How Disability Insurance Could Protect Your RRSPs

Don’t cloud your future retirement
by dipping into your RRSPs early

About Disability in Canada

Disability insurance is something that many people overlook, especially younger people who are healthy. However, a debilitating injury could happen at any time, and often when you least expect it. It is vitally important to know how your insurance agency defines a disability. While many disabilities are work-related, a disability can also be caused by car accidents, sports injuries, health disorders, and a diagnosis of a critical illness.

This may be a surprise to many, but according to Statistics Canada, it is estimated that approximately one-third of people suffer from a disability each year, and 10.4% of Canada’s population is disabled by illness at any given time. Why are these numbers so important? If you are not prepared, becoming disabled can have a major impact on your finances, and it is forcing many Canadians to dip into their RRSPs and retirement funds early.

Dipping into RRSPs

Being forced to dip into your RRSPs is not ideal, as doing so comes with a heavy list of consequences. As outlined in The Globe and Mail, the many impacts of removing money from your investment early include:

• Heavy tax penalties

• A long-term negative impact to your savings

• Loss of contribution room in your RRSP

• Loss of the compound interest that you have built up over time

Having to draw from RRSPs to cover disability-related costs is not good for Canadians, especially since many Canadians have minimal retirement savings and already anticipate having to work past retirement age to garner enough savings. The good news is that there is an alternative — disability insurance.

A Better Alternative — Disability Insurance

To avoid dipping into their retirement savings and to protect their long-term financial future, many aging Canadians are seeing the value of disability and critical illness insurance as a viable means of protection.

Rather than removing funds from their RRSPs and other retirement fund accounts, it makes more financial sense to invest in disability insurance. In general, disability insurance insures a person’s earned income against the risk of a disability preventing them from making a living. If you become disabled, disability insurance will help to supplement lost wages and help you maintain a certain standard of living.

There are two main types of disability insurance to consider: “injury only” and “injury and illness.” But as the article “Understanding the Differences Between Injury Only and Injury and Illness Disability Policies” points out, “Some occupations may only qualify for injury coverage, but Neil Paton, president and CEO of The Edge Benefits, a disability insurance manufacturer specializing in small business owners and the self-employed, tells us [LSM Insurance] his company may still be able to help in providing something for those who may not be eligible for a traditional injury and illness plan.”

Rethinking Your RRSP as a Savings Account
Part of the problem with RRSPs is when you view them as an accessible savings account. As you see the money adding up, it is tempting to think, “Ah, here is a financial cushion in case of an emergency.”

Not so.

What you have is a fund building up for your retirement. Dipping into that early not only means heavy penalties, but it can also seriously compromise your future. Do you want to be working in your 70s or 80s? If not, seriously reconsider and consult with a financial adviser before you touch those RRSPs.

You do need a financial cushion and savings in case of emergencies. Failing to plan in this area can spell financial doom. However, most of us simply don’t have the disposable income to stow away into a savings account month after month. What we do have, however, is enough change to buy coffee, go to a movie, or have a dinner out. Let’s say you do all those things at least once a month. Now, be honest. Most of us do those things several times a month. If you brewed a few cups at home, saw one or two fewer movies, or skipped a pricey dinner, you could likely afford disability insurance. Instead of struggling to come up with extra cash to stow away, you should be putting aside less money but seeing it work harder for you. The little you pay monthly can save you years of financial setbacks if a disability were to occur. Now isn’t that a better plan than compromising your retirement?

How Disability Insurance Could Protect Your RRSPs

Investing in disability insurance is a better long-term financial option compared to dipping into your retirement funds. Protecting RRSP contributions is essential for Canadians — especially for Baby Boomers, who will be retiring in the near future. Speak with an insurance broker today to ensure you have the protection you need in case of a work- or illness-related disability. A qualified broker can discuss in detail the disability insurance policy that will leave you worry-free and fully protected, with your RRSPs intact.

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