Matt Hands, VP, Insurance and MoneySense
Disability insurance is a type of life insurance product that protects you and your loved ones financially in the event you're unable to work due to illness or injury. These types of policies typically replace 60 to 85% of your regular income (up to a set amount and set period), ensuring your financial stability in a time that's already full of hardship.
Short-term disability insurance
Long-term disability insurance
In Canada, disability benefits are available for purchase from various different sources, including individual and group plans. You can also receive support from government programs if you don't have other coverage options in place.
Individual disability insurance is purchased on your own, through an insurer (e.g. Sun Life) or bank (e.g. RBC).
Group disability insurance is available through your employer – this can include sick leave, STD, and LTD.
If you're unable to work due to health, government financial assistance programs can include WBIS, EI, and CPP.
If you're purchasing a plan individually or through your employer, you'll need to make regular payments (typically monthly) to keep your policy active. Your insurance rate will be dependent on several factors, such as your age, health status, and coverage amount.
It's also important to note that different policies may define what constitutes a disability differently. Generally speaking, there are three ways this can be done:
Own-occupation disability – Benefits are paid out if you're unable to perform the job duties of your own occupation. And if you take on another job, outside of your designated skillset, you'll still receive payment. This is especially useful for skilled professionals, such as doctors and nurses.
Regular-occupation disability – Benefits are also paid out if you're unable to perform the job duties of your own occupation. But if you choose to engage in another type of job, you may receive fewer benefits or void your payments completely.
Any-occupation disability – Benefits are only paid out if you're unable to perform the duties of any job that's reasonably suitable for you – based on age, experience, and education.
Additionally, disability insurance policies have a specified waiting period. This is the amount of time after the onset of your injury or illness in which you won't be able to receive benefits. This can range from a few weeks (for short-term disability coverage) or a few months (for long-term disability coverage).
If you do become disabled (and meet the definition outlined in your policy), you'll be eligible for benefits after the waiting period. The exact percentage of your regular income paid out will depend on your plan. And the coverage will last until you're no longer considered disabled or you've maxed out the entire time period.
According to the Canadian Life & Health Insurance Association, an average of 1 in 3 people will be disabled for 90 days or more before they turn 65 years old. A disability can last months or even years, and if you have loved ones that rely on your income or recurring bills, such as a mortgage payment, this type of coverage may be exactly what you need. Here are a few examples to better illustrate the need for disability benefits in Canada.
A construction worker breaks their arm on a ski strip, leaving them with the inability to work.
A software developer suffers a stroke, leaving them with trouble remembering how to code.
An employee is unable to work due to a depression diagnosis after a traumatic event.
What can a disability insurance payout be used for?
Disability benefits are there to act as income replacement – it can be used for any financial obligations you have, such as medical expenses, household bills, loan payments, and even retirement savings.
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Generally speaking, disability insurance should cost you between 1 to 3% of your annual income – so if you make a salary of $50,000, expect to pay a premium of $500 to $1,500 each year. To find the exact number you'll be paying, be sure to compare disability insurance quotes with us today.
The price you'll be paying for your disability insurance is dependent on a number of factors – here are a few common ones you should be aware of to better understand how insurers calculate your quote.
Age & gender
The older you are, the more expensive your coverage will be. And women tend to pay higher rates due to statistical risk factors.
Having a pre-existing condition can lead to higher rates. And if you smoke, you can also expect to pay more.
Some jobs can put you at a higher risk of becoming disabled (e.g. construction worker), leading to higher insurance rates.
It's no surprise that the more coverage you purchase, the more expensive your monthly premium will be.
Policies are only set to pay out for a specific period, and choosing a longer one will inevitably lead to higher coverage rates.
This is the set period of time you'll need to wait before your benefits kick in – shorter periods lead to higher rates.
While there is no one-size-fits-all figure, most disability insurance plans should replace between 60 to 85% of your regular income. Here are a few questions you can ask to help determine the right amount for yourself. And for more guidance, be sure to consult a licensed life insurance broker in Canada.
How much money would my loved ones and I need to be supported if I'm unable to work?
What debts would I need help paying off (e.g. mortgage, credit card) if I'm unable to work?
Would I need help saving for the future (e.g. child's education, retirement) if I can't work anymore?
Do I have already have emergency savings in place? Do I need more protection on top of this?
Does my employer offer coverage already? Do I need anymore on top of this?
How much risk am I willing to take on? How does this weigh against my current budget?
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Another life insurance product you may be interested in is critical illness insurance. This type of coverage protects you financially in the event you're diagnosed with a specified illness. Let's take a look at a few key differences in the table below.
Are disability insurance premiums tax-deductible in Canada?
In Canada, disability insurance premiums aren't tax deductible for individuals. If you're self-employed or an employer who pays group premiums, however, there may be an opportunity to claim disability insurance as a business expense. But be sure to consult a licensed tax professional for more details.
Can you get life insurance while on disability?
Yes, but life insurance for those with pre-existing conditions is usually much more expensive. You may also be denied conventional forms of coverage, and instead, need to opt for a form of no medical life insurance.
Is mortgage disability insurance worth it?
It depends on your financial situation. Can you afford to make mortgage payments on a reduced income? Do you have an emergency fund that can cover extra costs while you’re disabled? If the answer is no, it's highly recommended that you look into disability insurance to cover your mortgage payments.
Does term life insurance cover disability?
No, term life insurance is a policy that pays your beneficiaries a lump-sum amount upon your passing. You can buy disability insurance from your life insurance provider at the same time, but they are two different products.
What is key-person disability insurance?
Key person disability insurance is a type of business insurance that protects employees who are most valuable to the organization. Should anything happen to this key person, whose skills and intellect are needed, the business may suffer extreme financial loss. And in that case, key person disability insurance is there to compensate the business.
How long does long-term disability insurance last?
This depends on the exact terms of your policy. Long-term disability insurance typically lasts upwards of two years, and some plans may even payout until you reach the age of retirement. It's always important to clarify all details and expectations with your broker before signing.
How long does short-term disability insurance last?
Short-term disability insurance typically lasts about six months, but it also depends on your policy terms. It's always important to clarify all details and expectations with your broker before signing.