What You Need To Know About Disability Insurance

What You Need To Know About Disability Insurance

Written by Priyanka Correia
Fact-checked by Caitlin Wood
Last Updated May 19, 2022

You depend on your job to pay all of life’s expensive bills. But what would happen if you were no longer physically able to work? What would happen to your income and all the financial responsibilities that still need to be taken care of? 

If you ever become disabled and could not work anymore as a result, you may be able to have a large chunk of your income replaced through a disability insurance policy. With this type of insurance, you can have the peace of mind knowing that if you can’t report for work because of a disability, you won’t have to sacrifice upcoming financial commitments.

While disability insurance is not required, it can be a useful financial tool for those who may not be able to qualify for government-sponsored disability programs offered through CPP or QPP.

Let’s take a closer look at disability insurance to help you determine if this is something you may want to consider buying into. 

What Is Disability Insurance?

Disability insurance pays out a tax-free payment every month to replace part of your income if you are ever injured or diagnosed with a disease that prevents you from working. Payouts are based on a percentage of your salary and are made for a specific time frame. 

The exact types of disabilities that are covered under disability insurance will be specified in each individual policy. That said, there are generally two types of coverage: short-term and long-term disability insurance. Short-term insurance typically lasts for no more than 6 months, while long-term insurance can last as long as 10 years or until you retire, depending on the situation. 

How Does Disability Insurance Work?

When you take out a disability insurance policy, you’ll be asked to choose the exact coverage amount you want as well as any additional benefits to personalize your policy. In order to receive coverage, you’ll need to pay your premiums on time, just like with any other insurance policy. 

In the event that you become disabled, you will need to file a claim. There will be a waiting period before you start receiving benefits, after which you will receive monthly payments. This period is the amount of time from the date that you become disabled to the start date of the benefit. 

Once the benefit period ends and you go back to work, your payments will stop.

What Disabilities Does This Policy Cover?

The exact disabilities that are covered under disability insurance depend on your insurance provider and the policy. That said, there are certain disabilities that are usually covered under a typical policy, including the following:

Short-Term Disabilities

  • Ongoing illnesses
  • Disabling injuries (ie.broken arm or leg)
  • Chronic digestive illnesses
  • Musculoskeletal conditions (ie.back pain)
  • Mental health conditions
  • Complicated pregnancies

Long-Term Disabilities

  • Musculoskeletal disorders (ie. osteoarthritis) 
  • Connective tissue disorders (ie. slipped disk)
  • Accidental injuries (ie. head injury from a car accident)
  • Cardiovascular conditions (ie.heart attack)
  • Circulatory conditions (ie. coronary artery disease)
  • Prolonged mental disorders (ie. PTSD)

Types Of Disability Insurance 

If you want to have a disability insurance policy in place, you may first want to see if your employer covers you for this type of insurance. Many employers offer what’s known as “group insurance” to their employees. Otherwise, you may need to pay for an “individual insurance” policy if you are not covered by your employer. 

Group Disability Insurance 

Most companies offer some form of disability insurance to employees. These policies provide a percentage of an employee’s monthly income if they cannot work as a result of an injury or illness. The amount of coverage that you are eligible for depends on your income and the exact policy that your employer has. Group insurance plans are typically less expensive than individual insurance plans.

Medical evidence is not usually needed to receive a benefit from an employer-based group insurance plan at the time of application. All employees are covered by a long-term disability group plan that an employer purchases, regardless of what their medical history is. 

However, the majority of policies issued through employers typically have a pre-existing condition clause, which means that an employee would not be eligible for disability benefits for any disability that started within the first 12 months of coverage for the employee if the disability is a result of a pre-existing condition.

Individual Disability Insurance

If your employer does not offer a group disability insurance plan, or has one but is not sufficient enough for your needs, you may opt to purchase an individual disability insurance policy. With these plans, you have the flexibility to choose the disability benefit amount based on how much you earn and your individual needs. These policies also feature more flexible terms compared to most group insurance policies

Generally speaking, private individual insurance is more expensive than group insurance because the risk of a claim is not spread across many people in a group policy.

Who Is Disability Insurance Best For? 

Disability insurance may be better suited for those who depend heavily on their income and do not have significant savings. It may also be ideal for those who are self-employed and do not have a group insurance policy with their employer to take advantage of. 

In these cases, disability insurance may provide peace of mind knowing that if you are no longer able to work because of an injury or illness, part of your income will be covered. 

How Much Does Disability Insurance Cost?

Premiums for disability insurance vary quite a bit from situation to situation. Ultimately, the amount you pay will come down to the following:

  • Your coverage amount
  • Your job
  • Your health
  • Your location
  • Waiting period
  • Benefit period

Generally speaking, disability coverage will typically fall within the 1% to 3% range of your annual income. That means if you earn $80,000 a year, for instance, you could be paying anywhere from $800 to $2,400 a year.

How Much Do You Get From Disability Insurance?

The amount that you collect through your disability insurance policy will depend on how much you typically earn. Your policy will pay out a certain percentage of your income, usually between 40% to 70% of your income. So, if you make $6,000 a month, your payout through your policy would be somewhere between $2,400 to $4,200 per month. 

How Does Disability Insurance Differ From CPP/QPP?

The Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) provide disability benefits to those who are unable to work as a result of an illness or injury. Benefits are paid out by the government to partially replace lost income as a result of your inability to work. In order to qualify for CPP or QPP disability, you must have made enough contributions to the Canadian or Quebec pension plan. 

So, how do these plans differ from a disability insurance policy? 

While CPP or QPP disability benefits are provided by the government, disability insurance benefits are not. CPP and QPP disability are government-sponsored benefits available to all Canadians or Quebec residents, respectively, who make regular contributions to the plans.

Instead, disability insurance policies are provided by an insurance provider in the event that you become disabled, are no longer able to work, and file a claim to receive income replacement. This type of insurance is either provided through an employer group plan or can be purchased individually with an insurance provider.  

Final Thoughts

Disability insurance can come in really handy if you are ever diagnosed with a critical illness or become injured and are no longer able to work. Whether for a short period of time or for the long haul, going without an income can be financially devastating. But with a disability insurance policy in place, you can receive a payout to help replace part of your income while you are off work.

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Priyanka is a personal finance expert at Loans Canada. She is passionate about money management and educating Canadian consumers about how to take control of their financial lives. She has taken financial control of her life by using Mint to budget and track her expenses while growing her wealth by investing through Wealthsimple. She also believes in having an emergency fund, so she keeps a good sum of money in an easily accessible high-interest savings account. She also uses the American Express Cobalt Card to earn points on all her purchases, further fueling her savings goal. She also uses Loans Canada’s lender directory whenever she wants to compare rates from different lenders.

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