6(1) (f), the accumulated employee contributions in respect thereof
(but not any interest credited thereon) would represent a return of capital to
employees and need not be included as part of the taxable lump sum payment.
Employee's Contribution
12. Employee contributions that are deductible under subparagraph 6(1)(f)(v), are
restricted to those that were made to the particular plan from which the benefits
were received. Thus, if an employee changes employment and becomes a
beneficiary under the plans of the new employer, the employee may not deduct
the contributions made during the previous employment from benefits received
from the new employer's plan. For this purpose, a change in employment is not
considered to take place where an unincorporated business is incorporated or
where there has been a merger or amalgamation. Also, the continuity of an
existing plan is generally not affected by internal alterations in the plan, such as a
change in the insurer or an improvement in benefits.
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However, for purposes of section 19 of ITAR, an increase in benefits after June
18, 1971, in a pre-June 19, 1971 plan may be viewed as the creation of a new
plan as indicated in paragraph 4 of IT-54.
On the other hand, where an employee, because of a promotion or job
reclassification, is moved from one of his employer's plans to another, such as a
move from the "general" plan to the "executive" plan, contributions to the former
plan would not be deductible in respect of benefits received from the latter plan.
Employer's Contributions
For benefits received by an employee under a wage loss replacement plan to
be subject to tax in his hands under paragraph 6(1) (f), the plan must be one to
which the employer has made a contribution out of his own funds. An
employer does not make such a contribution to a plan if he merely deducts an
amount from an employee's gross salary or wages and remits the amount on the
employee's behalf to an insurer. In these circumstances, the employee's
remuneration for tax purposes is not reduced by the amount withheld and
remitted by the employer to the insurer.
Where the employer has made an actual contribution to a plan, paragraph 6(1)
(a) provides that it is not to be included in the income of the employees if the plan
is a "group sickness or accident insurance plan". It is considered that this
exemption in paragraph 6(1) (a) applies to any of the three types of plans
mentioned in paragraph 6(1) (f), provided that they are group plans.
13. If an employer should have a plan that is in part a wage loss replacement
plan and in part a plan that provides for other types of benefits, the employer
must be prepared to identify that part of any premiums paid by him, or other
contribution by him to the plan, that relates to the other types of benefits included
in the plan and, similarly, the part of the employees' contributions, if any, that
relate to the wage loss replacement part of the plan.
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This information is required to determine whether the wage loss replacement
plan is one to which the employer has contributed and the relevant amount of an
employee's contribution for purposes of subparagraph 6(1)(f)(v).
Employee Pay-All Plans
An employee-pay-all plan is a plan the entire premium cost of which is paid by
one or more employees. Except as indicated under 21 below, benefits out of
such a plan are not taxable even if they are paid in consequence of an event
occurring after 1973, because an employee-pay-all plan is not a plan within the
meaning of paragraph 6(1)(f).
14. It is a question of fact whether or not an employee pay-all plan exists and the
onus is generally on the employer to prove the existence of such a plan. It should
be emphasized that the Department will not accept a retroactive change to the
tax status of a plan. For example, an employer cannot change the tax status of a
plan by adding at year-end to employees' income the employer contributions to a
wage loss replacement plan that would normally be considered to be non-taxable
benefits.
On the other hand, where an employee pay-all plan does, in fact, exist and it
provides for the employer to pay the employee' s premiums to the plan and to
account for them in the manner of wages or salary, the result is as though the
premiums had been withheld from the employee's wages or salary. That is, the
plan maintains its status as an employee pay-all plan if the plan provided for such
an arrangement at the time the payment was made.
15. If, under a wage loss replacement plan, the employer makes contributions for
some employees, but not all, the plan will not be considered to be an employeepay-all plan even for those employees who must make all contributions
themselves.
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It is the Department's view that all payments out of a wage loss replacement plan
to which the employer has contributed are subject to the provisions of paragraph
6(1)(f) regardless of the fact that the employer's contributions may be on account
of specific employees only.
16. Where the terms of a plan clearly establish that it is intended to be an
employee-pay-all plan, the plan will be recognized as such even though the
employer makes a contribution to it on behalf of an employee during an
elimination period (i.e. the period after the disability but before the first payment
from the plan becomes due). During this period normally there would be no
salary or wages from which the contribution could be deducted. Any amount so
contributed by an employer should be reported as remuneration of the employee
on whose behalf it was contributed in order to maintain the employee pay-all
character of the plan.
17. Where an employer pays, on behalf of an employee, the premium under a
non-group plan that is:
a. a sickness or accident insurance plan,
b. a disability insurance plan, or
c. an income maintenance insurance plan,
the payment of the premium is regarded as a taxable benefit to the employee.
The payment by the employer is not viewed as a "contribution" by the employer
under the plan, and paragraph 6(1) (f) does not apply to subject to tax in the
employee's hands any benefits received by him pursuant to the plan.
18. Whether or not the benefits an employee receives under a plan are required
to be included in his income is governed both by the type of plan in effect at the
time of the event that gave rise to them and any changes in the plan subsequent
to that time.
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When a pre-June 19, 1971 plan, or an employee-pay-all plan, is changed and
becomes a new taxable plan, an employee who was receiving benefits at the
time of the change may continue to receive them tax-free thereafter but only in
the amount and for the period specified in the plan as it was before the change.
Where the new taxable plan provides any increase in benefits, whether by
increases in amounts or through extension of the benefit period, the additional
benefits must be included in income since they flow from the new taxable plan.
Where an employee is receiving benefits under a taxable plan at a time when it is
converted to a new employee-pay-all plan, the benefits he continues to receive
subsequent to the date of conversion, to the extent that they were provided for in
the old plan, will remain of an income nature because they continue to flow from
the old taxable plan.
Claimant's Survivors
19. If the payment of wage loss replacement benefits should continue after the
death of an employee who was receiving such benefits, paragraph 6(1) (f) is not
applicable to such benefits paid to the widow or other dependent for the
reason that the amounts received do not relate to a loss of income from an office
or employment of the recipient. Such payments, however, may be viewed as
being received in recognition of the deceased employee's service in an office
or employment and be included in income as a death benefit if they exceed the
exemption provided in subsection 248(1).
Information Returns
20. Paragraph 200(2)(f) of the Income Tax Regulations stipulates that every
person who makes payments pursuant to a wage loss replacement plan is
required to file Form T4A information return. The law does not require that
income tax be deducted from such payments.
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E.I. (U.I.C.) Employee Premium Rebate
21. A wage loss replacement plan may qualify the employer for a reduction in
unemployment insurance premiums under subsection 64(4) of the
Unemployment Insurance Act, 1971. This subsection also provides that fivetwelfths of any such reduction must be used by the employer for the benefit
of his employees. The benefit may be conferred directly by the employer,
indirectly through an employees health and welfare trust or in any other manner,
but it will only be tax-free in an employee's hands if it is conferred in the form of a
benefit specifically exempt from taxation by paragraph 6(1)(a).
ONE ASSOCIATION’S COMMENTS ON A CRA RULING FOR WLRPs
In a recent technical interpretation (Document No. 2005-0148221E5, dated Nov.
21, 2005), the CRA provided comments with respect to a situation where a
corporation was considering the purchase of insurance policies to provide salary
protection to its two employees, the sole shareholder and his son.
The following statement appears at the end of the letter:
Finally, we would like to note that there is no requirement under the Act that
different insurance policies that provide wage loss benefits coverage to
employees be “grouped” together to qualify as a wage loss replacement plan for
purposes of paragraphs 6(1)(a) and 6(1)(f).
It is not apparent what is meant by this statement, particularly as it applies with
respect to paragraph 6(1) (a). The relevant part of that paragraph is the reference
in subparagraph 6(1) (a) (i) to a “group sickness or accident insurance plan.”
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Here are the questions that CRA were asked by this Association:
1. Would the CRA clarify what is meant by this statement as it applies with
respect to paragraph 6(1) (a)?
2. Has the CRA changed its position as to what is required for an arrangement
to be considered a group plan when the arrangement involves the employer
acquiring individual insurance policies in connection with the provision of
sickness or accident benefits to employees? If so, what is now required for
such an arrangement to be considered a group plan?
CRA’S Response:
Our reply is based on the CRAs long-standing position that an employer can
provide group benefits under a plan via a single contract with an insurer or under
individual contracts. For a particular plan to be considered a group plan it must
provide benefits to more than one employee.
Further, where there is more than one policy under a plan we would expect that
the policies provide similar benefits to employees and that employee entitlements
under the policies are documented; otherwise it may not be reasonable to
consider that the benefits provided under each policy are under the umbrella of a
single plan.
OTHER FORMS OF CORPORATE DISABILITY POLICIES
Business Disability Overhead Expense
If you run a business of your own, this sensible insurance ensures that your
business can continue in the event of your total disability. Office Overhead
Expense Insurance can help pay the bills for your sole practice or partnership
when an accident or illness leaves you temporarily disabled. In other words,
these plans pay for specific business overhead expenses that remain the
responsibility of a business owner even if disabled.
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Reimbursement will be provided for incurred expenses such a rent, salaries,
utilities, leased or rented equipment and other expenses which are normal and
customary in the operation of your office. In the event of joint occupancy or
partnership, only you share of the office overhead expenses will be used in
determining the amount of insurance payable.
Premiums are tax deductible, while benefits are taxable.
KEY PERSON DISABILITY INSURANCE
These disability policies are designed to compensate an employer for a financial
loss due to the disability of a key employee. These plans pay benefits based on
proof of loss or on a percentage of the employee’s income usually for a period of
no more than a year.
This disability insurance provides the most affordable solution to all the following
business concerns:

Premiums can be included in the budget as a fixed expense.

Cheaper than any of the alternatives.

Automatically provides the funds at time of the greatest need.
Premiums are deductible; however, the benefits are not taxable.
Disability Buy-Out Insurance
In a partnership or small Corporation key person has a lengthy or permanent
disability buying the disabled parties business interest becomes increasingly
important.
The problems that are caused by the disability increase to the survivor:

The business will suffer.

The business may lose money.

The survivor’s face increased difficulties and frustration.

Personal deteriorating financial position of the disabled.
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Funded Buy-Out Disability Agreements
The best way to guarantee the fulfillment of the buy-out agreement is to have it
funded by a special type of disability insurance. The agreement will state the
terms of payment as to amount and length of time in which to make the
payments. Some restrictions on underwriting apply, usually to do with length of
time in business or high occupational risks.
Without insurance in the event of disability the buy-out is left to the uncertainties
of chance and negotiation. The seller is under distress and time is on the side of
the survivor.
Some Buy-Out Points to Remember

The buy-out price has to be paid in cash by the survivor and the payment
period if paid out of cash flow may be long and hazardous. On the other hand
insured agreements provide for an agreed upon price or evaluation method
and the terms of payment are guaranteed.

Insurance companies will issue both personal disability policies and buy-out
insurance on the same life payable on the same disability.

For the buy-out to proceed in a guaranteed fashion a properly drawn, funded
buy-out, agreement must be in place at the time of disability.

Third party insurance (owned by a partner or shareholder) must be issued for
the agreed upon price and ownership is not transferable.

Financial statement must be submitted prior to issue of the insurance.

The insurance proceeds must coincide to the agreement price of the Buy-Out.

Usually the company needs to be in business for two years or more and show
signs of profitability.

Insured disability Buy-Out agreements usually have a long waiting period of
1 – 2 years. The benefit, if monthly, may have pay out period of up to 5 years.
There are two methods of pay out:

Monthly pay out – is paid out monthly for the guaranteed term.

Lump sum – is paid in one large lump sum payment.
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Some agreements contain both payout methods, lump sum to provide an initial
deposit and a monthly payment over a period of months to complete it.
SOME DISABILITY BUY-OUT AGREEMENT PROVISIONS
Disability definitions
The disability definition is defined by the insurance contract and the agreement is
contingent upon the disability, meeting the terms of that definition.
Mandatory Buy-out
As with a buy-sell agreement, the disabled party must sell and the survivor must
buy.
Compensation to the Disabled Party
Prior to commencement of the disability payments the agreement can provide:

Continuances of prior pay or draw.

Combination of disability and top-up to match previous pay.

Any pay increases or profits payments should be outlined.

Any increased payments to the survivor to reflect increased workload should
be spelled out.
Purchase Price
Purchase price is subject to the same consideration as in the buy-sell agreement.
It can be based on current value at time of commencement of disability or start of
buy-out agreement (waiting period 1-2 years).
Notch Provision
If included, the agreement will provide for a time limit on recovery of the disabled
and provide for a repayment of the buy-out payments, e.g. 6 months.
Provision for Death of the Disabled
If life insurance is in force, the balance of the purchase price will be paid in a
lump sum by the life policy and the surviving partner will keep any balance.
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If the agreement was not funded by life insurance, the payments will proceed as
stated in the document.
AFTER COMMENCEMENT OF THE BUY-OUT
The disabled party ceases to be an owner and becomes a creditor. The disabled
party would not become an owner again should the surviving partner die or
become disabled. Both parties should continue to insure each other until the
agreement is fulfilled.
The buy-out disability insurance ceases at this point (ownership could not be
transferred for a price equal to the CSH). For a health insurance policy it would
be the value of the unearned premiums.
NOTES ON TAXATION
Premiums are not deductible and benefits are not taxable. Any premiums paid
by corporation on the life of an employee are a taxable benefit.
When a policy is surrendered before death, the proceeds more than the ACB are
taxable at corporate income tax rate.
In third party insurance, where the owner and premium payor is also the
beneficiary, the benefit is received tax-free.
TARGET MARKETS FOR KEY PERSON DISABILITY INSURANCE
Partnerships and professional corporations comprised of two to five principals.
The types of businesses that would depend on a Buy Sell product for protection
might be:

Accounting firms,

Advertising agencies,

Architectural firms,

Computer firms,

Medical practices and clinics,
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
Engineering firms,

Law practices,

Employment agencies AND other small manufacturers to name a few.
Deferred Tax
These plans are designed to protect the unincorporated professional who is
disabled and has a deferred income tax liability to the Canadian Revenue
Agency. Benefits can be paid monthly after an elimination period of 90 days or in
a lump sum after a minimum of 180 days.
Retirement
These disability riders provide for 20% of annual income up to a maximum
amount as specified by the insurer. This money is deposited into a trust account
for retirement purposes. The elimination period is typically 90 days and benefit
periods’ range from 10 years to “age 65”.
3. OVERVIEW OF PERSONAL DISABILITY CONTRACTS
3 (A) Commercial Policies
Characteristics

May be issued as Accident only, or as an Accident and Sickness Policy.

The rates are the least expensive of the three types.

Premiums can be changed or cancelled individually (usually on anniversary).

Restrictive clauses and exclusions can be added by amendment after issue.

Contract wording may be prohibitive, thereby giving the Insurance complete
control.
3 (B) Guaranteed Renewable Policy
Characteristics

Premiums may be adjusted by class (on anniversary)

Renewal is guaranteed and policy cannot be cancelled, amended or changed
after issue. Except for right of premium adjustment Contract is guaranteed in
every way.
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
Contract provisions are not as restrictive as Commercial Policies.

These policies are guaranteed renewable usually to age 65 although they
have to be only renewable to age 55.

These policies are usually priced right at issue to allow for unforeseen
changes in the future.
3 (C) Non-Cancellable and Guaranteed Renewable Policies (Non-Can)
Characteristics

Premiums are guaranteed and may not be adjusted after issue.

No policy changes are allowed and contract is considered to be unilateral,
that is, one sided. If the insured pays the premium, the Company guarantees
all the contract provisions and cannot change or eliminate any benefits after
issue, even in the event of an occupational change resulting in more
hazardous work conditions.

Policy improvements are frequently offered to existing policy owners, but new
restrictions or exclusions cannot affect policies already in force.

These policies continue to age 65, at the insured’s option, because of the
guarantees, they are the most expensive.
PREMIUMS AND RISK SELECTION
When insurance is underwritten, the principle of risk sharing is followed. Many
people will pay into the fund to compensate or indemnify the few unfortunates
who suffer a loss.
It is the insurer’s role to gather all the necessary funds to pay any claims. The
insurer has to guarantee that at the times of disability, money is going to be
available to pay the disabled person.
It is the insured’s obligation to pay any premiums that fall due for the plan.
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Three factors determine the amount of premiums charged:
1. Claim costs
2. Operating Expenses
3. Investment Earnings
Policy Conditions
Contract and impact on the benefits define most conditions provided and the
premiums charged.
Occupational Classifications
Rates will vary as to gender and smoking status. In addition, occupations are
grouped into classification. The classification may vary from five to twenty. It is
important to note that not all companies will adhere to the same criteria for each
class. It is beneficial for the agent / broker to look around for their client in order
to seek out the best contract.
Classifications may be titled or number with the lowest number or letter the most
hazardous and the highest usually being the professionals like Doctor, Lawyer or
white-collar executive.
Occupational classifications are rated on their morbidity exposure and based on
the following questions:

Are the occupation and income stable and permanent?

Does the occupation require a regular work schedule?

Does the occupation require travel and location of work site?

What are the work duties?

Is there any health or hazard related job tasks?

What economic, social or environmental factors affect the worker?

Are there any moral hazards?
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CLASSES (FIVE USED AS AN ILLUSTRATION, MAY VARY BY COMPANY)
5A - Professionals who are only in the office

White-collar executives such as physicians, dentists, lawyers, accountants
etc.

Usually excludes those involved in laboratory work or outside supervision.

Executives who meet specified qualifications such as income, duties, and
business stability, size of business operation.
4A - Professional with out of office duties

Non – hazardous duties such as laboratory work, physical activity or outside
supervision.

Laboratory technicians, teachers etc.

White-collar executive with less of a profile than 5A.

Certain office workers with clerical duties, accountants and librarians.
3A - Non-hazardous occupations

Occupation demands that take the worker out of the office on a regular basis.

Manufacturing agents, certain clerical duties, auctioneer and surveyors

Supervisor, superintendents, contractor and inspectors. On the job site but
supervising only.
2A - Light manual occupations

Skilled trades who are fully qualified and with good occupational experience
such as plumber, electrician and painters.

Hairdresser, barbers, tailors, bookkeepers etc.
1A - All others that are insurable

Drivers, factory workers, heavy equipment operators, unskilled worker in nonhazardous industries.
Some occupations are not insurable and some disabilities will be prohibitive in
one occupation and of little consequence in another occupation.
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Disability policies are easier to market and harder to get Insured that life products
and require much more detail.
It is important that the agent / broker give full details about the applicant’s job.
Titles mean very little. The insurance company has to know what the applicant’s
duties are.
SOME CONTRACTUAL TERMINOLOGY
Waiting Period or Elimination Period (Exchangeable Terminology)
This is the length of time between the onset of disability and the commencement
of benefit, usually expressed as 14, 30, 60 or 90 days. May extend up to 1 or 2
years. The shorter the period, the higher the premium.
Benefit Amounts
Benefit is based on a percentage of pre-disability income and is determined by
the companies Issue and Participation Limit tables.
Coverage can be less than maximum allowed and all companies have minimum
issue limits.
Benefit Period
Benefit is paid for a stated number of years as per contract. 1, 5, 10 and to age
65 are common. Lower classification (1A) may only qualify for 1-5 years, while
higher classes (5A) will qualify for age 65 limits.
The longer the benefit period, the higher the premium. A good “rule of thumb” is
the longer the elimination and benefit period, the better the plan, especially if
premium dollars are a consideration.
Disability Definition
All disability definitions include the concept of total disability, that is the inability to
do one’s job, but may phrase it in different terms.
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Even when the benefit is payable for other than total disability, the inability
concept is inherent, just the degree is in question. This definition forms the
traditional and basic description. This definition forms the traditional and basic
description.
From the description grew the idea that a job is composed of a series of
functions, the inability to do any or all of them constitute total disability. Finally
came the idea that if the individual’s disability was to cause a reduction of
income, then inability was evident to some degree.
As times change, so does the meaning of Disability
Original Wording
Total Disability
Evolutionary Wording
Inability to engage in any occupation
for wages
Unable to perform the important duties
of your occupation
Most Recent Wording
Finally, the definition is qualified to occupation:
1. Any Occupation
Unable to engage in all occupations qualified by educators, training or
experience.
2. Regular Occupation
Unable to perform the occupation used currently to earn a living and not gainfully
employed in other occupation.
3. Own Occupation
Unable to perform the important duties of one’s own occupation (trained and
educated specifically) and not gainfully employed in any other occupation.
For some professional occupations, the “not gainfully employed” clause is
deleted.
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All disabilities are considered to result from accident or sickness by a physician
and require monitoring. For those disabilities that are not total, but do cause loss
of function or income.
Partial Disability
Loss of some functions will provide 50% of the total disability income provided by
the contract.
Residual Benefit
When the degree of disability results in a loss of income (usually billings, fees,
etc.) the percentage of loss of income is applied against the monthly benefit and
paid out in addition to the remaining income earned. As an example, this benefit
may have a threshold of 20% loss before commencement of the residual benefit
and 80% loss is considered total. The residual benefit is based on the premise
that those occupations that require this benefit are more motivated to return to
work and the all or nothing concept of total disability would be a hindrance to
return quickly, even though not fully recovered and functioning.
Inflation Indexes
The problem with a fixed level of benefit is that due to inflation, the longer a
disability continues, the less the benefit is in relation to the ongoing earnings.
Frequently this will be addressed by a clause that indexes the pre-disability
earned income, causing the residual benefit to also increase, offsetting the
effects of inflation. A yardstick measurement, such as the C.P.I. index is used to
adjust the increase.
Qualifying Period
Originally, a residual benefit would not be paid until after total disability had taken
place and recovery was being made. Most policies for 4A and 5A can have a
reduced or eliminated (0 days) qualifying period, thereby removing the need for
total disability to qualify. This can apply to residual or partial benefit.
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Presumptive Disability
Even though the insured is not completely disabled, they are “presumed” to be so
if they lose the use of speech, hearing, sight or two limbs.
Rehabilitation Clause
Early return to work can be encouraged by use of rehabilitation services and it is
in the Insurer and the Insured’s best interest for the Insurance Company to pay
for the service.
Waiver of Premium
Most companies waive the premium after the insured has been disabled for 90
days or more. The waiver period and the elimination period may be coincidental.
Recurrent Clause
If the disability reoccurs within six months, the claim resumes as if no recovery
had taken place. After six months, the recurrent or new disability will require a
new elimination and benefit period.
Statutory Conditions
The Accident and Sickness Insurance Act contains 12 statutory conditions that
apply to both Group Insurance and Individual Disability Contracts. There are
guidelines to enable the companies to conform to certain standards. Some are
required as is, some can be adapted and some eliminated.
Additional Benefits (Riders)
Additional clauses can be added to the basic benefit to provide increased levels
of coverage. Each additional rider increases the premium.
Lifetime Injury or Sickness
This benefit sometimes issued as an “accident” only benefit providing for an
extension of the basic benefit if disability occurs before age 65. It may provide
for a reduced benefit if disability occurs after age 50 or 55.
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Cost of Living (COLA)
This rider indexes the basic benefit using some extensive yardstick like CPI or a
5% adjustment annually. The rider may have a cap (2 X basic benefit) or it may
be unlimited (very expensive).
Some companies will boost monthly benefits prior to claim, causing a
corresponding increase in premiums. In addition, the insured may be able, after
recovery, to purchase the “COLA” accumulated benefit, without proving their
good health.
Future Insurability (F.I.O., G.I.O)
This benefit enables the policyholder to purchase a stated amount of benefit at
stated intervals, after issue and before a certain maximum age and/or a
maximum amount.
E.g. $500 per year, to maximum of age 55 and 2 X basic benefit. The applicant
is not required to qualify medically (guaranteed issue), but may require increased
income to qualify.
First Day Hospital
Elimination Period eliminated if disability results in hospitalization. Benefit paid
on a per diem basis. (1/30 of monthly benefit per day).
Accidental Death and Dismemberment
A rider can be added that is identical to the Group Insurance Benefit.
Return of Premium
A percentage of paid premiums are refunded of claims over a certain period of
years do not exceed a stated amount. E.g. 10 years – 20% or 20 years – 25%.
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OTHER DISABILITY COVERAGES
A) Association Group Insurance
The Master Contract for this coverage is with the Association. These
associations may be professional or occupational. The Insurance Company can
cancel the contract, or they may change the rates if the experience is bad.
The coverage usually will terminate when the member ceases to belong to the
association. Unlike employer group insurance, each member is underwritten and
given a policy.
Association plans usually will cost less than personal plans because the rates
can be increased if need be. Usually these plans increase in premiums every
five or ten years. This can cost the older members more, and the younger ones
less.
B) Creditor Insurance
Some lending institutions, such as banks, trust companies and credit unions
have benefits through insurance companies that will pay off loans or mortgages
in lump sums in the event of a debtor’s disability.
A TYPICAL CANADIAN BANK’S CREDITOR DISABILITY INSURANCE
PACKAGE
What is Disability Insurance?
Disability Insurance provides coverage for the payments on your Line of Credit.
Benefit payments from the Insurer are applied directly against your Line of Credit
and are designed to replace your minimum contractual payment, up to a
specified maximum.
What qualifies as a “disability”?
Disability means you are prevented from performing all (or substantially all) of the
essential duties of your own job and you do not engage in any other occupation
or employment.
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Is Creditor Life Insurance not enough?
Creditor Life Insurance only provides coverage in the event of death. Disability
Insurance makes monthly payments for you, helping to protect your credit rating
while you recover.
Why do I need disability insurance when I have long and/or short term disability
through my company?
Long term disability coverage from your employer usually only covers up to 70%
of your income. With a disability you may be faced with medical and other
unexpected expenses. Disability Insurance on your Line of Credit will help to
alleviate the financial strain of a reduced income during a disability.
Do I need to answer any medical questions to be approved?
Only if your Line of Credit is greater than $25,000 – there are two simple
questions to answer. If your Line of Credit is $25,000 or less, you’ll be
automatically approved if you meet the eligibility criteria.
Can I get joint coverage?
Yes, a maximum of two people can be covered – and there are special rates for
joint coverage.
How much does it cost?
Disability Insurance premiums are calculated based on your Line of Credit
payment. For single coverage, the cost is $2.50 per $100 of calculated monthly
payment. For joint coverage, the cost is $4.50 per $100 of calculated monthly
payment.
Will my rates ever change?
If rates change, you will be given 60 days' notice.
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What if my Line of Credit changes?
If you refinance your Line of Credit (which includes any increase in your credit
limit) then a new insurance application is required. This follows the same process
as when you first applied for coverage.
When does coverage begin?
Coverage begins on either the date the Line of Credit is approved or the date the
insurance is approved, whichever comes later.
When does coverage end?
Coverage ends when:

You cancel (in writing) the coverage

The Bank cancels your Line of Credit

You cease to be a borrower

You refinance or renegotiate (which includes your request for an increase in
credit limit) your Line of Credit or Loan

You reach age 70
Are there any conditions or limitations?
Yes, as with any insurance policy there are some limitations and exclusions.
These are designed to protect the benefits of all those insured and to keep the
cost as reasonable as possible.
C) Savings Group Insurance
Banks, trust companies, credit unions and some investment companies such as
mutual fund companies may provide coverage on the lives and or well-being of
their depositors or investors.
D) Blanket Insurance
This class of group insurance covers losses that arise from specific hazards to or
defined by a reference to a particular activity or activities.
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CLAIMS
An important function of an agent’s duty includes facilitating claims payments.
The insured or the agent will need to submit:

Claimant’s statement.

Attending Physicians statement.

May require other reports from other practitioners.

Employer’s statement, if any.
The Insurance Company will want full disclosure into the details of how, when
and why. They will also want to know of other pending claims to Insurance
Companies and/or Government benefits.
It is always best to underwrite the risk fully disclosed than to be forced to disclose
at time of claim.
HEALTH AND WELFARE TRUSTS
A health and welfare trust (HWT) is not a type of benefit plan, but a funding
vehicle for certain group benefits which can include PHSPs and group sickness
and accident insurance plans. As a funding vehicle, an HWT is an alternative to
two common funding arrangements for group benefits, being: i) an insurance
policy (under which the insurance company assumes the risk associated with
providing the benefits promised under the group plan) or ii) an “administrative
services only” (ASO) contract (under which a third party (typically an insurance
company) administers benefits for a fee, but which is funded by the employer on
a more or less current basis).
The term “health and welfare” trust is not defined in the ITA. CRA’s position on
these arrangements is set out in what is now a somewhat dated 1986
Interpretation Bulletin, IT-85R2, entitled Health and Welfare Trusts for
Employees. CRA has recently prepared a revised version of IT-85R2 and
released it on a limited basis for comment, but it is not available to the public and
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it is uncertain when it will be made available, either as a draft for further
comment, or in final form. As of January 2012 no updates have been released.
An HWT is a true trust under the common law and an inter vivos trust for ITA
purposes. It may be a multi-employer arrangement or may be established by a
single employer.
Under IT-85R2, the main requirements are the type of benefit plans that can be
funded through an HWT, which are limited to:
a. group sickness or accident insurance plans;
b. PHSPs;
c. group term life insurance plans; or
d. any combination of a) through c).
In Addition:

Trustee(s) must act independently of the employer;

Employers cannot retain control of funds once they are contributed to an
HWT;

Assets of an HWT cannot be invested in securities or debt of the employer or
a person that does not deal at arm’s length with the employer;

Assets of an HWT cannot revert to a participating employer (this applies even
on termination of the trust); and

Employer contributions to an HWT cannot exceed the amount required to
provide the benefits under the plans funded through the trust.
Where qualifying benefits are provided through an HWT, the employees are
taxed in the same way as if the benefits had been provided under an insurance
policy or were paid directly by the employer. Specifically, as to PHSP and LTD
benefits, the tax consequences to employees who receive benefits by way of an
HWT will be the same — they will not be taxable on PHSP benefits, will be
taxable on LTD benefits if the employer contributed to the LTD Plan and will not
be taxable on LTD benefits if the LTD plan is an employee pay-all arrangement.
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The employer will be entitled to a current deduction for amounts contributed to an
HWT to the extent that they are reasonable.
As noted, the HWT is an inter vivos trust for ITA purposes.
In calculating its taxable income, such a trust is entitled to deduct expenses
incurred in earning income, expenses of administering the trust (e.g., expenses
relating to collecting and accounting for contributions, reviewing insurance
policies, management fees) and amounts paid out of the trust income for benefits
(or premiums) that are allocated to and included in the income of the trust
beneficiaries pursuant to the ITA.
Tax Issues Since an HWT is a taxable trust, tax efficiency will be best achieved if
the annual income of the trust can be used to meet deductible expenses and pay
benefits in the year in which it is earned, so as to avoid taxation of income in the
trust in that year and then again in a later year when it is paid out in the form of
benefits.
However, a tax efficient arrangement will also ensure employees who receive
benefits from an HWT are not taxed on those benefits in a different manner than
would apply if the benefits were provided through a different structure (such as
an insurance policy or ASO arrangement).
If benefits are paid to an employee out of an HWT’s current income and
deducted by the trust from its income for tax purposes as permitted by paragraph
104(6)(b) of the ITA, the value of those benefits will be required to be included in
the recipients’ income pursuant to paragraph 104(13)(a) of the ITA. This may
result in otherwise non-taxable PHSP or employee pay-all LTD benefits
becoming subject to tax.
To avoid converting otherwise tax-free benefits into taxable receipts from an
HWT, it will be important that PHSP and employee pay-all LTD benefits are not
deducted by the trust in calculating its own income for tax purposes.
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Practically, this will usually mean that it is not tax efficient to set up an HWT that
provides only PHSP or employee pay-all LTD benefits, as this will mean that the
trust will be required to pay tax on its income (to the extent that it cannot be
reduced by deductible expenses) to ensure that the employees are not taxed on
such benefits.
In deciding whether to establish an HWT, an employer will want to consider the
expected income of the trust relative to the expenses and taxable and nontaxable benefits to be provided. The employer’s cost of funds may also be
relevant to the decision to establish an HWT. In determining that cost, the
employer will want to consider the extent to which it can deduct amounts
contributed to the HWT (and borrowing costs, if any, associated with those
contributions). CRA’s position on “pre-funding” benefits under an HWT is
relatively restrictive.
An employer, however, may still find the after-tax cost of making contributions to
an HWT and having the trust pay benefits is less than if the employer retained
the contributions and paid the benefits directly.
While not primarily a tax issue, the employer’s risk tolerance will also be relevant
to the decision to establish an HWT. In this regard, under a single employer
HWT, the employer will generally be responsible for any difference between the
amount the trust can pay and the amount of the benefits to which the covered
employees and their eligible beneficiaries are entitled. This is essentially the
same as under an ASO arrangement except that the HWT facilitates the
investment of contributions and may result in more favourable accounting
treatment for benefit liabilities that are secured by trust assets.
In contrast, under a multi-employer arrangement that requires employers to
contribute fixed amounts as negotiated under a collective agreement, the
participating employers will generally not be the ultimate guarantors of the
benefits being provided through the trust.
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The key requirements for an HWT can also raise some concerns. In particular,
the requirement for independent trustees may be difficult to apply, especially in
the case of an HWT that is not collectively bargained. In addition, CRA’s position
on the funding of HWT benefits is also problematic in some respects.
Regarding the independence of the trustees, CRA indicates in IT-85R2 that “[t]he
type of trust arrangement envisaged is one where the trustee or trustees act
independently of the employer as opposed to the type of arrangement initiated
unilaterally by an employer who has control over the use of the funds whether
there are employee contributions.” In the case of a single employer trust, it would
not be unusual for the employer to wish to appoint the trustees. CRA has
acknowledged that the fact that all the trustees of an HWT are appointed by the
employer or are employees is not in and of itself determinative of the issue of
whether the trustees are independent of the employer. Nevertheless, the
trustees’ independence will be a question of fact and it may be more difficult to
demonstrate the appropriate level of independence where the employer
determines who may act as an HWT trustee.
With respect to funding and, in particular, the deductibility of HWT contributions,
CRA’s position has been that contributions to an HWT cannot exceed the amount
required to provide the health and welfare benefits and such contributions may
be calculated on an actuarial basis. In October 30, 2002, CRA noted this
requirement refers to the “current” cost of paying out benefits for a given year.
In CRA’s view, contributions to an HWT in respect of benefits payable over future
years represent consideration for insurance in respect of a period after the year
in which the contributions are made, which is not deductible in the year in which
the contributions are made. CRA’s “compromise” with respect to such
contributions is that they will not result in the arrangement ceasing to be an HWT,
provided they are based on actuarial determinations of the amounts needed to
fund the future benefits.
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A good argument can be made that CRA’s position on the deduction of
contributions to an HWT is flawed. A Joint Committee on Taxation of the
Canadian Bar Association and Canadian Institute of Chartered Accountants
made this argument to CRA in connection with draft IT-85R3 in September 2005.
It will be interesting to see how CRA responds.
However, the HWT is really a creature of CRA policy and provides an exception
to the general rule that, in the absence of a specific provision in the ITA
authorizing a deduction for contributions to a trust, such contributions will be in
the nature of capital and not deductible at all. As the ability to take any deduction
for contributions to an HWT is in the nature of an administrative dispensation on
the part of CRA, it is not clear they would be prepared to expand that
dispensation to encompass what could be significant lump-sum contributions
(particularly in connection with LTD benefits).
So are HWTs viable?
As can be seen, it is important that employers and employees appreciate the ITA
and CRA requirements for PHSPs and LTD Plans, as well as the consequences
of failing to meet those requirements, to ensure the delivery of the desired
benefits at the expected cost. It is also important that employers considering
using an HWT to fund their PHSP and LTD Plan obligations fully understand the
tax advantages and limitations of such trusts before making a decision to
establish one.
SUCCESSFULLY SELLING SUBSTANDARD CASES
The mandate of any Disability insurer is to make the most equitable and
appropriate decision for each case submitted. Most companies will strive to
achieve balance among such factors as Agent / Broker needs, service to the
consumer, company profitability and expense goals.
A basic understanding of disability medical underwriting enables the agent /
broker to provide sufficient detail to the underwriter with the application.
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This can have a dramatic effect on time service by minimizing the need for
additional requirements and clarification.
Many companies believe that an understanding of the possible underwriting
action on a disability application is critical to the success of each sale.
Occasionally, there may be the need to have a policy issued with possible
modifications that could be necessary in order to issue coverage to individuals
with significant health impairments. Prior knowledge is important in order to
prepare the prospect, but the agent may also be able to deal with the adverse
reaction by proposing a longer elimination period or by selling a reduced benefit
period. This may allow the underwriter to allow coverage with minimal or no
modifications to the policy. An extended elimination period often negates the
need for many exclusion endorsements. A shorter benefit period may lower the
percentage of extra premium required.
In disability income, substandard underwriting refers to some modification of
coverage due to medical history, physical condition, laboratory findings or some
non-medical situation that exists or has existed in the past.
The objective of substandard underwriting is to modify the coverage being
approved so that the experience results of the substandard group to which the
applicant belongs are the same as a standard group.
There are several courses of action that can be taken that will allow companies
to offer coverage to as many applicants as possible.
Actions that can allow coverage:

Extra premium rating

Full exclusion rider

Limited period exclusion rider

Qualified condition exclusion rider

Change in benefit period
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
Change in elimination period

Reduction of indemnity amount

Removal of certain supplementary benefits

Any combination of the above
Extra Premium Rating
Whenever possible, the first consideration is to offer the benefits requested and
use an extra premium. An example of an extra premium could be an extra 20%
premium. Any history requiring less than this increase would be approved on a
standard basis. The use of an extra premium allows the insured to have the
coverage and therefore the protection being sought after.
Full Exclusion Rider
The use of exclusion riders has been recognized as necessary in disability
income underwriting when an applicant has a relatively specific condition, which
causes an increased risk of future disability. This history may be chronic or
severe in nature, may recur or may require future surgery in some cases.
Limited Period Exclusion Rider
This exclusion places a specific elimination period on a particular condition, but it
provides full coverage after the specific elimination period is met. In many cases,
this elimination period is longer than the elimination period on the basic policy.
Qualified Condition Exclusion Rider
The qualified condition exclusion is a step beyond the limited period exclusion. It
provides benefits for a specific named impairment showing the elimination
period, benefit period and indemnity payable for the particular condition. It may
also extend or limit coverage under various benefit riders.
Reconsideration of Current Decision
Each case is given the best decision that the facts permit at the time.
Reconsideration of an underwriting decision is only possible when there has
been a significant change since the original decision.
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Many companies will not reconsider current underwriting decisions unless the
written request is supported with specific details and new information that may
alter the facts that were made available at the time the decision was originally
made.
Declines
There will be a small percentage of applicants who will not be eligible for
disability coverage due to medical or non-medical findings. These people
present risks, which are too great to be taken under regular underwriting
practices. Individuals with progressive diseases, recent or scheduled surgery
and chronic or current disabling conditions would be ineligible for disability
coverage as would those persons who are found to have significant nondisclosed medical history.
INSURANCE LAW AS IT PERTAINS TO A & S CONTRACTS
Even though each province has its own Insurance Act, the insurance legislation
pertaining to the common law provinces (all of Canada except Quebec), has
been based on the model accident and sickness insurance policy Act.
Material Facts
All material facts must be disclosed. Misrepresentation of a fact will make the
contract voidable by the insurer. The smoker issue is a good example of this.
There is a two-year time limit for voiding the contract from the date of issue,
renewal or reinstated. After that period, the insurer is bound by the contract
except in the case of fraud.
Policy Particulars
Every policy must contain the following provisions:

Name of the insured

Amount or a method of determining the amount of money to be paid.

The amount if any of the premium and grace period.

Any conditions upon which the contract may be reinstated if it lapses.
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Term of the insurance, or method of determining when the insurance will
terminate.
Insurable Interest
An applicant has to have insurable interest in the contract when it is issued.
Grace Period
The act does not require the insurer to provide a grace period in which to pay
premiums due. It is commonplace in today’s world that most insurers will allow a
thirty-one day grace period.
Incontestability
The insurer because of misrepresentation of facts cannot cancel a contract, after
it has been in force for two years, unless fraud has been committed, or unless a
misstatement of age has occurred.
Misstatement of Age
If an age of the insured has been misstated, the insurer can increase or decrease
the benefits payable under the contract to an amount that would have been
purchased for the same premium at the correct age, or they can adjust the
premium accordingly.
Reinstatement
The Act does not provide for the insurer to allow the insured the right to reinstate
the contract once it has lapsed for non-payment of premiums, but most insurers
do have a provision.
Protection against Creditors
The law in this case is the same as for Life contracts; the death benefit belongs
to the beneficiary and cannot be attacked by the creditors of the insured. The
beneficiaries do of course have to be of the preferred class. Caution should be
taken here, as each case is looked at individually.
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Information Statement
The following statement must appear on a policy form, and application form,
every advertisement, brochure and any other piece of sales literature that
illustrates the cost of insurance for a specific type of contract. For policies of this
type, the insurer anticipates that ____% of the premium will be required for
claims. This is not a contractual obligation.
THEY ARE ALL LEGAL CONTRACTS…MAKE SURE YOU READ THEM!
Insurance policies are legal contracts. Read and compare the policies you are
considering before you recommend one, and make sure you understand all of
the provisions so that you can let your clients and prospects know about them.
Marketing or sales literature is no substitute for the actual policy. Know what you
are selling!
Have a summary of each policy’s benefits for an outline of coverage. Good
advisors and good insurance companies want their clients to know what they are
buying.
CONCLUSION
Long-term absenteeism is a significant and costly problem that affects
employers, unions, employees and their families.
A constantly growing phenomenon, it presents many challenges for those
concerned, particularly with respect to the return to work of the absentee. As we
have seen throughout the years, the employer and the unions must do everything
reasonably possible to facilitate the return to work of a person who has been
absent for reasons of disability, pregnancy or family status.
The parties involved must work together to find a reasonable solution that will
ensure respect for the employee’s fundamental rights, while taking into
consideration any hardship the situation imposes on the employer or the union.
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Given these complex obligations, employers and employees’ representatives are
increasingly well-advised to adopt disability management strategies that help to
eliminate problems at the source and facilitate the reconciliation of the interests
involved. A workplace disability management program, developed with input
from all concerned, allows a comprehensive approach to absenteeism and the
planning of various measures to deal with it, ranging from prevention to the
reintegration of employees.
Collaboration between employees and management to ensure working
conditions that promote physical and mental health, balancing of work and family
obligations and the return of employees as quickly as possible to their jobs or to
other suitable jobs is in the best interests of all concerned.
Not only does it enable the parties to meet their legal obligations, but it also
favours a reduction in disability insurance premiums, increased productivity, and
opportunities for people who have had to be absent to resume an active life in
dignity.
Finally, after disability strikes, what happens to income and expenses? Income
drops and expenses rise due to medical and other bills associated with disability.
In addition, savings evaporate to cover or attempt to cover expenses.
These are very strong points you can use to easily point out the risks associated
with disability. Use them to your advantage. Make sure your clients and
prospects are adequately covered.
Making disability sales part of your everyday activity comes down to four
business elements:
1. Responsibility
Sell yourself as a professional, and then present yourself as a well-rounded
financial advisor providing a complete financial solution.
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2. Productivity
By providing more than one product to your customer, you provide a fence of
financial security around your client. This makes it more difficult for them to be
prospected by other agents / brokers. It also increases your persistency as well
as your income.
3. Liability
It is your obligation as a professional to provide the right products to answer the
particular needs of each individual. What a customer needs and does not need
is not your decision. If you overlook a complete solution, you are inadvertently
providing a disservice rather than a service.
4. Credibility
By ensuring that responsibility, productivity and liability are looked after, your
credibility and referability as an astute financial advisor will secure your long-term
success in the business.
On the following pages, you will find some useful information that you can use
when speaking to your clients and prospects about Disability insurance.
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A SAMPLE DISABILITY INCOME INSURANCE WORKSHEET
HOW MUCH WILL YOU EARN?
Your current earnings X Years until age 65 = Your future earnings
Monthly expenses
Mortgage or rent
$
$
Utilities
$
Food
$
Automobile
$
Education
$
Clothing
$
Insurance
$
Taxes
$
Entertainment
$
Gifts
Other expenses (Monthly savings etc.) $
Total Expenses
Your Monthly Income Needs
Amount
$___________
$___________
How long could you cover these expenses without an income?
Disability Needs Analysis Worksheet
A. Present Earned Income
B. Monthly Benefit Required
Present Monthly Coverages
 Individual
 Group
 Association
C. Total
D. Shortage (B – C)
$
$
$
$
$
$
$
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TAXATION OF DISABILITY INSURANCE PREMIUMS & TAXATION
Who Owns the Insurance and Who Is
Paying For It?
Types of Insurance
Personal Protection
Owner
Payor
Insured
Insured
Insured
Employer
Employer
Employer (1)
Employer
Employer
Insured
Insured
Insured
Employer
Employer
Employer (1)
Employer
Employer
Employer
Employer
Cross Purchase
Individual
Individual
Redemption – entity
purchase
Business
Business
Overhead Expense
Business
Business
Loan Protection
Business
Business
Wage Loss Replacement
Plan (WLRP)
Premiums &
Tax
Deductibility
No – Personal
expense
Yes – Taxable
benefit
Yes – Taxable
benefit
Yes – No Tax
benefit
Retirement Protection
Wage Loss Replacement
Plan (WLRP)
No – Personal
expense
Yes – Taxable
benefit
Yes – Taxable
benefit
Yes – No Tax
benefit
Key Person Protection (3)
No – Capital
outlay
Disability Buy Sell
No – Capital
outlay
No – Capital
outlay
Office Applications
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Yes – Business
Expense
No – Capital
outlay
TAXATION OF DISABILITY INSURANCE BENEFITS & REFUNDS
Benefits & Tax
Types of Insurance
Refunds & Tax
Payee
Tax Status
Payee
Tax Status
Insured
Tax-free
Owner
Tax-free
Wage Loss Replacement
Insured
Tax-free
Owner
Tax-free
Plan (WLRP)
Insured
Tax-free
Owner
Taxable
Insured
Taxable (2)
Owner
Taxable
Trustee
Tax-free
Owner
Tax-free
Wage Loss Replacement
Trustee
Tax-free
Owner
Tax-free
Plan (WLRP)
Trustee
Tax-free
Owner
Taxable
Trustee
Taxable (2)
Owner
Taxable
Employer
Tax-free
Owner
Tax-free
Individual
Tax-free
Owner
Tax-free
Business
Tax-free
Owner
Tax-free
Overhead Expense
Business
Taxable
Owner
Taxable
Loan Protection
Business
Tax-free
Owner
Tax-free
Personal Protection
Retirement Protection (3)
Key Person Protection (4)
Disability Buy Sell
Cross Purchase
Redemption – entity
purchase (5)
Office Applications
Notes for above two tables
(1) The employees must be obligated to pay all premiums and therefore any
payments will be on the employee’s behalf.
(2) Benefits from a WLRP are considered earned income for tax purposes
(3) Retirement protection coverage provides for the payment of a monthly benefit
into a non-registered account if the insured becomes disabled.. This account
accumulates and invests the benefits up to age 65 when it pays out a lump
sum amount to provide for the insured’s retirement. Benefits paid under a
WLRP application to a non-registered plan are considered earned income
eligible for RRSP calculations. Income earned on the investments in the nonregistered account is also taxable on an annual basis.
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(4) In the case of Key Person protection coverage, the corporation may require
funds to meet immediate cash needs to find a replacement during the period
of disability. This structure may also be used to provide disability benefits
when the insured is a shareholder. The business received the tax-free benefit
and in turn could pay out the benefit in the form of a dividend, which is subject
to regular taxation as a dividend to a shareholder.
(5) In both the cross purchase and the corporate redemption the proceeds are of
a capital nature and are tax-free. The sale or corporate redemption of the
business interest is a taxable transaction.
Note – We suggest that you use the above tax information as a guide only. For
more exact taxation information in regards to your clients and prospects, please
consult an Accountant.
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