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Compare and consider income replacement insurance

During their careers, one in three Canadians will be sidelined for 90 days or more by injury or disease. Are you prepared?

Driver Standing In Front Of Tractor

Most farmers insure their buildings, vehicles, equipment and other farm assets. Many insure their crops and livestock. Increasingly, farmers also use risk management strategies to insure a price they will receive for the commodities they sell.

However, few farmers insure what may be the biggest risk to the farm; the inability for the farmer to work or manage the farm as a result of an accident, sickness, or disability. While loss-of-income insurance is often included in part of a wage earner’s benefit package, it is something many self-employed farmers ignore.

Mark Hardy, senior manager with RBC Insurance, says farmers should carry some form of disability insurance, particularly since farmers are the lifeblood of their businesses, both in their roles as managers of the farm business and in many cases as primary workers.

Disability insurance not only covers salary and the withdrawals an injured or disabled farmer had been earning from the business, but it can even cover a business’s overhead costs including repayment of business loans and a loss of business income as a result of an accident or disability.

But Hardy also emphasizes an important point: “Disability insurance is a complicated topic. You need to speak with a professional insurance adviser to get a policy which will protect your income and your business. There are a lot of factors to consider, and it will take time to review.”

When it comes to disability insurance, there really is no “one-size-fits all” policy. Income replacement by insurance can start the day after a disability or not come into effect for months or even years. The benefits can range from a few hundred dollars a month to an amount equivalent to the net income you were earning from the business before the accident.

Similarly, the benefits an injured party receives rarely last a lifetime and could even end after just a few months. Disability payments might continue until you can do everything you had been doing before the accident or may end (or decrease) if you are able to work in any job, even non-farm work.

It all depends on the policy and the premium you are willing to pay. As always, the more comprehensive the policy, the higher the premiums you’ll pay.

Comparing disability plans

When seeking disability insurance, the first question to ask is what constitutes a disability. Is coverage only for accident or injury, or does it include illness that prevents you from working? Are there any exclusions? Is coverage 24 hours per day or only if the injury happens at work?

The second question should be what the benefit is if you become disabled. Is it a fixed dollar amount per month or a percentage of your income/wage when you became disabled? Most policies provide a maximum benefit of two-thirds of gross employment income, although this is not a fixed rule.

When the policyholder is self-employed, this calculation of benefit is even more critical. The question to ask yourself is, could you live on that benefit amount without any other source of income and without dipping into savings? Furthermore, you need to ask if the benefit has a cost-of-living option which adjusts payments in step with the inflation rate. This could be very important if you are faced with long-term disability.

Third, what is the elimination period? Policies with benefits that start the day after an injury are much more expensive than those which do not pay for the first 30, 60, or 90 days after an injury. If you can live off savings for the first couple of months when disabled, you can significantly reduce the premiums.

The other way of reducing the cost of disability insurance is to limit the duration of benefits. Lifetime disability coverage is very rare. Most policies pay for a set term of years (often just two or five years) and after that time, you are on your own.

Some plans pay until age 65, but as you might expect, these are much more expensive.

Be very aware of how long an income replacement policy will provide a source of income after a disability occurs.

Besides these main points, there can be many differences in the fine print that also need careful review.

If you are unable to farm, but are employable in another job or industry, do you still qualify for disability benefits? Does the policy insure you until you can return to your own occupation or only until you are employable? If you can work part time, will it pay a partial benefit to top up the wage to the full benefit amount?

What happens if you return to work but then the disability flares up and you are forced to stop working after a short time back at work? Is this a continuation of the initial claim or will this be considered a new claim and you are subject to another elimination period?

Does the disability policy cover any costs of health care or rehabilitation services, or will you have to pay these new costs out of the benefit you receive?

What is the claims procedure? Too often it is very easy to enrol in disability insurance, but collecting the benefit can be quite another story.

Finally, and unfortunately, the place where many farmers start their comparison of disability insurance policies is with what the plan will cost rather than what insurance it provides. Disability insurance is not cheap and the lowest price is not necessarily the best. To compare plans just on the cost of the premium would be equivalent to a farmer deciding to only plant the cheapest crops to grow, without looking at what the market would pay for those crops.

In any case, it’s a good idea to stop putting it off. This insurance can be vitally important.

Statistics reveal one in three Canadians will be disabled by injury for 90 days or more at some point in their lives.

What about WCB?

The furor over Bill 6 in Alberta had lots of farmers claiming the disability insurance they currently carry is much better and cheaper than WCB. In some cases, this might be true. But you need to compare both the premiums and benefits of WCB and private plans.

One Alberta farmer sent me a copy of his premium statement to back up his claim that the private disability insurance he has for himself and his employees was superior to WCB. He pointed out that cost of the short-term, long-term, and life insurance he carried cost $2.85/$100 of earnings through private insurance. WCB coverage would have cost him $2.97/$100 of earnings.

Unfortunately, he did not elaborate on the elimination period for his private insurance. (WCB begins paying the day after the disability occurs.) He did not compare the duration of benefits between WCB and private insurance. He did not say if his private policy provides rehabilitation and/or retraining that WCB provides.

He said that he tops up the disability plan with medical and dental coverage. Based on the premium statement and estimating the wages based on the amount of disability coverage he carries, the total cost of the benefit package he provides jumps to over $10/$100 of earnings when the additional insurance is included, not nearly the deal he described. And he ignores the fact that he could top up WCB coverage with medical and dental coverage just as he is doing now with private insurance.

His biggest complaint seems to be his private coverage is in effect 24 hours per day whereas WCB coverage only covers work injuries and accidents. Again, he could use private insurance to top up disability coverage outside of work hours.

He also ignores the fact that WCB is a no-fault insurance and protects the farm against lawsuits from a party injured while working on the farm. This protection is not offered in private disability policies. What is the value of having this no-fault lawsuit protection?

So is his private insurance better and cheaper? We simply do not know without knowing a lot more about the benefits his private insurance offers. You simply cannot tell which is better by only looking at premiums paid!

I tried to get a better comparison by asking an insurance broker if he could tell me how WCB coverage and private insurance compare in price and value. He based a comparison on coverage for a 55-year-old Alberta farmer withdrawing $80,000/year from his farm business for personal use.

At a WCB rate of $2.80/$100 of earnings (2016 WCB Alberta farm assessment), this farmer would pay a premium of $2,240 per year for WCB workplace disability coverage that pays a benefit of $6,000/month, no elimination period, and offers comprehensive medical and rehabilitation services until he could return to work.

By contrast, the bare-bones private policy the insurance broker found provided a maximum benefit of $4,250 per month, two-month elimination period, and a maximum payment duration period of two years with medical and rehabilitation services provided during those two years. The cost of this policy was $3,488.60 for 24-hour coverage. Is it worth paying $1,248 more for the 24-hour private insurance but that only provides two years of benefits?

The broker also priced the same policy for a 55-year-old farm employee instead of the farm owner. The employee could only be insured for $4,000/month, two months elimination, two-year duration, and the premium jumped to $5,753/year, roughly $3,500/year more than WCB coverage. And the private insurance did not protect the farm owner from the employee suing the farm for his accident.

The broker stressed the quoted rates were for individual coverage. He noted group rates (if your farm is eligible) can be significantly less. When seeking disability insurance, ask any groups or associations which you are a member of if they offer a group disability insurance policy that you and your employees would qualify to be insured under.

I also asked WCB Alberta how WCB compares to private disability insurance plans. Ben Dille, corporate communications team lead, WCB Alberta, acknowledged it is very difficult to compare WCB and private insurance. He said: “Private plans vary widely in the types of coverage they provide and the cost associated to those policies. Private insurers do have the flexibility of offering a variety of different packages to policyholders, but for an individual worker, this can mean the protection they have may vary from one workplace to another. WCB coverage applies equally to all workers.”

He added: “WCB also provides no-fault insurance to all parties who are covered, which means protection from liability extends beyond the policyholder.

“Many employers choose to supplement WCB coverage — which provides protection for injuries which arise out of or occur in the course of work — with private coverage for other things such as life insurance and extended health benefits. This type of coverage, which complements and supports workers’ compensation coverage, is standard in the private insurance industry.”

Regardless of whether you prefer WCB, private insurance, a combination of both, or if you are able to self-insure against accidents and injury, it is important you have an income replacement plan in case you or your employees become disabled. After all, there is a very real risk it will happen.

What is WCB?

Workers’ Compensation dates back to 1884 Germany when Chancellor Otto Von Bismarck introduced a compulsory state-run insurance plan for workers. It was introduced in Canada in 1910 when Ontario created a Royal Commission to study workers’ compensation. That resulted in a recommendation for a no-fault insurance that would operate on the principle of collective liability, would have independent administration, and have exclusive jurisdiction. It would operate at arm’s length from the government.

According to the Association of Workers’ Compensation Boards of Canada (AWCBC) website, there were five basic cornerstones to the original workers’ compensation laws. These cornerstones which have survived, to a greater or lesser extent, are as follows:

1. No-fault compensation: Workplace injuries are compensated regardless of fault. The worker and employer waive the right to sue. There is no argument over responsibility or liability for an injury. Fault becomes irrelevant, and providing compensation becomes the focus.

2. Collective liability: The total cost of the compensation system is shared by all employers. All employers contribute to a common fund. Financial liability becomes their collective responsibility.

3. Security of payment: A fund is established to guarantee that compensation monies will be available. Injured workers are assured of prompt compensation and future benefits.

4. Exclusive jurisdiction: All compensation claims are directed solely to the compensation board. The board is the decision maker and final authority for all claims. The board is not bound by legal precedent. Instead, it has the power and authority to judge each case on its individual merits.

5. Independent board: The governing board is both autonomous and non-political. The board is financially independent of government or any special interest group. The administration of the system is focused on the needs of its employer and worker clients, providing service with efficiency and impartiality.

While each province has its own Workers’ Compensation Board, they all operate similarly. All boards are funded by premiums assessed to employers. Assessments vary by industry and province based on the risk of disability in each occupation. An employer may also pay more or less than the average assessment based on injury history in his workplace.

All premiums paid by employers go into the Accident Fund which covers wage loss benefits, medical aid, and rehabilitation arising from work injuries. The Accident Fund also funds permanent disability benefits and survivor benefits for dependants of workers killed on the job. Premiums also cover the administrative costs of WCB.

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