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Disability insurance

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Why you should care about disability insurance

If you're anxious about what happens if you can't work due to an injury or illness, then buying disability insurance will put you at ease. While most people recognize the need for life insurance, many don't understand what disability insurance is. Consider what happens following a car accident, or you're told to "take it easy" after a heart attack, or the debilitating after-effects of chemotherapy treatment - if you can't work, the income stops, but the bills don't.

Below we explain the differences between short-term and long-term disability insurance in Canada, how long it lasts, how much it costs, and whether it's right for you.

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What is disability insurance?

Disability insurance helps protect you and your family due to a sudden and unexpected illness or life-altering injury that makes it impossible to work and earn an income. Depending on your policy, it replaces between 60 – 85% of your income, up to a specified amount, for a defined period.

Do I need disability insurance?

No one can predict the future, but we can look to our past. According to the Canadian Life & Health Insurance Association, 1 in 3 people, on average, will be disabled for 90 days or more before the age of 65.

A new disability can last months, sometimes years, and if you have anyone who relies on you for financial support, a mortgage, or even your regular recurring bills, disability insurance can help you survive the financial strain. 

Here are some examples that may better illustrate the need for disability insurance in Canada.

  • A construction worker goes skiing and breaks their arm - they can’t work for 8 weeks.
  • A software developer suffers a stroke and has difficulty remembering how to code.
  • Anyone who receives a depression diagnosis following a traumatic event.

How much does long term disability insurance cost per month?

Your premium will typically range between 1-9% of your salary, depending on several factors. Life insurers will consider the following when determining the price to offer you for disability insurance:

  • The amount of coverage you need
  • The length of the waiting period before payments begin.
  • The duration of payments (i.e. how long you want to receive payouts)
  • Your age, general health, and occupation

Unlike auto & home insurance, where you live is less of a determining factor in the price you receive from an insurer.

Pro Tip:

The longer your waiting period before coverage begins, the cheaper your price will be

What is short-term disability insurance (LTD)?

  • Typically lasts for up to 6 months.
  • May be provided through your employer.
  • If provided by the employer, you may need to use up sick or vacation time before short-term disability begins.
  • You can purchase your own plan over and above your employer's coverage.
  • If you have no short-term disability insurance, you may be eligible for Canada’s Employment Insurance (EI) sickness benefits.
  • Typically pays out 70% of your income.

What is long-term disability insurance (LTD)?

  • Long-term disability begins after short-term disability, sick leave benefits, and EI benefits.
  • Typically lasts for up to 2 years, depending on your policy.
  • After 2 years, you may continue to receive benefits, but only if you can’t work in any occupation.
  • Most plans replace 40-70% of your income but max out around $5,000 per month.
  • Owning multiple long-term disability plans doesn't mean you'll get more money. Instead, the benefit becomes evenly distributed among all available income sources from different providers, usually maxing out at 85% of your regular pay.

How do insurance companies define disability?

Each insurer defines disability differently. The most significant difference is between “any occupation” or “own occupation,” so make sure to get the one suitable for your needs.

Any occupation means you only receive disability benefits if you’re unable to work in any capacity. Essentially, you won’t qualify for benefits if you can do a different job based on your training, education, and experience. For example, if you’re normally on the sales floor of a busy retail shop, but chemotherapy makes it too exhausting, they could make you sit behind a cash register instead. 

Own occupation means you'll receive benefits if you can't return to the job you had before the injury or illness. Often, own occupation plans are purchased individually and more expensive.

Consider “own occupation" if you work in a specialized field, which would require a significant reduction in pay to work in another occupation. 

How much disability insurance should you have?

The simplest way to calculate how much disability insurance you need is to multiply your after-tax income by the number of months you estimate you'll need coverage. However, much like life insurance, deciding how much disability insurance you need depends on many things.

  • Personal Lifestyle - How much does it cost for you to live? If you become disabled, how far are you willing to cut back to survive on less income.
  • Family & Dependents - How many people depend on you financially? Are you married? Do you have kids? What about your parents?
  • Employment Status - Would you be willing to change jobs for lesser pay?
  • Debts & Savings -  Who could make your mortgage or car loan payments and handle the recurring bills once your regular paycheque stops coming in? How long will your savings or emergency fund last? Do you have other investments from which you could pull money to last a little longer? What happens after you wipe out your savings if your disability lasts a long time?

How to buy a disability insurance policy in Canada

Individual insurance plans

Group insurance plans (e.g. through your employer or union)

Special purpose plans (e.g. credit card, mortgage, auto insurance)

Government plans (WSIB, CPP, or EI)

Questions to ask when buying disability insurance

  1. Get clarity

    Seek clear definitions on what qualifies as a disability, what exclusions exist, and if you have a pre-existing condition, be sure there are no exemptions.

  2. Analyze the money

    How much does it cost, and how will you pay? What percentage of income is paid out to you, and if there is a dollar limit. Who coordinates your payments among the other plans that you might have available. Do you still need to make payments while claiming disability?

  3. Changes

    Can you increase your coverage, and if so, does it require a medical exam?

  4. Claims

    Are benefits taxable? How long do you have to wait until you start receiving the benefits following a claim?

  5. The fine print

    Are there terms and conditions when you renew? Is it guaranteed renewable? Or, if you’re buying into a group policy at work - do you have the option to continue coverage if you leave the job until you find new coverage?

FAQ

Questions about disability insurance

Are disability insurance premiums tax-deductible in Canada?

Can you get life insurance while on disability?

Is mortgage disability insurance worth it?

Does term life cover disability?

What is key-person disability insurance?

How long does disability insurance last?

Author Bio

Matt Hands, Business Director of Insurance

Matt started his professional career at CARPROOF where he honed his marketing and analytical skills for over 3 years. Matt then took his wealth of experience to Ratehub.ca’s Toronto offices, working with insurance providers, agents, and brokers to grow and expand the Insurance business unit. He is a thought leader in the community and a valuable insurance resource to respected publications like the Globe & Mail, Toronto Star, Huffington Post, Yahoo News, and 680 news radio in Toronto.

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