Disability Insurance # 8 - Pro- Web viewThe problems resulting from long-term disability include the...

The Financial Advisor Guide to Disability InsuranceSelf-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.

Disability Insurance – SSC #8Pro-Seminars Limited © 03/12

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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 INSURANCECould 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 eggBefore 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 day-

to-day sales activity.

SIX REASONS TO MARKET DISABILITY INSURANCEDisability 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 ProspectsAs 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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http://www.disabilityliving.ca/people-with-disabilities-elderly/

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 2.7 to 1Age 37 3.3 to 1Age 42 3.5 to 1Age 47 2.8 to 1Age 52 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

AgeDisability Begins

Length of Disability

1 Month 3 Months 1 Year 2 Years 5 Years 10 Years22 3923 664 75 51 27 1627 3877 657 74 52 29 1932 4372 778 91 65 39 2637 5029 981 119 87 55 3842 6918 1257 172 129 85 6047 6918 1676 283 219 149 10552 8158 2239 463 372 260 17857 9816 3110 842 707 501 32862 1737 4427 1491 1286 910 558

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 NEEDSo 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

A) OVERVIEW OF PUBLIC SECTOR PLANS


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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

Waiting period

Under CPP legislation, your payments

start four months after the date

Service Canada determines that you

are disabled under CPP rules.

Amount

Flat rate of $445.50 (indexed) plus

75% of what remaining benefit would

have been paid at age 65 (e.g. 2012 -

$1,185.50)

CPP Disability Pension for qualifying child:

AmountFlat rate (indexed)

(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

New benefitsMaximum rate

2012

Number of beneficiariesOctober 2011

Amounts paidOctober 2011

$MillionsCPP QPP CPP QPP CPP QPP

Retirement (at age 65)

$986.67 $986.674,024,87

61,464,59

6$2,053.

0$669.

0

Disability$1,185.5

0$1,185.4

7326,418 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

Total1,044,65

2354,541 $329.3

$131.8

Children of disabledcontributor

$224.62 $71.32 77,129 7,527 $16.9 $0.7

Children of deceasedcontributor

$224.62 $224.62 62,783 15,392 $13.7 $1.1

Death (maximum lump sum)

$2,500.00

$2,500.00

10,458 3,041 $23.7 $7.4

Total5,546,31

61,915,36

1$2,704.

4$876.

4Combined BenefitsSurvivor/Retirement at age 65

$986.67 $986.67 718,964 225,621 $522.7$148.

0

Survivor/Disability$1,185.5

0na 14,653 2,530 $13.9 $2.7

Total 733,617 228,151 $536.6$150.

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Disability and Survivor Rates - 2012

Benefit Flat Rate

Earnings-RelatedPortion

Total

CPP disability benefit $445.50 $740.00 $1,185.50CPP survivor's pension under 65 $173.82 $370.00 $543.82

QPP disability benefit $445.47 $740.00 $1,185.47QPP survivors - under 45 Not disabled, no child $114.09 $370.00 $484.09 Not disabled, with

child $413.62 $370.00 $783.62

Disabled $445.47 $370.00 $815.47 Age 45 to 64 $445.47 $370.00 $815.47

NOTES FOR THE PREVIOUS TABLES1. 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


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have a job to go back to, you may be able to receive regular EI benefits without a

waiting period.

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 WorkplacesBringing 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,

To promote health and safety in the workplace in Canada to:


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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 CCOHSOn 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 CanadiansCCOHS 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.

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


23

on a cost recovery basis include database subscriptions, manuals and training

programs.

HISTORY OF WORKER’S COMPENSATION IN CANADAThe 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, self-

insurance 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.

SAME GOALS – DIFFERENT PROVINCIAL NAMES

Alberta Workers' Compensation BoardBritish Columbia WorkSafeBC


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Manitoba Workers' Compensation Board

New BrunswickWorkplace Health, Safety, and Compensation Commission (WHSCC)

NewfoundlandWorkers' Compensation Commission of Newfoundland and Labrador

Northwest Territories and NunavutWorkers' Compensation Board of the Northwest Territories and Nunavut

Nova Scotia Workers' Compensation BoardOntario Workplace Safety and Insurance BoardPrince Edward Island Workers' Compensation Board

QuebecCommission de la santé et de la sécurité du travail (CSST)

Saskatchewan Workers' Compensation Board

YukonWorkers' 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 BENEFITSBenefits 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 work-

related disability or injury.

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


25

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.

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


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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 ProvinceThis 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 % of earnings

Waiting Period

Alberta $82,800 90% net NoB.C. $71,700 90% net NoManitoba No Maximum 90% net NoN.B. $56,700 85% loss of

earnings3/5ths of weekly benefits

Newfoundland $51,595 80% net NoN.T./Nunavut $75,200 90% net NoNova Scotia $52,000 75% net 1st 26

weeks then 85% net2/5ths of weekly benefits

Ontario $79,600 85% net No

P.E.I. $47,800 80% net 1st 38 weeks then 85% net

3/5ths of weekly benefits

Quebec $64,000 90% net NoSaskatchewan $55,000 90% net (for injuries

on or after Sept. 1985)

No

Yukon $77,920 75% gross No


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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 BenefitsIn 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 ProgramThis 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,


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physicians, an occupational hygienist, and nurse case managers, all of whom are

experienced with the unique circumstances of occupational illnesses.

Survivor BenefitsIf 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 CostsWCB 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 CounselingBoth the surviving spouse and children are entitled to bereavement counseling,

but must request this counseling within one year of the worker's death.

WCB FUNDINGWorkers’ 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).


29

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 BENEFITSPremiums 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 PLANSIntroductionSerious 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


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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. 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.


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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.

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, STDWeekly 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)


32

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.

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 – LTDWaiting 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


33

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.”

TAXATION OF GROUP DISABILITY PLANSIf the employer (company) pays any portion of a group premium such as long-

term 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 POLICIESThese are individual personal policies applied for, owned and paid by the

employer, with the benefits payable to the employer. According to Revenue


34

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.

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 PremiumsWhen 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.


35

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. Wage-loss replacement plans can be in place of or in addition to self-

administered 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.


36

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.

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 PlanFor 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.


37

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.

Eligibility for a Wage Loss Replacement PlanGeneral 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 CORPORATIONAll 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.


38

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 PROPRIETORSHIPWhen 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.”

INCORPORATED PROFESSIONALS AND WAGE LOSS PLANSProfessionals (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 The EmployerPremium Payer The Employer

Employer PremiumContributions

Tax deductible by the Employer


39

Policy Benefits Payable to The Employee

Benefits Received by Employee at time of claim

Taxable income to the Employee which allows him / her to continue to make deposits to his /

her RRSPMore 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.

Sample Wage Loss Replacement Plan (WLRP) Board ResolutionAuthorizing 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


40

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.

CERTIFIEDA true and correct copy of a Resolution passed the ______day of _______2012.

_________________________ __________________________ Chairman Secretary

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


41

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.

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


42

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 self-

employed 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.

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


43

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.

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


44

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 short-

term sickness benefits and another plan that provides for long-term disability

benefits.

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


45

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).

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 employer-

employee 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


46

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.

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


47

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.

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


48

some employees, but not all, the plan will not be considered to be an employee-

pay-all plan even for those employees who must make all contributions

themselves.

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


49

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.

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


50

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.

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 five-

twelfths 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 WLRPsIn 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.”


51

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 POLICIESBusiness Disability Overhead ExpenseIf 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


52

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.

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 INSURANCEThese 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 InsuranceIn 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.


53

The business may lose money.

The survivor’s face increased difficulties and frustration.

Personal deteriorating financial position of the disabled.

Funded Buy-Out Disability AgreementsThe 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.


54

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.

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 PROVISIONSDisability definitionsThe disability definition is defined by the insurance contract and the agreement is

contingent upon the disability, meeting the terms of that definition.

Mandatory Buy-outAs with a buy-sell agreement, the disabled party must sell and the survivor must

buy.

Compensation to the Disabled PartyPrior 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 PricePurchase 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 ProvisionIf 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.


55

Provision for Death of the DisabledIf 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.

If the agreement was not funded by life insurance, the payments will proceed as

stated in the document.

AFTER COMMENCEMENT OF THE BUY-OUTThe 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 TAXATIONPremiums 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 INSURANCEPartnerships 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,


56

Advertising agencies,

Architectural firms,

Computer firms,

Medical practices and clinics,

Engineering firms,

Law practices,

Employment agencies AND other small manufacturers to name a few.

Deferred TaxThese 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. RetirementThese 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 CONTRACTS3 (A) Commercial PoliciesCharacteristics

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 PolicyCharacteristics

Premiums may be adjusted by class (on anniversary)


57

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.

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 SELECTIONWhen 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.


58

Three factors determine the amount of premiums charged:1. Claim costs

2. Operating Expenses

3. Investment Earnings

Policy ConditionsContract and impact on the benefits define most conditions provided and the

premiums charged.

Occupational ClassificationsRates 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 non-

hazardous industries.


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Some occupations are not insurable and some disabilities will be prohibitive in

one occupation and of little consequence in another occupation.

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 TERMINOLOGYWaiting 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 AmountsBenefit 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 PeriodBenefit 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


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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.

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 DisabilityEvolutionary Wording Inability to engage in any occupation

for wages

Most Recent Wording Unable to perform the important duties of your occupation

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.


62

For some professional occupations, the “not gainfully employed” clause is

deleted.

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 DisabilityLoss of some functions will provide 50% of the total disability income provided by

the contract.

Residual BenefitWhen 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 IndexesThe 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 PeriodOriginally, 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.


63

Presumptive DisabilityEven 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 ClauseEarly 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 PremiumMost 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 ClauseIf 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 ConditionsThe 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 SicknessThis 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.


64

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 HospitalElimination Period eliminated if disability results in hospitalization. Benefit paid

on a per diem basis. (1/30 of monthly benefit per day).

Accidental Death and DismembermentA rider can be added that is identical to the Group Insurance Benefit.

Return of PremiumA 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 COVERAGESA) Association Group InsuranceThe 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 InsuranceSome 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 PACKAGEWhat 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


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essential duties of your own job and you do not engage in any other occupation

or employment.

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 InsuranceBanks, 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 InsuranceThis 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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CLAIMSAn 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


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released it on a limited basis for comment, but it is not available to the public and

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


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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.

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.


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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.

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 non-

taxable 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.


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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.

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


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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.

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 CASESThe mandate of any Disability insurer is to make the most equitable and

appropriate decision for each case submitted. Most companies will strive to


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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.

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:


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Extra premium rating

Full exclusion rider

Limited period exclusion rider

Qualified condition exclusion rider

Change in benefit period

Change in elimination period

Reduction of indemnity amount

Removal of certain supplementary benefits

Any combination of the above

Extra Premium RatingWhenever 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 RiderThe 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 RiderThis 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 RiderThe qualified condition exclusion is a step beyond the limited period exclusion. It

provides benefits for a specific named impairment showing the elimination


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period, benefit period and indemnity payable for the particular condition. It may

also extend or limit coverage under various benefit riders.

Reconsideration of Current DecisionEach 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.

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.

DeclinesThere 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 non-

disclosed medical history.

INSURANCE LAW AS IT PERTAINS TO A & S CONTRACTSEven 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 FactsAll 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.


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Policy ParticularsEvery 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.

Term of the insurance, or method of determining when the insurance will

terminate.

Insurable InterestAn applicant has to have insurable interest in the contract when it is issued.

Grace PeriodThe 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.

IncontestabilityThe 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 AgeIf 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.

ReinstatementThe 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.


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Protection against CreditorsThe 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.

Information StatementThe 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.

CONCLUSIONLong-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


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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.

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.


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Making disability sales part of your everyday activity comes down to four business elements:

1. ResponsibilitySell yourself as a professional, and then present yourself as a well-rounded

financial advisor providing a complete financial solution.

2. ProductivityBy 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. LiabilityIt 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. CredibilityBy 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 AmountMortgage or rent $Utilities $

Food $

Automobile $

Education $

Clothing $

Insurance $

Taxes $

Entertainment $

Gifts $

Other expenses (Monthly savings etc.) $

Total Expenses $___________ Your Monthly Income Needs $___________

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


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Individual $

Group $

Association $

C. Total $ D. Shortage (B – C) $

TAXATION OF DISABILITY INSURANCE PREMIUMS & TAXATION

Who Owns the Insurance and Who Is Paying For It?

Premiums & Tax

Types of Insurance Owner Payor DeductibilityPersonal Protection

Wage Loss Replacement Plan (WLRP)

Insured InsuredNo – Personal expense

Insured EmployerYes – Taxable benefit

Employer Employer (1)Yes – Taxable benefit

Employer EmployerYes – No Tax benefit

Retirement Protection


Insured InsuredNo – Personal expense

Insured EmployerYes – Taxable benefit

Employer Employer (1)Yes – Taxable benefit

Employer EmployerYes – No Tax benefit

Key Person Protection (3)

Employer EmployerNo – Capital outlay

Disability Buy Sell

Cross Purchase Individual IndividualNo – Capital outlay

Redemption – entity purchase

Business BusinessNo – Capital outlay

Office Applications


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Overhead Expense Business BusinessYes – Business Expense

Loan Protection Business BusinessNo – Capital outlay

TAXATION OF DISABILITY INSURANCE BENEFITS & REFUNDS

Benefits & Tax Refunds & TaxTypes of Insurance Payee Tax Status Payee Tax StatusPersonal Protection


Insured Tax-free Owner Tax-freeInsured Tax-free Owner Tax-freeInsured Tax-free Owner TaxableInsured Taxable (2) Owner Taxable

Retirement Protection (3)


Trustee Tax-free Owner Tax-freeTrustee Tax-free Owner Tax-freeTrustee Tax-free Owner TaxableTrustee Taxable (2) Owner Taxable

Key Person Protection (4)Employer Tax-free Owner Tax-free

Disability Buy SellCross Purchase Individual Tax-free Owner Tax-free

Redemption – entity purchase (5)

Business Tax-free Owner Tax-free

Office ApplicationsOverhead Expense Business Taxable Owner Taxable

Loan Protection Business Tax-free Owner Tax-free

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


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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 non-

registered account is also taxable on an annual basis.

(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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