Incorporation can change how professionals earn, retain and draw income. It can also lead to a mismatch between what they think is “protected” income and what the insurance company deems as income.
This mismatch is important to CPAs, medical association consultants and other professional advisors who learn about changes to compensation before the insurance advisor does.
A shift toward dividends, recent incorporation, higher practice expenses and material income growth can all warrant a fresh disability coverage review.
When looking at an incorporated professional, it helps to review their disability policy in conjunction with their current form of compensation and business needs. The aim is not to find the best product when referring them.
It is to find out if there is something in the current plan that may no longer work for them.
If your client is incorporated, a disability insurance review may be appropriate when there has been a significant change in compensation, income, cost of doing business or current coverage. The review should look at insurable income, monthly benefit limits, definition of disability, waiting period, partial-disability benefits, offsets and business-overhead coverage.
Contents
- Why incorporation changes the review
- What existing coverage may miss
- Five urgent referral triggers
- Questions to send with the referral
- A coordinated review protects the plan
Why Incorporation Changes the Disability Insurance Review
Incorporation separates income earned by the corporation from income paid to the professional. So it becomes important to know how your client is getting paid when applying for coverage, increasing it or reviewing it.
The British Columbia Medical Journal notes that earned income for disability insurance can be calculated differently from income for tax purposes. For an incorporated professional, the calculation may take account of salary and bonus as well as corporate net income attributable to the owner. Dividend treatment depends on the insurer’s earned-income definition and the client’s corporate compensation structure.
Carriers may define earned income differently and ask for different financial documentation. So the simple referral question is: has your client’s method of compensation changed since they were insured or since their coverage was last increased?
If so, there may be a discrepancy between their insurance file and their accounting file.
What Existing Association or Group Coverage May Miss
There is value in having a group plan. But just because a client has a group plan does not mean that it is suitable or that the amount and terms of the contract are what they need. The review needs to dig deeper than the fact that a plan exists.
The Financial Consumer Agency of Canada states that disability policies will generally pay between 60% and 85% of your income, depending on maximums and the terms of the policy. It also recommends looking at these features when comparing policies:
- the monthly benefit amount
- the waiting period before benefits begin and the maximum benefit period
- partial-disability benefits
- inflation adjustments
- tax treatment
- whether you can increase your coverage without a medical exam
- how the plan defines disability
The important point is not simply whether disability coverage exists. The benefit amount, waiting period, disability definition and available features still need to match the professional’s current income and circumstances.
Five Urgent Referral Triggers
A referral opportunity becomes more urgent if there is a financial change that can impact either the client’s income protection needs or the practice’s survival. Watch for these five indicators when speaking with accounting firms or associations:
- Compensation changed. The client incorporated, reduced salary, increased dividends, or materially changed the salary and dividend mix.
- Income increased. The client’s income has increased. Their monthly disability benefit has not been assessed against that increase.
- The practice took on fixed costs. There may be lease payments, employees, equipment financing or other recurring costs that still need to be paid if the professional is unable to work.
- Coverage is assumed rather than understood. The client is aware of an association or group plan, but they are unable to tell you the benefit amount, waiting period, definition of disability or offsets.
- The client’s role became more specialized. Someone whose job is now focused on more specific physical, cognitive or technical responsibilities should compare their current responsibilities to the definition of disability in the policy.
Fixed practice costs create a separate issue from personal income protection. Rent, staff costs, equipment financing and other recurring expenses may continue even when the professional cannot work, so those costs should be considered separately during the review.
There is no need for the referring advisor to restructure their client’s insurance. A referral for insurance planning support can raise questions about compensation, existing policies, household needs and practice expenses.
The referral is most useful when it includes information on how their finances may have changed since the existing coverage was arranged.
Questions to Send With the Referral
A referral should start with the client’s financial and coverage information rather than a product proposal. By using a simple referral form, you allow the insurance consultant to identify any gaps in coverage without getting buried in insurance terminology yourself.
- How does the client receive their income from the corporation: salary, dividends, bonus or a combination?
- Has there been any significant change to the client’s compensation or professional income since the policy was taken out?
- Does the client already have disability coverage in force? If so, is it individual, group or association coverage?
- How much does the client spend each month on personal expenses that depend on their working income?
- What business expenses would the client still have to pay if they were unable to work?
- Has the client taken on any additional debt, dependants, staff, premises or equipment since the last review?
A Coordinated Review Protects the Plan
When a client’s situation changes, they should look at their disability coverage. There is no reason to wait until a renewal date or another trigger to review it. Personal income, corporate cash flow and practice expenses can all go in different directions for an incorporated professional.
For Advisors: A useful first step for clients is to identify if there may be a mismatch and act accordingly.
- A review can tell you what income the insurer will treat as insurable and what benefit level may be available and how benefits may interact with each other.
- It can also highlight what definitions are in the contract and whether any business expenses being paid from ongoing income require additional coverage.
- A review can also confirm policy ownership and whether the client has enough liquid resources to cover the waiting period.
Frequently Asked Questions
Don’t assume they do. Carrier guidelines can differ on what income is considered insurable or earned income. An insurer may assess income from an incorporated owner differently from ordinary T4 employment income.
For some, yes. For others, no. You will have to take the monthly benefit cap and policy terms and compare them to your current income, household expenses and other disability income.
Then consider whether ongoing business expenses would require separate protection, such as overhead expense insurance.
It is prudent to review your plan after you incorporate, experience a material change in compensation, have a large increase in income, take on new debt or dependants or add significant practice expenses. All of these events can alter the difference between your current protection and your needs.
