Employee Benefits Plans | E008
Full Transcript:
Jason Pereira: Hello, and thank you for joining me for The Wisdom of Wealth, a show where we help educate Canadians about fundamental financial literacy topics to help you make better and more informed decisions and to know when and where to reach out for help. I'm your host, Jason Pereira. Today on The Wisdom of Wealth, we are going to talk about something that helps serve as the primary source of protecting people and their families, employee benefits plans.
Jason Pereira: Many employers in Canada look to attract, retain, and reward their employees by providing them with various insurance benefits to protect them and their families. These programs can cover a wide range of benefits and can often get very confusing. Today we're going to talk briefly about various types of protection that these plans provide you with. Let's get started with one of the simpler benefits, life insurance.
Jason Pereira: Life insurance is a pretty easy benefit to understand. If you die, your beneficiaries receive a benefit to help pay for final expenses and help take care of the people you leave behind. The amount of insurance you receive under a typical benefit plan is either a flat amount, like $20,000, or a multiple of your income, like two times your income up to a certain maximum. Many plans also include small benefits for spouses and children, like 25,000 for a spouse and 5,000 per child. One important thing to remember here is that these amounts are not based on your personal situation and that this amount may not be sufficient to cover your family's needs. Make sure to get advice from a qualified advisor as to what will meet your needs.
Jason Pereira: The next benefit we're going to talk about is accidental death and dismemberment, or AD&D. AD&D is a policy that will pay you and your beneficiaries a benefit if you die in an accident or an accident causes you the loss of part of your body. Benefits are pretty simple. It's typically equal to the same amount as your life insurance, so if you die in an accident, your beneficiaries will receive double. However, I will warn you, this is very, very rare. The vast majority of deaths are caused by health issues.
Jason Pereira: The next benefit we're going to talk about is disability insurance. Disability insurances are going to be the most important benefit you have access to. This form of insurance covers you in case you have a medical reason that you can't go to work. The most common reasons people claim this benefit are musculoskeletal, soft tissue, and mental nervous. Benefits can either be short term, lasting the first 120 days of your disability, or more commonly long term, starting after 120 days, going for two years, five years, or until age 65. The amount you're entitled to is based on a of your income, typically two thirds up to a certain maximum. Benefits can be tax-free or taxable depending on how the plan is structured. This is arguably the most important benefit you can have access to as it helps protect your earnings should you be unable to work.
Jason Pereira: Now let's talk about the next benefit, critical illness insurance. Critical illness insurance is a type of insurance that'll pay you a lump sum should you survive 30 days beyond the date of diagnosis of a critical condition. The most commonly covered critical conditions are heart attack, cancer, stroke, open heart surgery, and MS. Those account for about 90% of claims. The difference between disability and critical illness is that one pays you if you can't go to work for a long period of time, whereas the other one, critical illness, pays you a flat sum should you just get diagnosed. The reason this is important is because oftentimes you may have a condition that gets you back to work before that 120 day benefit starts to kick in, but you will still face increased costs due to missed work or increased costs of medication and expenses.
Jason Pereira: Now let's move on to the next type of coverage, dental. Dental benefits are pretty self-explanatory, it pays for you to go to a dentist, but there's a little bit more to it. Dental benefits fall into one of three categories, basic preventative, which covers routine cleanings and scalings, major restorative, which is more serious things like crowns and replacements, and orthodontics, which can cover braces. Each category has its own limit per year, so be aware of what those limits are.
Jason Pereira: Now, the next benefit we're going to talk about is probably the second most important benefit, extended health. Extended health plans are made up of various benefits including pharmaceutical plans that pay for prescription medication, paramedical practitioner benefits that pay for chiropractors, massage therapy and other medically-necessary professionals, hospital plans that pay for private or semi-private rooms, vision plans that pay for glasses, and travel medical that basically takes care of coverage outside of the province or when you're on vacation. It's very important that you're aware that you have these benefits and what their limits are.
Jason Pereira: The next benefit you might have access to is something called a health spending account. Health spending accounts are sometimes offered by employers and provide you with a set dollar amount that you can use to cover medical benefits not fully covered by the extended health plan. This can be used to your discretion. The benefit amount is usually a set dollar amount set by the employer per year. Depending on the plan you have, if you don't use it all in one year, you might be able to roll it over the next year.
Jason Pereira: Now let's move on to the next benefit, second opinion services. You've all heard that it makes sense to get a second opinion on advice that you receive, whether it's medical or financial. Second opinion services are available on many plans and most people don't even know they're there. This is a service that will get you a second opinion from one of the top experts in the world if you are diagnosed with a serious medical condition. Instead of going to another specialist in your local area, you can benefit from the opinion of one of the top doctors in the world for that specific issue.
Jason Pereira: Now let's talk about the last benefit of the day, employee assistance programs, or EAPs. EAP programs are designed to help employees with personal and work-related problems and provide access to services to help keep them healthy and working. These services are broad, but include counseling and psychology, smoking cessation programs, weight-loss counseling, elder care advice, and countless other services.
Jason Pereira: Now, we've covered a lot of benefits briefly today and there is a lot to know to make sure that you're making the most of your plan. Now, in order to help us discuss some of the key points that you should know, I've invited financial insurance advisor, Ruben Pereira, to join me in the studio today.
Jason Pereira: Joining me in studio today I have Ruben Pereira, investment and insurance advisor. Ruben, thanks for taking the time to come in.
Ruben Pereira: No, thank you, Jason. Thank you very much for having me.
Jason Pereira: Let's clear up the first question. We are not related.
Ruben Pereira: No, we're not. No, we're not, no.
Jason Pereira: Fair enough. Just a odd similarity. No, it's not. Okay, fair enough. Ruben, I brought you in to expand upon the conversation I just had about group benefits. There's a lot to know and I covered it very briefly, but I want to talk about various topics related to that. But before we do that, tell us about a little bit about yourself. What is it you do and where do you work?
Ruben Pereira: Okay, so I work with an independent firm, GP Wealth Management, with a focus on financial planning. My practice has taken a focus on group benefits with business owners. It's interesting, it's a growth opportunity. There's a lot of employees wanting benefits and employers are looking to create a total rewards package for their staff.
Jason Pereira: Makes a lot of sense. Let's start with the employers for. An employer wants to put one of these in place, what is involved and what is important for them to keep in mind?
Ruben Pereira: I mean, you want to make sure that you have a competitive offering, right? Competitive within your industry, competitive with your competition. You want to make sure that your staff has a schedule of coverage that really reflects what they value and what they need and what they'll use.
Jason Pereira: There's a lot of nomenclature involved with these plans that often trips people up. Let's talk about one of the first terms people come across, which is deductible. What is it a deductible on a group plan?
Ruben Pereira: The deductible is a fixed amount that the employee would have to pay out of pocket when filling a prescription or seeing a practitioner or going to the dentist.
Jason Pereira: Yeah, so it's a set sum and once I hit that, then the plan kicks in, correct?
Ruben Pereira: Of course, absolutely. You hit that deductible. Sometimes you can do $25 for a single member or $50 for a family member. Once you've hit that and you've exhausted that deductible, then the plan will kick in with the co-insurance.
Jason Pereira: Interesting. Co-insurance, that's another term people get tripped up on. Now, what does that mean?
Ruben Pereira: Co-insurance is the amount that the employee is paying out of pocket and the plan covers. Typically, it's not unreasonable to see plans at 100%, but a lot of times we'll have plans set up with 80 or 70% co- insurance. So 70% is reimbursed by the plan and then the 30% would be paid out of pocket by the employee.
Jason Pereira: What's the purpose of both deductibles and co-insurance? Why are they in place?
Ruben Pereira: We'll implement deductibles and co-insurance, really it's a cost-containment measure, but it's also used as a way to have employees invest in the plan so they understand the cost.
Jason Pereira: Because otherwise, if you're covered for 100% of everything, you don't stop twice to think about spending money.
Ruben Pereira: Absolutely.
Jason Pereira: And the next thing you know, the employer gets this renewal that jacks the price up 20, 25% and the entire plan is in danger.
Ruben Pereira: Absolutely. Ask the questions, right? If you go to a dentist and you're invested in the plan, if there's a co- insurance, maybe you're going to think twice about-
Jason Pereira: So, no gold teeth?
Ruben Pereira: No gold teeth, that's right. Absolutely not.
Jason Pereira: Fair enough. Excellent.
Ruben Pereira: Yeah.
Jason Pereira: Yeah, that makes sense. These plans, oftentimes when people hear insurance, they start worrying about medical testing, right? Let's talk about if that happens and when that happens.
Ruben Pereira: When it comes to medical underwriting for enrollment in a group benefits plan, typically if it's a new member enrolling in the plan there's no medical underwriting involved, which is really good, right, because if you're applying for health and dental insurance individually there's always going to be some sort of paramedical questionnaire.
Jason Pereira: So even if I've already got some severe medical issue, I'm a really bad diabetic, whatever it might be, I could still be covered by the plan because my employers put this thing forth.
Ruben Pereira: Absolutely, and that's one of the huge benefits. The only situation we run into with medical underwriting is if someone declines coverage when it's proposed and then at a later date that decide, "Hey, wait a second. I'm sick now and I want coverage."
Jason Pereira: Yeah.
Ruben Pereira: There we go.
Jason Pereira: Yeah. Same when it comes to insurance, you really only want it when your house is on fire. Unfortunately, no one's going to give you the insurance when your house is on fire.
Ruben Pereira: That's right.
Jason Pereira: [inaudible 00:11:18] beforehand.
Ruben Pereira: It's preventative.
Jason Pereira: Exactly. I mean, one of the other terms that's thrown around that we'll come across is something called non-evidence maximums. Can you explain how those work and how that may involve medical underwriting?
Ruben Pereira: Non-evidence maximums, typically that's applied to the short-term and long term disability. Essentially, we use NEMs to set a limit for the amount of coverage that we're applying for.
Jason Pereira: So basically I can get X amount of coverage with no medical. What happens if I qualify for more than that?
Ruben Pereira: If you qualify for more than that, then you'd have to provide proof of income, for example. If we apply for a long term disability option on a plan, we'll usually use the lowest earning individual to set the non- evidence maximum, you don't want to discriminate between anyone on the plan. Anything above and beyond, not to say that the employee can't get the reimbursement at their salary, but you'll have to provide proof of income over and above that not non-evidence maximum.
Jason Pereira: Mm-hmm (affirmative), excellent. I mentioned previously how you shouldn't just assume that because the employer gave you some life insurance that you have enough life insurance. Can we talk about basically what is involved in actually figuring out how much life insurance you should need?
Ruben Pereira: When it comes to life insurance in the group plan, I mean, one of the benefits is that most group benefits plans, they'll have some sort of offering on the life insurance front. It could be a multiple of earnings or it could be a fixed amount. In most cases, employees have the option to get or apply for more coverage if need be. There'll be some medical underwriting that's required with that.
Jason Pereira: That's interesting. Yeah, many plans offer the ability to get more. So if I have a choice between the group, more insurance, or going out and getting my own, what's the better case?
Ruben Pereira: Oh, of course. I mean, it's always a better option to source your own life insurance independently. I mean, one, you most likely get better rates if you market those rates. Secondly, the coverage is yours. It really goes with you as you go along.
Jason Pereira: So I change jobs, my employer decides to change my program, that could reduce my level of coverage.
Ruben Pereira: Absolutely, absolutely. Your employment is not guaranteed, unfortunately, right?
Jason Pereira: Mm-hmm (affirmative).
Ruben Pereira: And neither is your health.
Jason Pereira: No.
Ruben Pereira: Neither is your health, right?
Jason Pereira: No.
Ruben Pereira: So if you source your own a coverage, I mean, obviously in an ideal situation you discuss that with a financial advisor or an insurance advisor and they'll do a needs analysis and help you identify how much insurance you need and what types of products that you can implement. But essentially, source your own coverage for anything above and beyond what you need.
Jason Pereira: Yeah. I think the same advice applies to critical illness. I think disability is a little bit different. One of the key things that I encounter is when we start dealing with executives who have very high salaries, oftentimes there might be a limit on how much disability they're entitled to per month, 2,500, 5,000, whatever it might be.
Ruben Pereira: That's right.
Jason Pereira: But if someone's earning a couple hundred thousand dollars a year, that's not going to be anywhere near enough to cover out what they're making before. In situations like that, what should be done?
Ruben Pereira: When it comes to disability plans, disability options on a group benefits plan, your total earnings might not be reflected on that group coverage. In those cases, it's always an ideal situation to speak with a qualified professional and source your own private coverage to top up the difference. A lot of disability plans, they pay out based on net earnings, so you want to make sure that you're covered in case something does happen and you can go to work.
Jason Pereira: Because, I mean, high-income earner, say they're living off $100,000 after tax and the group coverage covers 60, that's a big haircut, you know? That's a big reduction itself.
Ruben Pereira: Oh, absolutely, absolutely.
Jason Pereira: Yeah.
Ruben Pereira: I think most Canadians aren't prepared for that, right?
Jason Pereira: No.
Ruben Pereira: They don't think about that.
Jason Pereira: I would say disability is probably the most undersold product they come across, because it's harder to get individually.
Ruben Pereira: It's complex.
Jason Pereira: It's not cheap.
Ruben Pereira: Yeah.
Jason Pereira: It's not cheap because unfortunately the stats are something like one in three, or one in four or one in three people is going to be coming down with a disability for some point in their lives, right?
Ruben Pereira: Yeah.
Jason Pereira: It's not-
Ruben Pereira: It's a very similar stat, Jason, with critical illness.
Jason Pereira: Yeah.
Ruben Pereira: One in three Canadians I believe that is-
Jason Pereira: Gets cancer and [crosstalk 00:15:40].
Ruben Pereira: ... they'll suffer critical illness in their lifetimes. So it's a big deal, and the insurers know that and premiums do reflect the risk.
Jason Pereira: That's the thing about insurance. If insurance looks expensive it's because it's more likely to happen to you.
Ruben Pereira: That's right.
Jason Pereira: Right? That house on fire, the insurance for a million bucks is going to cost you a million bucks, right?
Ruben Pereira: Yeah. The term policy for 20 bucks a month, they figured out the actuaries, that something may not happen.
Jason Pereira: Yeah. If it's that cheap it's because it's unlikely to happen.
Ruben Pereira: Right.
Jason Pereira: But it's still important.
Ruben Pereira: Yeah.
Jason Pereira: So people will have these plans in place. If they were to leave that employer, say retire, and they want to maintain coverage, what are their options?
Ruben Pereira: While you're in the plan, it's great, you have the options, you use the plan, but if an unforeseen circumstance, you're terminated from your job for whatever reason, you do have the option to continue coverage individually with another insurer. You can continue with the same insurer that the group is with or you can approach another insurer. Most have the option to convert to an individual policy within 60 days.
Jason Pereira: If I do that, will the benefits be the same?
Ruben Pereira: The benefits will not be the same. When it comes to individual coverage, those are more cookie cutter plans. They might have a basic package, an intermediate, and a more comprehensive.
Jason Pereira: If I want the comprehensive one, I'm probably going to have to provide medical information, right?
Ruben Pereira: Maybe not. When it comes to individual coverage coming from a group plan, one of the benefits of that is not needing to provide medical evidence, which is huge, right?
Jason Pereira: Mm-hmm (affirmative).
Ruben Pereira: I mean, if you're healthy it doesn't really matter, but if you're not healthy you want to make sure that you can get into a plan and they're going to cover preexisting conditions.
Jason Pereira: Now, let's talk about the important part to this, that often really shocks a lot of customers when I show them this, is the cost, right?
Ruben Pereira: Mm-hmm (affirmative).
Jason Pereira: When you're working for someone, whether you're paying for part of it or not, it's coming off your T4. You really don't necessarily see how much these plans are covering, and if the employer is paying for all of it, then you definitely don't see it. When we start quoting people for these individually, they are often shell-shocked. On an employee basis, what does this typically look like, in terms of costs, for having one of these plans?
Ruben Pereira: It depends, right, Jason? When it comes to employee plans, I mean, one of the real big benefits is that you're able to market the plan. The whole process, there's a design element. We'll design a few different options with different schedules of coverage. We might design a plan, a super comprehensive plan, at a hundred percent reimbursement covering paramedical practitioners, travel policies, everything, and then maybe a less comprehensive plan at 70 or 80% reimbursement. Once you market the plan, it really allows the premiums to be very competitive by having one insurer trying to match or beat for the business, right?
Jason Pereira: But it's not unusual that if we're looking for say a single employee, that's going to cost in the hundreds per month, maybe 100, 200 per month, and for families, it's entirely possible it gets to 500 plus.
Ruben Pereira: Oh, it could be three, four, 500 depending on the coverage.
Jason Pereira: This is what I often see, I'll see people come out of these plants saying, "Yeah, I'm not going to have this benefit anymore. I just want to replace it," and I hit them with a bill that's going to be $6,000 for the year and they're like, "You're crazy. I'm not going to pay six grand per year."
Ruben Pereira: What happened, that's right. Yeah.
Jason Pereira: It's like, "Well, you have to understand something. Your employer was paying this on your behalf before," and they really had no idea. Also, I mean, when people leave employed positions and they become self-employed, right? They often don't take that into consideration, right, and what that was costing. You think you bring home some amount, but it's actually costing a lot more for that employer to have you around.
Ruben Pereira: That's right, Jason. That's a great point. I think employers realize that as well and so do employees these days, that a benefits package really is part of a total rewards package, a total compensation package for the staff member. You'd be surprised how many employers would rather take-
Jason Pereira: The cash?
Ruben Pereira: No, actually a more comprehensive plan over a raise.
Jason Pereira: Interesting, I've seen both before, but yeah.
Ruben Pereira: I mean, well, it depends. A younger guy's probably going to take the cash
Jason Pereira: Want the cash.
Ruben Pereira: Then a family is probably going to want the benefits, right?
Jason Pereira: Now, one important thing to keep in mind, and I tell everyone I deal with this note, this is not a blank check, right? A lot of people treat these things like, "Oh, great. I'm entitled to X number of massages per year."
Ruben Pereira: A shopping spree.
Jason Pereira: Yeah, exactly, right?
Ruben Pereira: [crosstalk 00:20:10].
Jason Pereira: For instance, these things are there to help keep you healthy. If you do not medically need to go to the chiropractor every month, don't go to the chiropractor, right? I've actually seen cases where employers have welcomed in and said, "Oh, let's have a massage therapist on site every week." Now, if that happens, what are we looking at in renewals?
Ruben Pereira: Well, that's the problem, right, Jason? I mean, I know we've touched on it a bit earlier and that's one of the reasons why we do want to have some level of co-insurance, just to make sure that the employees are invested and they understand the cost to the plan and the cost to the employer, right?
Jason Pereira: Because if it's 100% covered and someone says, "Maybe you should do this." You're like, "Why not," right?
Ruben Pereira: You don't know, you don't know. That massage won't really hit you, right? But if you get five or six massages, that's five or six for the husband, five or six for the wife and-
Jason Pereira: If you're 20 bucks out of pocket every time, you're going to stop and think about every time you fishing out the 20 bucks, right?
Ruben Pereira: Yeah, well, and when that renewal comes up and their premiums go up 30%, you're going to think, "Wait a second, maybe I didn't need five massages." Right?
Jason Pereira: Yeah. Whenever we see the plans coming back and it's like, "Oh, look. All the paramedical practitioners are maxed out in these categories." It's like, "Yeah, you guys are really enjoying this a little bit too much." Yeah.
Ruben Pereira: That's right. Some employers, they're happy to see that.
Jason Pereira: Yeah.
Ruben Pereira: I've been in situations where they said, "Great, they're using it," and others are thinking, "Well-
Jason Pereira: Was that bill higher? They were using it, but they didn't use other things so it stayed the same, right? Good, excellent. Well, Ruben, thank you very much for taking the time to come in today-
Ruben Pereira: Thank you.
Jason Pereira: ... and help people understand what's going on with their group benefits plan. And thank you, yet again, for joining us for The Wisdom of Wealth. Hopefully we've helped increase your financial literacy today and help you make better choices surrounding your employee benefits plan. Until next time, I'm Jason Pereira. Take care.