Long Term Disability: Indexed vs Non-Indexed
For individuals currently or soon-to-be on long term disability, you need to understand the differences between indexed and non-indexed policies because these distinctions can significantly impact your financial security and peace of mind throughout the duration of your benefits.
Want to learn more about long term disability: indexed vs non-indexed? Share Lawyers’ experienced long-term disability lawyers can help you understand your options.
Long Term Disability Indexed vs Non-Indexed
For a while, inflation in Canada remained very low. As a result, whether disability benefits had provisions for adjusting the benefit amount to keep up with inflation wasn't a concern for most. However, recent inflation rates have surged to levels not witnessed for decades, prompting heightened concern over the potential for LTD benefits to increase over time.
Long term disability benefits come in two flavors, indexed and non-indexed.
Indexed Benefits
Indexed LTD benefits are adjusted periodically to account for inflation or changes in the cost of living. The benefit amounts increase over time to maintain purchasing power, ensuring recipients are not negatively affected by rising prices.
Indexed benefits safeguard against inflation by being tied to the Consumer Price Index (CPI) and adjusted annually, typically on the anniversary of initiating LTD benefits.
These adjustments are subject to maximum and minimum limits outlined in the policy. For instance, if the CPI indicates a 5% increase and the policy sets a minimum adjustment of 2% and a maximum of 10%, your benefits would rise by 5%. The calculation method—whether it's based on the original benefit amount or the prior adjustment—depends on your policy's wording.
Indexed benefit policies generally have higher premiums but offer greater financial security overall.
Non-Indexed Benefits
Conversely, non-indexed LTD benefits do not include provisions for adjusting benefit amounts based on inflation or changes in the cost of living. The result is that the value of these benefits will remain fixed, potentially leading to decreased purchasing power as costs rise.
Non-indexed benefit policies generally have lower premiums but offer less financial security overall.
Long Term Disability: Indexed vs Non-Indexed | ||
Aspect | Indexed LTD Benefits | Non-Indexed LTD Benefits |
Adjustment Frequency | Annually, typically ties to the CPI | Fixed, does not change over time |
Inflation Protection | Benefits increase to match inflation rates or cost of living increases | Benefits remain constant and may lose purchasing power over time |
Financial Stability | Offers stability and preserves purchasing power | Subject to the potential erosion of purchasing power |
Cost | May have higher premiums initially but provides long-term security | Lower premiums initially but may result in decreased value over time |
Example |
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As you can see, indexed benefits provide greater peace of mind through adjustments based on inflation and cost of living increases.
Some group policies may offer an alternative form of inflation protection, which can be confusing. This doesn't increase the monthly benefit but adjusts the prior earned income level, which is crucial for setting income when considering returning to work at a lower-paying job.
If this is confusing, you’re not alone. Thankfully, the experienced LTD lawyers at Share Lawyers are here to provide guidance.
