Helping older workers hedge disability risk

Canadians are choosing to work past the traditional retirement age of 65; some by necessity, and others by choice. But clients need to be aware of their disability insurance options when fewer carriers are offering individual disability policies.

The individual disability market in Canada has shrunk over the last two decades, said Richard Burjoski, head of insurance at Manulife Wealth. Only a handful of insurers like Canada Life, RBC and Desjardins still sell traditional individual disability policies.

“Companies like Manulife have gotten out of the [individual] disability business altogether,” he added.

While LTD coverage from an employer’s group plan typically expires at age 65, some individual disability policies for professionals and skilled workers allow the insured to renew coverage beyond the traditional retirement age, said Carolina Henao, a Sun Life advisor in Richmond Hill, Ont.

When an insured is about to reach age 65, the carrier usually reaches out to ask if they are still working and whether they would like to stay covered, said Chad Larmond, founder and principal of Larmond Risk Management Insurance Inc. in Oshawa, Ont. He specializes in finding coverage for executives and professionals.

Renewals at age 65 generally come with a maximum 24-month benefit period and the premiums stay the same, said Larmond.

But clients should start planning early and buy a future purchase option (FPO) that lets them bump up coverage when their income rises, said Larmond. The option can usually only be executed up until age 55.

Larmond has a client who collects over $10,000 a month from an individual disability policy that he bought from a previous advisor, but the client wished the last advisor had kept in touch with him so he could have increased his monthly benefit as his income rose. He would’ve been eligible for another $4,000 to $5,000 a month with an FPO.

“Most people are trying to minimize the cost,” Larmond said. “But the perspective really changes when you’re collecting the benefits .”

Clients can add other riders if they’re affordable, Burjoski said. His own disability policy has paid him back some of his premiums at the end of each claim-free renewal period with a return of premium rider and the monthly benefit goes up with inflation with a cost-of-living adjustment rider.

Advisors should work with clients to find out what they need and what they can pay. “The more complicated your wording gets, the more riders you have. It piles up and becomes a fairly pricey policy,” Burjoski said.

The shrinking individual disability market was partially driven by increasingly accessible group disability coverage. Twenty-five years ago, firms needed at least 50 people to get a group plan, now they only need two, Burjoski said.

Despite the growth of group LTD, its occupational definition can be limited. Burjoski has seen cases where policies only covered an insured for the first two years of a disability. After that, the policy only paid out if the insured couldn’t perform any occupation, like bagging groceries.

It’s important for clients and advisors to review the group plan’s details as they can be less favourable than taking out an individual policy, Larmond said.

In addition to buying individual disability insurance, clients can also hedge their risk with long-term care (LTC) or critical illness (CI) insurance.

Clients could consider buying CI insurance at a younger age as coverage typically lasts until age 75 and premiums are lower the earlier they’re bought, Larmond said. It could be in the form of a 10-year term CI policy that renews until age 75 or a level price product where premiums stay the same from age 40 to 75.

An LTC policy could also hedge against medical and care expenses for a disability, Burjoski said. “A long-term care policy really envisions, ‘Look, I’m not working, I don’t want to burn down my savings .’”

While applying for a new individual disability policy after age 60 is costly and the application has a lower chance of being accepted, LTC policies can be issued to people older than 65, Henao said. Clients should consider LTC insurance when they reach age 50 as some policies provide a lifetime benefit while disability insurance has limited benefit periods.

It’s important to help the client find the right combination of protection as their life and obligations change. “What was important to you when you’re 25 is different than what’s important to you when you’re 85,” Burjoski said. “[As] people move from living off what they do to what they have, you have to make sure what you have will support you.”