Reality check:
Protect your income before a disability sidelines your financial goals

In my experience I have found that people ‘get’ life insurance because of the inevitability that we have a one in one chance of dying. But you really are only half insured. A key point to remember is that if you do not have ‘enough’ life insurance to support the family after death, you will not be around to know. However, what if you are still a consumer after a disability and feel the effects personally if the income was not there when it is needed? Arguably, the family income need is greater during a disability.

A family of four whose breadwinner dies leaves a family of three; a family of four whose breadwinner is disabled is still a family of four.

As a boomer myself I think this generation as a whole is facing a dollar crunch that will seriously affect lifestyles – without factoring in a disability. An extended illness or injury will likely end all possibility of continuing the comfortable existence that we may have become accustomed to. Being single or a single parent presents difficulties in the event of a disability. There is simply no one to fall back on; no safety net in the form of another adult working or sharing in the family responsibilities. For dual income families the case may be even stronger if both salaries are needed to maintain lifestyle.

There are 4 key points I want to make:

• Your greatest asset is your ability to earn an income
• Disability can and does happen at a time you least expect it
• Income decreases or stops and expenses increase after disability strikes.
• There are no acceptable alternatives to disability income policy for protecting your income.

Did you know?

• There are over 2 million disabled Canadians
• Nervous disorders (such as depression and stress) are the leading cause of disability among office workers

Have you done the math?

• Would you qualify for
  -  Employer’s group benefits?
  -  Government benefits? (For CPP your disability has to be severe & prolonged)
• Will these benefits be enough?

Usually, it is not enough

• Many need to
  -  Use their retirement savings
  -  Sell off assets
  -  Lower their standard of living

10 Considerations for Long Term Disability coverage

1. How will you qualify for disability benefits? Your net income is used in calculating disability income benefits)
2. Are there exclusions or limitations for certain types of medical disorders, activities outside of work, or pre-existing conditions?
3. How much will the disability pay for?
4. What happens when you leave your job or are self-employed?
5. When do you expect to retire?
6. What percentage of your income comes from your investments?
7. How long could you maintain your current standard of living on savings alone?
8. How much money do you think you could borrow if you become disabled? (Would the bank lend you money if you are disabled?)
9. If you were to become disabled and unable to work, would your spouse be able to generate enough income to make up the shortfall?
10. To what degree do your children, spouse or parents depend on you financially?
     

Here are a few tax tips to help you:

1. Reduce the taxes you pay
2. More efficiently manage your family income
3. Use certain expenses to your best advantage

These are just brief explanations – if you want more information on any of these points please e-mail or call me.

Review your portfolio for tax efficiency

• Have interest earning investments within your RRSP
• Investments that generate capital gains are better to be in non-registered investments

Donate securities directly to a charity

• As opposed to selling securities and donating cash, special government incentive may cut taxes owing by half

Contribute to your RRSP

• Deadline is 60 days after the end of the year
• Contribute early, money will have more time to grow while sheltered from taxes

Contribute to a spousal RRSP

• Higher-income spouse makes the spousal RRSP contribution and receives the deduction

Defer your bonus

• Delay payment of the year’s bonus until January this will defer tax until the following year

Family budgeting

• Have the higher income earner pay for family expenses that are deductible, have the lower income earner invest their income

Child care expenses

• Qualifying child care expenses can be claimed on your tax return
• You can claim amounts paid to children 18 years or older who are looking after siblings 16 years or younger, when the child care allows you to earn income, this will make you eligible for a deduction (claimed on lowest spouse’s income)

Salaries to family members

• If you have a business, pay family members for any services provided (remember – must be reasonable to what you would pay someone else to do the same work)
• This will also generate RRSP contribution room for them

Make non-deductible debt - deductible

• If you are paying non-deductible interest and have non-registered investments, an option is to sell non-registered investments and use the proceeds to pay down non-deductible debt
• Take out investment loan and re-purchase investments (deduct interest payments)