Disability insurance

Disability insurance is an policy that pays benefits to a beneficiary when the policy holder suffers a disability that impacts their ability to work.Canadian Life and Health Insurance Association (CLHIA), A guide to disability insurance, viewed February 14, 2021. Essentially disability insurance is designed to protect you from the possible loss of income, and is sometimes also known as salary insuranceAutorité des marchés financiers (a provincial regulator), Disability insurance (salary insurance), undated, viewed December 26, 2024. or income protection insurance.
Disability insurance is important because:
* A typical 30-year-old is four times more likely to become disabled than die before age 65Julie Cazzin, The only insurance guide you need, MoneySense, February 4, 2015, viewed January 24, 2017 
* Yet only about 12 million Canadians have disability insurance, compared with 22 million who have life insuranceMoneySense, Critical illness and disability insurance in Canada, September 29, 2023, viewed December 24, 2024.;
* One in six Canadians will be disabled for three months or more before age 50, and one in three before age 65.
* The average length of a disability that lasts over 90 days is 2.9 years.Rino Racanelli, Disability Insurance (Part 1), Canadian MoneySaver, October 2008 issue, viewed January 21, 2017
Disability insurance is available through a variety of plans: individual plans; group plans (employer, union, associations); and government plans. Many plans have two components, short-term disability (STD) and long-term disability (LTD).
Disability benefits typically aim to replace up to 60 to 85 per cent of your regular income.Financial Consumer Agency of Canada, Disability insurance, updated June 13, 2018, viewed February 14, 2021. What events are covered depend on the definition of "disability" and/or "occupation" used in the policy. Another important consideration is whether the plan covers disabilities resulting from both injury and illness. While injury-only disability insurance is cheaper, illnesses (including mental illness, cancer, cardiovascular diseases, and musculoskeletal diseases) are much more likely to cause disabilities.Advisor's Edge, Few clients have disability insurance, March 6, 2015, viewed December 26, 2024.
This article first covers the government programs that are available. These are typically insufficient, so workers must insure themselves through group plans or individual policies purchased from insurance companies.
==Government programs==
===Employment insurance sickness benefits===
If you have worked enough hours in the last 52 weeks, Employment Insurance (EI) sickness benefits can provide you with up to 26 weeks of financial assistance if you cannot work for medical reasons. You could receive 55% of your earnings up to a maximum of $668 a week.Employment and Social Development Canada, EI sickness benefits: What these benefits offer, viewed December 24, 2024.
If you simultaneously claim EI sickness benefits and short term disability insurance, there may be interactions.
Workers who have a solid coverage for long-term disability through a group plan, but lack short-term disability insurance, may decide that a combination of EI sickness benefits and their personal savings (e.g., emergency fund) is good enough.
===CPP and QPP===
Canada Pension Plan (CPP) disability benefits are paid to workers who have a "severe" disability that "prevents them from working regularly at any job that is substantially gainful", that is "long-term and of indefinite duration" or "is likely to result in death". Another condition is to have contributed "enough" to CPP, meaning that that you have contributed:Employment and Social Development Canada, About the Canada Pension Plan Disability Benefits, viewed February 14, 2021.
*in four of the last six years, with minimum levels of earnings in each of these years, or 
*in three of the last six years for those with 25 or more years of contributions
In 2024, the basic monthly amount is about $580 and the average paid is about $1180 a month.Employment and Social Development Canada, Canada Pension Plan disability benefits: How much you could receive, viewed December 24, 2024. If you have dependent children, you could get more.
The Québec Pension Plan (QPP) offers similar benefits for workers who suffer from a "severe and permanent disability".Disability pension under the Québec Pension Plan, viewed February 14, 2021. For the QPP benefits, sufficient contributions can be either:
*at least 2 of the last 3 years in your contributory period
*at least 5 of the last 10 years in your contributory period
*at least half of the years in your contributory period, but not less than 2 years
On a yearly basis, the average paid by the CPP disability benefits is about $14k, so obviously this is not a substitute for long-term group or individual disability insurance. Also note the "any job" language in the definition of disability.
===Worker's compensation boards===
If you are injured at work, you may be covered by a provincial program, such as the Workspace Safety and Insurance Board in Ontario, the Workers Compensation Board in Alberta, WorkSafeBC In British Columbia, or CNESST in Quebec. Check with your employer to see if you are covered.
However these programs do not cover you outside of the workplace.
==Disability insurance generalities==
The rest of this article covers disability insurance offered by private insurance companies, as part of group benefits or individual policies.
===Short-term disability===
For short-term disability, you are usually required to provide a medical indicating your condition and your expected date of return. 
Short-term disability plans pay a percentage of normal earnings – for example, 70 per cent – up to a certain length of time. Typically, this can be up to 15, 26 or 52 weeks. Some employers, however, choose not to provide short-term disability benefits, relying instead on Employment Insurance (EI) disability benefits. The amount you receive from EI sickness benefits may be impacted by amounts received from STD plans.Employment Insurance Sickness Benefits, viewed February 15, 2012.
===Long-term disability===
Most plans consider someone disabled if in the first two years they are unable to perform their own occupation, and any occupation (total disability) they are reasonably qualified to do if they are off work longer than two years.Rino Racanelli, Disability Insurance (Part 2), Canadian MoneySaver, Nov/Dec 2008 issue, viewed January 21, 2017
This coverage starts when your short-term disability (or EI) benefits run out. Typically, the goal is to replace 60 to 70 per cent of your normal income, but there is always a maximum dollar amount.
====Definitions of occupation====
In general, there are three possible definitions of "occupation" in disability insurance policies: 
*"regular occupation" is the occupation in which you were engaged at the time of disability. If you can perform another occupation than your regular one while disabled, but choose not to, you get still disability benefits.
*"own occupation" is like regular occupation but "if you are able to work in another occupation, and choose to, total disability benefits will continue to be paid", on top of your wages. (This rider is only available for certain professions, e.g. see RBC Insurance, Disability Income Protection Standard Issue Plans - Riders available on your plan, viewed March 2, 2021..)
*"any occupation" means that you are unable to perform any type of work. This is least favorable definition: if you can perform another occupation than your regular one while disabled, but choose not to, you do not get disability benefits.
Note that the definition of occupation may be included within the definition of "disability" or "total disability", rather than provided as a stand-alone definition.
===Terms and conditions===
Although STD and LTD benefits are offered by many companies, you should be aware there is no standardization, the terms and conditions depend on the companies and coverage providers. You are advised to review the terms and conditions of your specific plan(s).
===Tax considerations===
Some plans pay tax-free benefits while others are taxable.TaxTips.ca - Disability Insurance, viewed January 11, 2016.Canada Revenue Agency, IT428 - ARCHIVED - Wage Loss Replacement Plans, viewed January 11, 2016.
If you pay the premiums of an individual plan yourself, benefits will be received tax-free.
For a group plan, if the employer pays part of the premiums, the benefits may be taxable. 
While getting 60% or 70% of your normal gross income while disabled might be enough if the benefits are received tax-free, this may not be true anymore if the benefits are taxable, or capped to a relatively low monthly maximum. Therefore, some employees covered by group plans choose to get an individual plan on top.
==Individual plans==
People who don't have group disability insurance, and have dependents, should look carefully at individual plans. Such plans may not cover pre-existing conditions such as back pain or mental health issues, so the general recommendation is to get individual disability insurance while young and healthy, if possible.SecurePlan (an Ontario insurance broker), 10 Factors to Consider when Buying Disability Insurance, undated, viewed December 30, 2024. Further information on buying individual disability insurance is presented below. 
If your employer does not provide disability insurance, and you are looking at getting an individual plan, also examine group insurance options offered through a union, guild, or professional or alumni association.
For employees covered by a group plan, it is strongly recommended to review the group plan in detail and determine if it fits your needs. Look at the waiting period, the definition of occupation, the length of the potential benefits, the percentage of income replaced, the tax status of benefits, etc.
===Combining group and individual plans===
If you decide that your group LTD coverage is not sufficient, you can purchase an individual policy to supplement it. 
For example, if your group plan covers only total disability for any occupation after two years, but you only want to work in your regular occupation, you could purchase an individual plan with a regular occupation definition and a two-year waiting period.Rino Racanelli, Three Cost-effective Ways to Supplement Your Group Long Term Disability Coverage, Canadian MoneySaver, February 2013 issue, viewed January 21, 2017
Another example would be your LTD group coverage completely ends after two years; you would then buy an individual policy with a two year waiting period and benefits to age 65.
===Buying disability insurance===
Individual disability insurance plans are purchased through life and health insurance agents and brokers. Find an agent or broker who can access policies from several companies, to find the best fit for you. One way to find agents/brokers in your local area is through term4sale.ca, since life insurance agents/brokers might also sell disability insurance (ask prospective agents how often they sell disability insurance).
When comparing different long term disability plans, things to keep in mind include:LSM Insurance, Long-Term Disability Insurance, undated, viewed December 24, 2024.
*Does the plan cover injuries only, of both injuries and illnesses?
*Do you want a cancellable or non-cancellable policy?
*Do you qualify for an association and/or occupational discount?
*How much of your monthly income are you looking to replace?
*How long yo you want the benefits to last (e.g., 2 years, 5 years, until age 65)?
*How long can you wait before benefits start (the elimination period)?
*What definition of 'occupation' are you looking for?
*Do you want your benefits to increase along the cost of living?
Apart from these policy options, several factors of a personal nature can also affect premiums:PolicyAdvisor Brokerage Inc (on Ontario insurance broker), What is disability insurance?, viewed December 24, 2024.
*Age (older people pay more)
*Gender (women pay more, unlike for life insurance or auto insurance)
*Smoking status (smokers pay more)
*Health (unhealthy people pay more)
*Occupation (people in riskier jobs pay more)
Possible riders to the policy include the "future income option" which "allows you to increase your coverage as your income grows, without undergoing additional medical underwriting".
Once the insurance provider and plan have been selected, based on several quotes, the agent/broker will fill out an application form and send it out to the insurance company for approval. The form will include "details on your health, job, earnings and hobbies". A medical exam may be required.
An often quoted ballpark figure for premiums of individual disability insurance plans is 1-3% of annual income.
Monthly payments may end-up costing more (annually) than an annual lump sum. Calculate the potential savings of annual payments (versus monthly payments) in percentage terms to see if they are worth it.
==Alternatives==
===Mortgage disability insurance===
Banks sometimes offer a limited form of disability insurance called "mortgage disability insurance". It covers only mortgage payments if you become disabled and unable to work, typically for a maximum of two years.LSM Insurance (an Ontario insurance broker), Disability Insurance: Everything You Must Know, updated June 10, 2020, viewed February 14, 2021. The benefits are paid directly to the mortgage lender.Brian So Insurance (a BC insurance advisor), Mortgage Disability Insurance: The Definitive Guide, undated, viewed December 26, 2024. 
Obviously, should you become disabled, you will still have other living expenses beyond your mortgage, so normal disability insurance, although more expensive, makes more sense.
The Financial Consumer Agency of Canada notes that the "lender cannot insist that you buy (optional) mortgage insurance", including mortgage disability insurance, in order to obtain a mortgage. The lender can't add such insurance without "your express consent".Financial Consumer Agency of Canada, Optional mortgage insurance products, modified December 1st, 2023, viewed December 26, 2024.
===Critical illness insurance===
Critical illness insurance pays a tax-free lump sum if you are diagnosed with an illness covered by your policy.MoneySense, What you need to know about disability insurance, May 17, 2019, viewed March 6, 2021.
In short, critical illness insurance only covers a portion of situations that can be covered by disability insurance. On the other hand, it provides a lump sum which can be used to pay for medical treatment (although Canada has 'free' health care), or a partner to take time off of work, for example. Critical illness insurance can be stacked on top of a disability policy. However, it is not a good general substitute for disability insurance.Moneysense, When buying critical illness insurance makes sense, July 13, 2017, viewed March 6, 2021.
One actuary writes that critical illness insurance "has the highest rate of denial among all insurance products", i.e many claims are denied. He further notes that "a large part of the premium goes toward paying commissions, administration fees and marketing. Less than half of it goes toward supporting the claims."Advisor's Edge, Faceoff: How critical is CI insurance?, February 1, 2012, March 6, 2021.
===Combination insurance===
Some Canadian life insurance companies offer combinations of disability insurance with other types like term life insurance and critical illness insurance. One advantage is the apparent simplicity: you apply once, and pay a single premium, for the combined product. Because of the "shared pool of benefits", the combination is less expensive than buying all types separately.Brian So Insurance, Manulife Synergy: 3-in-1 Insurance, undated, viewed December 28, 2024. This means that if you make a claim for a disability and later die during the coverage period, the death benefit will be reduced by the amount already paid out during the disability. Also, the disability monthly benefit is a percentage of the coverage amount, rather than a percentage of your regular income.
Buying life insurance and disability insurance separately makes comparison shopping easier, and is much more customizable. Furthermore, if you die prematurely, the financial needs of your dependents don't change because of what may or may not have happened to you before death (experiencing disability and/or critical illness should not reduce the death benefit).
==See also==
==Further reading==
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*, focused on taxation issues
==References==
==External links==
*Income Tax Folio S2-F3-C2, Benefits and Allowances Received from Employment
*LSM Insurance, Comparing Canada’s Top Disability Insurance Plans
* MoneySense, 7 disability insurance myths to stop believing
Category:Insurance
Category:Employee benefits