What is Disability Insurance?

Disability income insurance is a binding contract between the insurer and the policyholder. In exchange for paying your premiums, the insurer agrees to pay you a monthly benefit if you become disabled and can’t earn a paycheck.

Disability income insurance has a simple goal — to replace part of your monthly income when you can’t work because of an injury or an illness. It helps you buy groceries, pay bills, and cover other expenses to support you and your family. You may not even have to pay tax on your coverage depending on who pays the premiums.

Before you purchase this policy, consider the following questions:

• How much is the monthly premium?

Like any other life insurance product, you’ll have to pay a premium every month to keep your disability policy active.

• How does the policy define disability?

Some policies pay a monthly benefit if an injury prevents you from performing your regular occupation duties, but allows you to do other types of work. Other policies don’t pay a monthly benefit if you can work any job at all.

• How much monthly benefit you’ll receive

A disability insurance plan pays out a percentage — generally 60% to 80% — of what you earned before you became disabled.

• How long will the policy pay benefits for

Some policies pay out a monthly benefit for a few months. Others payout for several years or until you reach a specific age.

What Does Disability Insurance Cover?

Disability income insurance covers illnesses and injuries that affect your ability to work at your regular occupation. Sounds simple? Surprisingly, many people are not sure what counts as a disability and what doesn't.  

For example, you may associate disability with a bodily injury, like a fracture. But what about mental illness? Can depression be defined as a disability?

If you said no, think again. The most common cause for long-term disability in Canada is mental illness, followed by musculoskeletal issues like arthritis.

Just to be clear, this doesn’t imply fractures, spine injuries, or broken bones are not disabling injuries. Of course, they are. But what this does mean is that the definition of a disability is much broader than what you may think.

Disability insurance covers virtually every type of condition that can prevent you from working. This includes:

• Back pain
• Arthritis
• Cancer
• Depression
• Heart Disease
• Stroke
• Musculoskeletal disorders
• Physical injury
• Poisoning

In addition to these conditions, some non-illness or injury conditions like pregnancy are generally covered. If a condition is excluded (like a preexisting condition) your policy will spell that out as well.

Do I Need Disability Insurance?

Would your monthly income be adversely affected if you suddenly fell ill or sustained an injury that prevents you from working?

If the answer is yes, then disability insurance is likely worth it and you should consider putting a disability income insurance plan in place.

Frankly, just about everyone who earns a paycheck needs disability income insurance. It acts as financial protection for what is perhaps your most valuable asset — the ability to earn a living.

What Conditions Qualify for a Disability Insurance Payout?

If you get an injury or illness that prevents you from doing work that you did before the injury, you qualify for a disability insurance payout. You may also receive a monthly benefit if you are partially disabled. That is, you have a medical condition that prevents you from performing one or more important duties of your occupation.

What are the Benefits of an Individual Policy?

Signing up for group disability insurance is a no-brainer, but relying solely on it to protect your paycheck may not be a good idea.

Why you may ask?

Generally speaking, a group disability insurance plan offers basic disability benefits and is one-size-fits-all. Plus, you can’t take it with you when you switch jobs.

By contrast, an individual policy provides the exact amount of disability income insurance coverage you need and is portable. You are also free to customize it to meet specific needs. For instance, you can have it cover income from bonuses, commissions, and other incentive pay that group plans usually don’t cover.

What Are Different Types of Disability Insurance?

There are two types of disability income insurance policies:

• Short-term disability insurance
• Long-term disability insurance

While both pay a monthly benefit in case you become too ill or disabled to work, they have some key differences. Before we look at each in detail, here’s a quick rundown of how they are different.

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This should give you a clear idea of the features that come with each policy.

Short-Term Disability Insurance

Short-term disability insurance coverage can keep you afloat if you have to take time off work for a few weeks or months due to sickness or injury. It pays a percentage of your pre-disability salary — usually 60-80% — and helps you fill income gaps and cover expenses.

Most short-term disability insurance policies provide disability coverage for a few months. Some, however, may pay out a benefit for up to two years. These policies have a short elimination period, usually less than two weeks.

Many employers offer short-term disability insurance as a company-paid benefit to their employees. You can also buy a short-term plan separately, but it may not be worth the cost.

That’s because these plans often cost as much as long-term disability insurance, in spite of a short coverage period. That money would be better spent creating an emergency fund. If you become temporarily disabled, your savings can help you get by until you resume work.

Long-Term Disability Insurance

Long-term disability insurance is an insurance policy that provides a steady stream of income to help pay bills and cover living expenses during a prolonged illness or after a disabling accident.

You can buy long-term disability insurance in Canada yourself, through your employer, or both. But it’s usually less expensive if you can get it through the employer.

It is also possible to get disability insurance if you are self employed.

Long-term disability coverage usually costs around 1-3% of your salary. If you get disabled and meet your insurer’s definition of disability, you will receive a monthly benefit amount after the waiting period. The waiting period may vary from one policy to the next, but it is rarely less than 90 days. The benefit is usually about 60% of your after-tax salary and can last anywhere from 24 months to several years, depending on your policy.

What Isn’t Covered by Disability Insurance?

Disability income insurance is intended to cover a portion of your income if you can’t work because of an illness or injury. It doesn’t cover medical care or long-term care services. Nor does it provide disability benefits after age 65.

While long-term disability policies usually don’t cover pregnancy, they do cover complications during pregnancy. But you will receive disability benefits only if you purchased the policy before pregnancy and after the waiting period, which is usually 90 days.

Short-term policies, by contrast, generally cover leave related to childbirth and pregnancy complications. These policies usually provide a weekly benefit for 6-8 weeks after delivery. So a short-term plan can help you enjoy a few weeks of paid leave after the birth of your child, even if your employer doesn’t provide paid leave.

Does Disability Insurance Cover Pre-Existing Conditions?

No, disability insurance does not cover pre-existing conditions. If you have a disability and are considering disability insurance options, it is important to know that disability coverage will only start the day your disability starts. Prior to this date, if you were ever diagnosed with an illness or experienced any injuries then these would be considered preexisting conditions which disability income insurance will not cover.

Insurance companies may carve out an exclusion when it comes to pre-existing conditions, however. Some disability policies will exclude any disability that is the result of an injury or illness that occurred within a specified period, such as 30 days before applying for coverage.

The exclusion may also be time-dependent. For example, if you applied for disability insurance and were diagnosed with cancer two years ago during your initial application but are now disabled because of the cancer, your disability will be covered.

If you are disabled and need disability insurance to cover pre-existing conditions then it is important for you to know what type of disability coverage that you have as this exclusion may vary depending on the policy.

What are the Different Disability Definitions?

You can choose from three different types of disability definitions — Own, Regular, and Any.

Own-Occupation Disability Insurance

Own-occupation disability insurance protects your ability to work in your chosen profession. The policy pays disability benefits even if you can earn a paycheck doing something other than the job you had before the disability.

You are eligible for disability benefits even if you take a similar job in a similar field. For instance, let’s say you are a medical professional and can’t practice in your preferred area due to sickness or injury. However, you are not so disabled that you can’t practice medicine in any other capacity. In this scenario, you will still be eligible for disability benefits if you have an own-occupation disability policy.

Own-occupation disability insurance is more lenient than other types of disability policies. Consequently, it is also usually the most expensive.

Regular-Occupation Disability Insurance

Regular-occupation disability also protects your ability to work in your preferred occupation. However, it’s not the same as own-occupation. Under this standard, if you choose to work in another occupation, your disability benefits may be reduced or completely withdrawn. In other words, you receive full disability benefits if you are totally disabled from your occupation, but you can’t choose to engage in another occupation.  

Any-Occupation Disability Insurance

Under this standard, you’ll be ineligible for benefit payments if considered fit to work in any job, regardless of whether you’ve actually taken another job or not. That is to say, you are considered disabled only if you can’t perform the duties of any job.

This is the stringiest provision under definitions of disability. While that can mean lower premiums, you may end up losing in the long run if you get disabled, but find you can’t claim the disability benefits.

How Much Disability Insurance Cost?

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Generally speaking, the cost of disability insurance is between 1-3% of your income. That said, premiums are specific to the insured and depend on several factors that will be assessed in a process called disability underwriting. These factors include:

1. Age

Your date of birth is a top factor that impacts your disability insurance premiums. Younger people are less likely to become disabled than older individuals. As such, insurance companies reward them with lower premiums.

2. Gender

While women live longer than men, they file more disability claims. Also, claims filed by women tend to be more expensive. For this reason, women tend to pay higher rates for disability insurance.

How much more? Well, research shows women pay nearly 40% higher premiums than men.

3. Health

When you apply for disability insurance, the insurer will look at your current and past medical history. Since healthy people are less likely to suffer from a severe illness, they can qualify for better rates.  

4. Tobacco Use

Tobacco use is the leading preventable cause of disease, disability, and death. If you smoke, expect to pay considerably higher rates than a non-smoker. In short, smoking is not good for your health — or wealth.

5. Occupation

What you do for work can affect your disability insurance premiums. The more hazardous your job, the higher the premiums. So someone who works with heavy equipment will fork out more for disability coverage claims than someone with a desk job.

6. The Definition of Disability

Policies that define disability broadly are more expensive than those that don’t. Expect to pay more for an own-occupation policy than a comparable any-occupation policy.

7. Length of Waiting Period

You can lower your premiums by increasing the waiting period before the policy starts paying disability benefits.

8. Your Annual Salary

The more income you have to protect, the higher your premiums.

9. Benefit Period

Policies that pay disability benefits for a longer period of time cost more. For example, a policy with a lifetime benefit period will be more expensive than a policy with a 2-year benefit period.

Who Needs Disability Insurance?

If you have someone that relies on your income, you should probably consider disability insurance. You should also consider disability insurance if you have no dependents, but would find it difficult to stay afloat in the event of a disability.

Why do you require disability insurance? Because the risk of suffering a disability is far greater than you may think. And for most people — perhaps, you as well — taking time off work can have serious financial implications.

Consider the following:

• 1 in 5 people in Canada aged 15 years and over have a disability
• More than 4 in 10 Canadians with disabilities have either a severe or a very severe disability
• Less than half of Canadians have disability insurance through work
• Nearly 7 in 10 Canadians admit they would be under severe financial stress if they were to become disabled and unable to work for 90 days

You might think disability income insurance is only meant for accidents, and you don’t need it if your job is not risky. That’s not necessarily the case. Nearly 90% of long-term disabilities stem from illnesses, not accidents. In other words, they can affect you, regardless of the nature of your job.

Without disability insurance, an illness or accident can cause financial hardship. In fact, even a short-term disability may exhaust your savings, have you falling behind your bills, and accumulate debt.

Disability insurance is for the truck driver who can’t drive because of a broken hand. It helps surgeons, pilots, or hairstylists who can’t perform their job responsibilities due to hand tremors. It can provide a financial lifeline to accountants, lawyers, or architects who experience brain injuries.

In addition, truck drivers should consider getting life insurance, or other types of insurance like commercial truck liability insurance, which can help protect them financially in case of accidents or other incidents on the road.

In short, disability insurance is for everyone. You also might want to know how much disability insurance you will need.

Where Can I Buy Disability Insurance?

Wondering how to buy disability insurance? Well, here are ways to get coverage:

• Many companies offer employer-sponsored coverage. In most cases, the employer pays some or all of the cost of premiums. If your employer offers disability insurance as part of an employee benefits plan, sign up for it.
• Purchase disability insurance through work. Instead of providing employer-paid disability coverage, some companies offer it as a voluntary benefit. This allows you to buy a policy through your employer’s broker at a discounted group rate.
• Purchase an individual policy. Get in touch with Dundas Life and we will guide you through the entire process. You can count on us to help you find the best coverage at the best rate.

Conclusion

Dealing with a sudden disability is difficult both physically and emotionally. The last thing you would want is to worry about how you’ll put food on the table and pay your bills. This is where disability insurance comes in.

It provides you with an income to live on if you become temporarily or permanently disabled. Everyone who relies on a steady paycheck to pay their bills and save money for the future should have this disability income insurance.

Do you feel that you need a bit more guidance? Feel free to check out our Check My Price button and a representative from Dundas Life will be happy to walk you through the process.