"Prepare for the worst and hope for the best" is a common expression. Disability should be on everyone's list of things to prepare for. Disabilities caused by injury or illness are challenging life events that happen to anyone. Disability and other types of insurance should be part of your financial and business plan. Most of us depend on our income to support our living expenses and our families. Disability insurance provides financial security. Knowing that insurance will cover your expenses if something serious happens to you brings peace of mind. It's hard to save up for emergencies and unexpected life events when you own a business. Undoubtedly, relying on savings can help, but it's a temporary solution. That's why insurance is so important because a disability can be long-term or even permanent.
Disability insurance is mission-critical
Company group benefit plans provide employees with short-term and long-term disability insurance coverage. As an illustration, if you become ill or injured and can't work, you could replace a significant part of your income (60%, 70%) with disability insurance benefits. But what if you're a small business owner or self-employed? If you're the sole breadwinner in your family, how would you cope without disability insurance? Without a doubt, disability insurance coverage will protect your income. If you become disabled, you might have to use your savings just to maintain your lifestyle. And what if you're single and have monthly mortgage, car and other loan payments? Disability insurance benefits could help you get the help you need if you became disabled.
More disability insurance options available for the self-employed
Until recently, insurers marketed disability insurance to affluent business owners and professionals. Self-employed people weren't on the radar. But insurers slowly adapted to the growing self-employed population. They started offering policies with lower costs and benefits for that market. Various disability coverage options are available today. Even if you're recently self-employed, plans are available for basic needs and coverage. There's no reason not to have disability insurance. For example, you can get an online quote for basic disability insurance from RBC (the only insurer who has a real-time quote-to-purchase option online) in a few steps, and also purchase a policy online. Coverage caps at $1,500 per month, and monthly premiums start at $10. RBC has higher coverage options, but you'll need to talk to an insurance advisor for pricing. For other large insurers, such as Manulife and Sunlife, you can't get a quote online.
Disability insurance features and costs
Buyer beware: Mortgage disability insurance
Big banks and other mortgage lenders offer to bundle life and disability insurance with mortgages. But these plans only pay your mortgage if you become disabled. Also, you can expect higher premiums and features that benefit the lender instead of you. This Globe and Mail article explains why standard disability policies are better and cheaper.
Can I claim disability insurance premiums on my taxes?
You made the decision to buy disability insurance or already have coverage. Now, you want to know whether premiums are deductible, like other business expenses. It's a simple "no" answer. Individuals can't claim disability insurance premiums on their taxes. According to Dave Dineen, who writes about retirement issues for Sun Life, "deductibility of insurance premiums is a complicated maze of specific rules for specific scenarios." If your small business offers a group insurance plan and pays the premiums for its employees, claiming those premiums for tax purposes by an employee is not allowed. In fact, premiums that employers pay for employees get treated as taxable income. Grant Thornton is one of the largest accounting firms in the country. Their tax-planning guide states that self-employed workers may be able to deduct health plan premiums from income for themselves and their dependents. Furthermore, the guide also explains that disability insurance premiums do not qualify as a personal expense deductible that is from income. The tax-deductibility of premiums is a complex issue. It's best to consult with a tax professional to discuss your specific situation. That way, you can review any insurance proposals you have and their tax consequences at the same time.
Disability insurance tips
- Disability insurance premiums aren't tax deductible.
- If you're self-employed or operate a small business, most experts agree that disability insurance is a must-have. It's especially important if your business can't generate income when you're incapacitated. If you have dependents and monthly bills to pay, disability benefits can replace over half of your income.
- You may be able to get group rates and coverage options if you're a member of an association, guild or other professional or alumni group
- Pay for your own disability insurance premiums yourself with after-tax dollars (not from pre-tax earnings). That way, any disability benefits you receive won't be subject to income tax. If someone else pays the premiums, then taxes get applied to your benefits.
- Personal disability insurance policies don't usually pay benefits for the first 60-90 days. Try to set aside a few months of living expenses for emergencies. Otherwise, you'll have to use a line of credit or a short-term loan. CIBC recommends keeping the funds as liquid investments in a TFSA account.
Are long-term disability insurance premiums tax deductible?
Whether you have a group disability insurance plan through your business or personal policy, it should cover short-term and long-term disability. The maximum duration of benefits depends on the policy you have. Policies can cover disability resulting from illness, injury, or both. Short-term and long-term disability coverage are components of group disability insurance policies. Second, short-term disability benefits can last for several months. Whereas, long-term disability benefits take over for up to several years after exhausting short-term benefits. Personal policies don't get structured the same way. Coverage begins after a waiting period and may continue until a specific age (60, 65, 70), or for a specific number of years (2, 5) depending on the policy. This chart illustrates the various definitions of "disability" and which choice offers the best value. If necessary, an insurance advisor can help you decide.
Can I deduct disability insurance premiums as a business expense?
The answer is no in almost every situation. Although, this Sun Life publication, authored by Stuart Dollar, Director of Tax and Insurance Planning at Sun Life, explains the exceptions across the spectrum of business and personal insurance products. He exhaustively covers the tax-deductibility of premiums for all types of insurance, including disability insurance premiums (which aren't tax deductible). The only noted exception that affects self-employed individuals deals with private health services plans (PHSP). In a nutshell, medical and dental insurance plan (or PHSP) premiums may be fully or partially deductible for the self-employed person and their spouse and children who live in the same household. In summary, premiums may be deductible expenses in the following situations:
- Health insurance plan premiums (not disability insurance premiums) for self-employed individuals and their dependents, as mentioned above.
- Group disability insurance premiums paid by an employer for an employee could be a deductible expense for the business.
What we've learned
By now, you probably understand that deducting the cost of disability insurance premiums from personal income isn't allowed under the Tax Act. Many have tried, but the CRA has updated and added rules over the years to limit aggressive insurance strategies that create artificial tax benefits. For small business owners and self-employed individuals, disability and other life insurance options are must-haves and the cornerstone of a good financial security plan. Although disability insurance premiums for your personal disability policy aren't tax deductible, the benefits you receive will be tax-free as long as you pay the full amount of the premiums yourself. Unless you have access to a group disability plan through an association or your company, you'll have to purchase your own disability coverage. Therefore, getting insurance is strongly recommended to ensure your financial security, your family's well-being, and continued payments such as mortgages and other loans. Just as importantly, consult with a tax professional to validate your assumptions to avoid making the wrong decisions about tax deductions.
