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[LTD] Owners should consider opting-out of group LTD

RBC Tower in Toronto
RBC Tower in Toronto

If you own a business that has a group long term disability (LTD) plan, and you are enrolled, you should consider opting out and buying an individual LTD policy instead. Only business owners are allowed to opt out of group LTD – regular employees cannot.

Why would a business owner opt out of LTD?

Almost all off-the-shelf LTD plans come with an “85% all source max” clause. This means that if you become disabled, and you are receiving income from sources other than your LTD benefit, the insurer will reduce the income they send you by an amount such that your total income from all sources is not more than 85% of your pre-disability income.

What is the purpose of the 85% all-source max clause?

The reason for this clause is to manage incentives. Imagine if an employee became disabled, received income from another source, plus their LTD benefit, so that they earned 100% or even 90% of what they used to earn.
Do you think there’s any motivation for that employee to try to rehabilitate and try to return to work? Would you want to return to work if you could earn the same by doing less?
The spirit of this clause is meant to deal with people who are employees – not business owners. Group LTD is an income replacement tool – not an income supplement tool.

As a business owner, if you were to become disabled, would you cut yourself off payroll like you do with other employees? Probably not. Even if you did stop your income, you might draw the odd dividend.

Therefore, if you continue to pay yourself, guess how much your group LTD plan will pay? Zero.

You could be paying for a benefit that you’ll never be able to collect on.

Assess if you really need to have an LTD policy. Ask yourself:

• Do you have a nest egg that you can draw upon in case of emergency?
• Have you been diligent about saving money in case you can’t run your business?
• Do you have other income-producing assets which will pay you if you are disabled?
• Can you survive on $1,000 to $2,000 a month if you only had to rely on government assistance?

If not, then buying an individual LTD policy makes sense.

We recommend the RBC Insurance Professional Series, since it has the most generous provisions for income. For example, if you are disabled, but can do some work, the policy will not cut back your LTD income to the great extent that other policies would.

Individual LTD can be 3x to 5x more expensive than group LTD, however, you’re buying something you’ll actually collect, instead of spending money on something you’ll never access.