When it comes to risk management farmers and small business owners understand the value of life insurance and the need to protect their family or business from a financial disaster should they die prematurely. Also how life insurance can be used to conserve or to equalize their final estate, for those children who will be involved in the business and those who will not.
Unfortunately many tend to discount the risk of getting disabled or suffering from a debilitating illness and the impact this would have on their farm, business or family. Critical illness and disability insurance are equally as import as life insurance when it comes to protecting yourself and your family against financial risks.
A diagnosis of cancer, heart attack, stroke, or any other of the 20 to 27 illnesses that a critical illness policy typically covers, means a lump sum tax free payment between $10,000 and $2 million for the insured, depending on the plan purchased. This lump sum payment has no restrictions. You can use the money for anything you can think of: mortgage payments, experimental treatments abroad, expensive drugs, extra income, or just an once-in-a-lifetime vacation. A drawback to critical illness plans is that they are paid out as a lump sum, once the money is spent, it’s gone. So while critical illness plans provide immediate cash, disability insurance provides replacement income. So, best that the two plans work in tandem with each other, allowing the critical illness insurance lump sum to cover what disability insurance won’t.
Why You Need Disability Insurance: Critical illness coverage isn’t enough to keep you financially protected during a serious, potentially disabling, illness. If you trigger a critical illness payout and it is paid out to you, then that’s it. For example, if you had a CI policy that was $25,000 and you claimed on it at age 25, but were permanently disabled as a result of your illness, then that’s it, that’s all the money you will get. Whereas with disability insurance, your lost income earning ability can be protected up to age 65 and will generally kick in after 90 days of disability.
In the case of a long term disability you could receive well over a million dollars of tax free income over your working life for a reasonable monthly premium. Disability plans will replace anywhere from 50 to 70% of your net income. The reason they won’t replace 100% is because the income under a disability policy is paid out tax-free. 60% tax-free is almost the same as 100% before tax. Although, the higher amount you earn, the less of a percentage will be replaced. Someone who is earning $200,000 might have only 35% of their income replaced.
Both Critical illness and disability policies have waiting periods. Typically, you would wait 30 days, 60 days, or 90 days before you receive the benefit amount. When purchasing a policy consider that the shorter the waiting period or the longer the benefit period, the more expensive the premium. An issue driving the need for adequate life, disability or critical illness protection is the ever increasing debt load Canadians today are carrying more debt than ever before and have minimal savings to cover “life’s stuff happens” expenses!
Today there is a wide of insurance products that can cover off the risks discussed here, from very specific to multi risk protection, so please take the time to sit down with a trusted life insurance advisor to develop your customized financial risk management plan. One suited to you, your families, you farm or your small business needs.
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