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Group long-term disability insurance is the most common way for companies to provide income replacement coverage for employees. It pays a monthly benefit if an employee can’t work due to an injury or illness.
But did you know there are many shortfalls with these types of plans? For example, higher earning staff may not be adequately compensated because of low benefit amounts. Premiums can also increase if there are lots of claims.
For these reasons, employers that want better disability coverage for their high-income earners and executives have to look elsewhere. And the most suitable option is a wage loss replacement plan (WLRP). This post explains how these plans work and the advantages for employers and employees.
Why Do You Need Disability Insurance?
Did you know that the chance of at least one disability in a group of four 40-year-old men is almost 90%? In fact, there is an 89.3% chance of at least one in the group becoming disabled for 90 days or longer before age 65.
Once a disability reaches 90 days, the average length of the disability for a 40-year-old man is 3.1 years. Imagine going over three years without an income. It would wreak havoc on the average person’s financial situation.
That’s where long-term disability insurance comes in. By paying a monthly benefit while you’re disabled due to an injury or illness, long-term disability insurance provides a financial safety net while you recover.
Many employees come to expect disability coverage from their employers through their group plan. It’s an essential part of their compensation package and plays a crucial role in employers’ ability to retain employees. A wage loss replacement plan is the best way to provide disability insurance to employees.
Your Guide To Wage Loss Replacement Benefits
How does a wage loss replacement plan work?
With wage loss replacement benefits, an employer buys individual disability insurance for two or more employees. If an employee suffers a disability, the insurance company pays monthly benefits to him.
As the employer, you control which classes of employees receive the benefits. If you only want to offer it to senior management personnel, you can do so. However, you must offer coverage to all employees in the specific class.
What are the advantages of a WLRP for employers?
Because individual disability policies comprise wage loss replacement plans, you can customize them to each employee. This includes the benefit amounts, waiting period, benefit period, and optional riders like the cost-of-living adjustment.
Unlike group long-term disability insurance, the premiums for wage loss replacement benefits are guaranteed. The insurance company cannot increase the premiums or cancel your benefits, putting you in control of the plan.
Because wage loss replacement benefits offer better coverage than group LTD, employers get a competitive advantage over other companies who only provide the latter. This helps attract and retain key employees.
Finally, employers with at least three employees forming a wage loss replacement plan can qualify for a group discount.
What are the advantages of a WLRP for employees?
A crucial benefit for employees is that the wage loss replacement benefits are portable. This means they can keep the coverage if they leave the company. Because their new jobs may not have long-term disability coverage, they can fall back on the wage loss replacement benefits provided by their previous employer.
The departed employee owns the ported disability policy and can keep the coverage as long as he pays the premiums. Many former employees choose to become self-employed. Since disability insurance for the newly self-employed can be difficult to obtain, this is a valuable benefit.
Whereas some group LTD plans require employee contributions, the employer pays all the premiums for WLRPs. Therefore, staff gets to reap the benefits without needing to pay into the plan.
What are the drawbacks of a WLRP?
The main disadvantage to wage loss replacement plans is the cost. Compared to group long-term disability benefits, wage loss replacement contributions cost more.
Also, because wage loss replacement benefits are comprised of individual disability policies, each applicant has to qualify medically. Employees with health or lifestyle issues may end up with exclusions or have their applications declined.
How are wage loss replacement plans taxed?
By grouping the individual policies, the arrangement qualifies for preferential income tax treatment with Canada Revenue Agency. This means the premiums are tax-deductible for the employer but not taxable to the employee.
Upon disability, the employee will receive payments from the insurance company. These benefits paid have to be included on his income tax return.
What is the difference between a WLRP and group LTD?
The most common way to provide wage loss replacement benefits to more than one employee is by using a group LTD. Long-term disability insurance forms part of a benefits package which usually includes life insurance and extended health and dental coverage.
The table below shows the differences between wage loss replacement benefits and group LTD and how the former is superior:
Wage loss replacement plans | Group LTD | |
|---|---|---|
Designed for | Smaller group of senior management employees | Larger group of employees providing basic wage loss replacement benefits |
Benefit amounts | Higher | Lower |
Definition of disability | More comprehensive, resulting in more claims paid | Less comprehensive |
Cost stability | Premiums are guaranteed not to change | Premiums may increase due to claims experience |
Optional benefits | Customizable with optional riders like cost of living adjustment, partial disability insurance | Fewer options |
Underwriting | Individual underwriting may result in exclusions or declines | Guaranteed issue |
Insurance portable upon termination of employment | Yes | No |
Tax-deductible premiums for the employer | Yes | Yes |
Benefits taxable | Yes, benefits have to be included on your income tax return | Depends on who pays the premiums. Plans that are funded by employee contributions are considered non-taxable, while those paid by employers are taxable. |
Who is eligible for a WLRP?
To be eligible for wage loss replacement benefits, the insured must be an employee and receive employment income. Partners, owners, and sole proprietors are only eligible if they are active employees of the company.
At least two employees must participate in the group and must be part of an identifiable class defined by occupation. Although not every employee in the class needs to be insured, the wage loss replacement benefits must be offered to everyone in the class.
Frequently Asked Questions
Are wage loss replacement benefits received considered non-taxable income?
While the contribution paid by the employer is not a taxable benefit for the employee, disability benefits received by the employee are taxable.
What are wage loss replacement contributions?
Wage loss replacement contributions are when an employer provides disability benefits for a segment of employees using individual disability insurance policies.
Is wage loss insurance the same as short-term disability insurance?
While short-term disability benefits start immediately following a disability, benefits only last a short period like four to six months. On the other hand, wage loss replacement benefits have a waiting period of between 90 to 120 days. They also last much longer, with some plans having benefits paid until age 65. Therefore, wage loss replacement plans are more like long-term than short-term disability insurance.
Is wage loss insurance the same as EI?
Employment Insurance (EI) sickness benefits pay for 15 weeks if you can’t work for medical reasons. Contributions into the program are made by both employees and employers. Because of these differences from wage loss replacement plans, EI is more like short-term disability insurance.
Want To Set Up A Wage Loss Replacement Plan?
Once you’ve determined that wage loss replacement benefits are appropriate for your company, you can set one up with an insurance advisor. Implementation is a multi-step process that needs to be planned carefully.
First, you have to determine the class of employees to be insured. Next, you need to gather income information including salary and bonus. Once you’ve completed these steps, you can design the disability plans, including the monthly benefit, waiting period, benefit period, and optional benefits.
When you’re ready to apply, a qualified professional insurance advisor will assist you with obtaining quotes and completing the application forms. Contact us at info@briansoinsurance.com or 604-928-1628 to find out how we can tailor a wage loss replacement plan for your company.
Get Your WLRP Quote Now
While we make every effort to keep our site updated, please be aware that timely information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Brian So Insurance and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser. This post is a brief summary for indicative purposes only. It does not include all terms, conditions, limitations, exclusions, and other provisions of the policies described, some of which may be material to the policy selection. Please refer to the actual policy documents for complete details which can be provided upon request. In case of any discrepancy, the language in the actual policy documents will prevail. A.M. Best financial strength ratings displayed are not a warranty of a company’s financial strength and ability to meet its obligations to policyholders.
