Disability Insurance in Canada: What is it?

Have you ever wondered how you would make money if you were unable to work dues to an illness or accident? Sure an emergency fund could help you temporarily, but what you really want is a disability insurance policy.

Most employees assume that their employer or the government provides disability benefits, but that’s not always the case. Not every employer offers disability insurance, and even if they do, it may not be enough coverage. 

What is disability insurance?

Disability insurance provides you and your family with an income if you’re suddenly unable to work due to an illness or accident. For example, if you need to take extended time off work for medical procedures or if you’re in an accident and need time to recover.

The amount you’ll get depends on your policy, but you’ll usually get paid between 65% to 85% of your earnings.  

Since you’ll still be generating income via your insurance company, you can use the benefit payments for anything you want, such as mortgage payments, childcare, and monthly expenses.

Disability insurance could even cover a non-work-related illness or a difficult pregnancy where you must go off work early for an extended period.

Short-term disability insurance

A short-term policy typically provides a benefit period of three to six months while you cannot work.

Assuming your employer provides you with short-term disability coverage, you’d go through your disability plan to make a claim. In most cases, you won’t get your full salary while on disability, but you’ll likely get close to 85%. While on disability, employers aren’t required to provide paid sick leave or vacation days. That said, every employer is different, so check with your human resources department.

If you’re on an individual disability insurance plan, you’d have to wait for the elimination period to end before you start getting payments.

Long-term disability insurance

Long-term disability coverage will usually only provide up to 65% income replacement and would kick in when all of you’ve received the maximum benefit from all other available sources, such as:

• Short-term disability plan
• Sick leave and vacation time from your employer
• Employment Insurance benefits

Keep in mind that every long-term policy is different. If you’re getting disability insurance from your employer, you should read the policy details to know what you’re entitled to. For those looking to buy a separate policy, you should speak with an insurance broker so they can find a policy that meets your needs.

How does disability insurance work?

While each policy is different, the general process of temporary disability insurance works something like this:

• You purchase a plan and pay monthly or annual premiums (if you’re buying a separate policy)
• If you become disabled, your would contact your insurance provider
• Your insurance provider would contact your employer and provide instructions while withholding any sensitive information
• Your insurance provider would pay out part of your income depending on your policy
• You’d go on short-term disability first
• Your long-term disability plan would apply next
• Once you’re ready to go back to work, your insurance provider would contact your employer

Depending on the severity of your disability, the above steps may differ. Some people may not return to the same job as their disability may prevent them from doing so.

Disability definition

What’s interesting is that the disability definition will differ between insurance companies. Generally speaking, the disability definition falls under the following:

Any occupation

“Any occupation” is a clause that you’ll see in many disability insurance plans. Your disability insurance income would only apply if your illness or injury prevents you from doing any job to which you’re reasonably suited.

For example, let’s say you’re a labourer. After years of working, your back is in constant pain. While you might not be able to perform your own job, you’d likely still be able to operate some machinery sitting down or do office work. In this case, you wouldn’t qualify for disability benefits.

This type of disability definition is usually included in group insurance plans.

Regular or own occupation 

“Regular or own occupation” refers to benefits that are paid out if you can’t perform the main duties of the job you had when you became disabled. 

For example, if you’re a journalist and broke both your arms in a biking accident, you’d unlikely be able to perform your regular duties. As a result, you’d be able to receive benefits.

Regular or own occupation disability plans are common when purchasing an individual insurance plan.

Types of disability insurance plans 

There are two types of disability insurance plans: group and individual. It’s possible to have both plans at any given time, but the benefits from one plan may offset the other. In most cases, people only have one disability insurance plan. 

Group disability insurance

Group disability insurance is provided by some employers as a standard benefit. These plans are good because they’ll typically provide you with compensation of up to 85% of your salary. In addition, there are no additional payments to be made. It’s part of your benefits package that comes from your payroll deductions.

The obvious downside is that you’ll only have group disability insurance while you’re employed. If you ever leave your job, you’d have to purchase an individual insurance plan, which could be expensive if you’re older or have health concerns.

Individual disability insurance

Individual plans can be purchased separately from an insurance company or broker. This type of policy can be helpful for those looking to top up their group plan or for anyone that’s self-employed and is looking for insurance.

How much disability insurance you can get will depend on your income from the last few years. To get an individual policy, you may need a stable income and a health check. The effective date of your policy is when all the documents are signed. 

What is the elimination period?

An elimination period is the length of time it’ll take before your disability insurance policy kicks in. For example, it could be 30, 60, 90 days, or more. Elimination periods are commonly found in individual disability insurance policies,

While some people see an elimination period as a negative, it can actually help policyholders. The longer your elimination period, the lower your premiums are. Waiting three months for your benefits to kick in may seem weird, but if you have an emergency fund, then having an elimination period may not matter.

Who needs disability insurance?

For most people, their ability to earn an income is based on their ability to work. As a result, everyone should have disability insurance since it’ll allow them to earn an income even if they suffer an illness or accident. That said, there are a few specific situations where you want to get an individual disability insurance plan.

• You don’t have a disability insurance plan from your employer
• You don’t think your employer’s disability insurance plan pays enough
• You want to guarantee you’re always insured
• You’re self-employed
• You have dependents
• You don’t have an emergency fund saved.

How much disability insurance can you get?

Generally speaking, group plans pay up to 85% of your income for long-term disability and 65% for short-term disability.

If you’re purchasing individual disability income insurance, the amount of coverage you can get would typically depend on how much income you’ve earned in the last two years. For example, if you earned $100,000 in each of the last two years, that’s likely the most you’d qualify for. 

How much does disability insurance cost?

The cost of disability insurance will differ for everyone, but your premiums would be determined based on the following:

• Coverage amount – The higher portion of your income you want, the more it’ll cost
• Benefit period – The longer your compensation benefits last, the more you’ll pay
• Elimination period – If you take a longer elimination period, your premiums will be lower
• Age –Disability insurance is typically cheaper for younger people
• Health – Those that have pre-existing conditions or smoke may have to pay more for insurance
• Occupation – If you work in a high-risk job, your premiums could be higher

Is disability insurance taxable?

Anyone who pays for all of their disability insurance premiums by themselves will get a tax-free benefit if they ever need to make a claim. This would usually only apply to people with an individual disability insurance plan.

If your disability insurance premiums are being paid by your employer, then your disability benefits will count as taxable income.

In both cases, you may still qualify for tax credits or deductions if you qualify as a person with a disability.

What other disability benefits are available?

If you don’t have disability insurance, you may still qualify for benefits and/or tax credits, but they don’t go very far.

• Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) 
• Disability tax credit
• RDSP grant and account

How to get a disability insurance policy

Even though you can purchase a disability insurance policy on your own through an insurance company, you’re better off using a broker. This is especially relevant if you have any health issues or are self-employed.

An insurance broker can look at your individual needs and see if you’d run into issues qualifying. This is important because if you’re ever denied an insurance policy, it could greatly affect you being approved in the future. An insurance broker can speak to their contacts off the record to see if you applied.

In addition, insurance brokers can shop around to help you find the best policy. They don’t work for an individual insurance company. They work for you. An insurance broker can also they can advise you on other policies, such as critical illness and life insurance.