How Disability Insurance Works In Canada

Disability insurance is essential for almost every working Canadian, but it’s a subject that most of us would rather not discuss. Perhaps it’s because we only seem to benefit from insurance after something unfortunate happens. And there’s the cost factor too. When you buy insurance, you’re paying for something that you hope you will never have to use. You may like your chances of living a long and healthy life, but what happens if you are injured or become ill and are unable to work. Enter disability insurance.

What Is Disability Insurance?

Disability insurance provides you with a tax-free monthly payment to supplement your income in a situation where an illness or injury has prevented you from working. A lump-sum payment is made, in some cases.

If you are employed, chances are you have group insurance coverage through your employer. You can also purchase disability insurance privately.

There are three main types of disability insurance: Short-Term, Long-Term, and Critical Illness. Each coverage is unique and serves a purpose. Let’s take a closer look at each to help you decide what type of insurance you might need.

Short-Term Disability Insurance

Short-term disability is the most common type of disability insurance, which makes it very important. Its purpose is to replace a percentage of your income should you incur a disability that prevents you from working. Many people don’t realize it, but the chances you will incur a disability during your life are far from remote. A 2017 report from Statistics Canada showed that more than 6 million Canadians over age 15 had at least one disability.

Most employer benefits include short-term disability protection, which, in most cases, lasts for up to six months after the disability. Because it is so common, the cost of short-term coverage tends to be high.

Short-Term Disability on Credit Products

Lenders also offer Short-term disability insurance on credit products, like mortgages and loans. In this case, the insurance covers your principal and interest payments as long as you’re unable to work or until the credit product is paid in full, whichever comes first. When you’re applying for a loan, you should always consider what will happen to your income if you become ill or injured and unable to work. Will you have enough income to continue making loan payments? If not, then you should strongly consider opting for short-term disability coverage.

Characteristics of Short-Term Disability Insurance

Coverage will vary between insurance providers, but here are some common features you can expect with short-term disability coverage.

• The most common form of disability insurance
• Protects you when illness or injury prevents you from working
• Partial income replacement for up to six months
• Income replacement ranges between 60% and 80%
• Lenders offer short-term disability (credit protection) on loans and mortgages
• Credit protection covers your payments while you’re unable to work

Long-Term Disability Insurance (LTD)

The primary purpose of long-term insurance disability is to help replace your income if you cannot work for an extended period due to a disability. LTD won’t replace your entire income; the amount of coverage varies anywhere between 40%-90% depending on the plan you have. Generally speaking, the higher the income replacement amount, the more costly the protection.

Many Canadians have long-term disability insurance through their employer, which kicks in as soon as the short term coverage ends, usually after six months. If your employer doesn’t offer long term disability benefits, or you’re self-employed, you can purchase coverage from a private insurer.

Characteristics of Long-Term Disability Coverage

Here are a few things you should know about long-term disability insurance before you apply for coverage:

• Continues after short-term disability plans end (usually after six months)
• Coverage lasts until you return to work, turn 65, or pass away
• Lower monthly payout than short-term plans
• Available through employer group benefits or via a private insurer
• Covers “any occupation” or “own occupation”

Other Things to Consider about LTD Insurance

If you have a long-term disability plan, find out if it covers “any occupation” or “own occupation”. With “any occupation”, your coverage can be cancelled if it’s determined you can still work some sort of job, albeit a different one than you had before you became sick or injured. “Own occupation” coverage means it will continue until you can return to your previous job, and not a second before that.

If you can afford it, you may want to consider supplementing the long-term coverage through your group benefits with a private insurance plan. This is especially true if your current coverage will not be sufficient to cover your monthly expenses should you become disabled.

Critical Illness Insurance (CI)

Critical Illness insurance differs from both short-term and long-term disability in that it doesn’t provide you with a monthly payment. Instead, the insurer pays a lump sum when diagnosed with a life-threatening illness based on the amount of coverage you purchased. Because of this, critical illness shouldn’t be considered a replacement for long-term disability but rather supplementary protection.

There is a clear definition of what constitutes a life-threatening illness with critical illness insurance plans, but it usually includes cancer, heart attack, or stroke. The coverage varies between providers, so it’s important to read the policy in detail before applying.

Suppose you experience an interruption in your income; CI insurance can ease the financial burden for you and your family by allowing you to focus on your recovery. You can use the lump sum to pay down a mortgage or other debts. A critical illness benefit can also pay for medical-related expenses.

Because the risks of being diagnosed with a severe illness increase significantly as you age, you often cannot apply for critical illness coverage after age 55 or 60. If you do have coverage into your 50’s, the premiums are quite expensive, so you may need to decide if you need the coverage.

Characteristics of Critical Illness Coverage

Here are some common features of critical illness insurance:

• Paid as a lump-sum
• payable upon diagnosis of a life-threatening illness
• Common conditions covered: cancer, heart attack, stroke
• Several lenders offer CI on mortgages
• CI becomes much more expensive as you age
• Usually has a maximum age limit for coverage, i.e., 55 or 60

How Much Does Disability Insurance Cost?

The price of disability insurance will vary, depending on your age, the type and amount of coverage, and the applicant’s health profile, i.e., smoker or non-smoker. The younger you are, the cheaper your premiums will be. There are several places you can get a free disability insurance quote online. One of the easiest-to-use is PolicyAdvisor. They’ll ask you for a few details about yourself, and you’ll have a quote in minutes.

What Type of Disability Insurance Should I Buy?

After reading this, you may be wondering what type of disability insurance you should buy. While this advice won’t apply to everyone, most people earning an income should have all three disability coverages; short-term, long-term, and critical illness. The question will be where it will come from and how much of it you need. The answer will be different for everyone.

If you don’t have disability insurance; or you’re unsure what you are covered for, I recommend that you start by reviewing your group benefits through your employer. From there, it’s never a bad idea to consult with an insurance professional. They can assist you by completing a full needs analysis to identify insurance coverage gaps.