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Your current job may be more than enough to adequately cover your bills and maintain your current lifestyle. But have you ever thought about what could happen if you were no longer able to work, even just for a temporary period of time? 

More specifically, what would happen to your finances if an accident or serious medical diagnosis prevented you from working?

Income protection insurance protects your income in the event that you suffer an injury or illness that prevents you from continuing to work. If you can’t work, you’ll be unable to collect a paycheque, which can prove to be a dire financial situation for you. 

But with an income protection insurance policy in place, you can protect that valuable income needed so you can continue to pay your bills without a hitch. This will remove the financial stress so you can focus solely on improving your medical situation. 

What Is Income Protection Insurance?

Also known as disability insurance, income protection insurance is designed to replace a portion of your income in case you can’t work for a certain amount of time because of illness or injury. 

Your policy will pay you regular tax-free monthly payments to help cover part of your income and your expenses. The percentage of your income that it replaces varies from one policy to the next, but you may receive up to a maximum of 75% to 90% of your net income covered. For instance, if you earn $6,000 per month and your policy pays out 75% of your take-home pay, you would receive monthly payments of $4,500. 

Further, the amount of time that you would receive payouts is also finite. Generally speaking, the maximum length of time for this type of insurance is up to five years, though there may be situations where payouts could last much longer. 

Once you return to work or your benefit period ends, the payments will cease. 

Does Income Protection Insurance Cover Critical Illnesses?

It’s not uncommon to confuse income protection insurance with critical illness insurance, since they both are designed to help cover a portion of income in the event of a serious medical condition. 

But it should be noted that this income protection insurance does not cover the cost of medical care associated with your injury or condition. That type of coverage can be obtained through a critical illness insurance policy, which is another type of living benefit that pays out a one-time sum of money in the event that you are ever diagnosed with a serious illness. 

The funds received through this policy can be used to cover the cost for treatment and medications associated with your condition. 

Cost Of Income Protection Insurance

How much does income protection insurance cost? The answer depends on a number of factors, including the following:

  • Job type. Certain types of jobs are riskier than others, and as such, the risk on the part of the insurer will be higher. In this case, your insurance premiums will be higher. 
  • Your health. The healthier you are, the less of a risk you pose for your insurance provider. Less risk usually means lower cost of insurance. 
  • Smoking habit. Smokers pay much more for insurance premiums than non-smokers, and they may even be declined for coverage altogether. 
  • Your age. Older individuals are typically more vulnerable to getting sick than younger people, which means income protection insurance can be more expensive. 
  • Coverage amount. The more coverage you request, the more expensive your insurance policy will be. 
  • Benefit period. The longer the benefit period — which is the time period in which you receive regular monthly payments — the more expensive your policy will be. 
  • Waiting period. A waiting period refers to the length of time that you need to wait before coverage takes effect. A longer waiting period is generally associated with lower premiums.

Features To Consider When Getting Income Protection Insurance

Before you go out and buy an income protection insurance policy, look at the following features of these policies first:

Percentage Of Income Covered

As mentioned, you won’t get 100% of your income covered with an income protection insurance policy. That said, you’ll still want to get as much coverage as possible. Find out how much of your income will actually be covered by the policy. 

Monthly Payment Caps

These caps are the maximum benefit that can be paid out, which should adequately cover your financial obligations. 

Benefit Period

Consider how long the policy will remain in effect, during which time you will continue to receive income payments. 

Waiting Period 

The length of time that you have to wait until your coverage takes effect is referred to as the waiting period. Ideally, you don’t want to have to wait too long before you get your first payment. 

Stepped Premiums

Premiums are typically calculated based on age, so the younger you are, the lower your premiums will likely be. That said, premiums may increase each year as you age if your insurer employs stepped premiums. As such, this can make it difficult to determine how much you will pay over the life of your policy.

Level Premiums

With level premiums, your annual premiums are not based on age. Instead, they usually begin at higher prices compared to stepped premiums, but the increases in premiums will be a lot more gradual. This way, determining how much you’ll eventually pay over the long run will be easier. 

Cost Of Living Rider

With this add-on rider, you will be assured continued coverage that will keep up with the cost of inflation.

Residual Disability Benefit

You may be entitled to a residual disability payment if you aren’t completely disabled.

Future Income Protection

You may be able to increase your coverage to remain aligned with increases in your income with a future income protection component to a policy.

Income Protection Insurance FAQs

Do I need to undergo a medical exam to get income protection insurance?

Not always. Some insurance providers offer no-medical income protection insurance, which can make approval quicker and easier. However, coverage is usually less comprehensive.

Is the CPP disability enough to cover my income?

The answer to this question depends on your lifestyle. The average monthly benefit from the CPP is $966.43, and the highest payout based on 2019 numbers is $1,362.30. In many cases, these amounts are not adequate enough to maintain certain lifestyles, which is why an income protection insurance policy can help top you up so no change in lifestyle will be required.

Are income protection payments taxable?

No, income protection benefits are not taxable, as long as you remain up-to-date on your premiums.

Is Income Protection Insurance Right For You?

Income protection insurance isn’t a requirement, but it can prove to come in handy if you find yourself in a situation where you are unable to work. The question is, is this type of insurance right for you?

Income protection insurance may be right for you if you:

  • Live paycheque-to-paycheque and would be unable to cover your bills if you had to go more than a couple of weeks without your income.
  • Have no savings or very little in the bank. 
  • Would be ineligible for government benefits.
  • Are not entitled to sick leave or worker’s compensation.
  • Have dependents who rely on you for your income.
  • Are self-employed or run a small business.
  • Have major financial obligations, like paying rent or a mortgage

Final Thoughts

Income protection insurance payments can certainly come in handy if you suffer a disease or injury that incapacitates you and forces you to stay home from work. But this insurance policy requires regular premiums to be paid. Crunch the numbers and consider your current financial status and lifestyle, and find out what your employer (if applicable) offers in terms of disability benefits before buying into an income protection insurance policy.

Caitlin Wood avatar on Loans Canada
Caitlin Wood

Caitlin Wood is the Editor-in-Chief at Loans Canada and specializes in personal finance. She is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. Caitlin has covered various subjects such as debt, credit, and loans. Her work has been published on Zoocasa, GoDaddy, and deBanked. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security.

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