Disability insurance works when you can’t. It pays out a monthly cash benefit to protect you and your family financially in the event you’re unable to work because of illness or injury.
Disability insurance should be a part of an overall long-term financial plan, especially if you depend on paycheck.
So, how much does disability insurance cost?
Well, there’s no one-size-fits-all answer. The cost of disability insurance depends on a number of details specific to your situation. Continue reading to find out more about disability insurance and the factors that affect its costs.
What is disability insurance?
Disability insurance protects your biggest asset: Your ability to work. It replaces a portion of your income if an illness or injury prevents you from working.
Generally, disability insurance replaces 50% to 80% of your pre-disability income, providing financial stability at a time that is hard for you and your family. Long-term disability benefits are paid monthly and you can use them for any financial obligations you have, like household bills, medical expenses, loan payments, and tuition fees.
When you are shopping for a disability insurance plan, you can specify how much coverage you want. For most people, 60% of their pre-tax pay is a sweet spot, as that is close to their usual take-home salary.
The terms of your disability insurance contract will clearly specify how much the policy will pay out and when it will pay out. Review the policy carefully so that you know what you are paying for. Common details in a disability insurance policy document include:
- How much money you will receive each month if you become disabled
- How the policy defines total disability
- How long the insurer will pay disability benefits
- The length of the waiting period (if there is one)
- Any exclusions or limitations that can prevent you from receiving disability benefits (such as a pre-existing condition)
Why should you care about disability insurance?
The risk of suffering a disability is far greater than many people think. According to the Canadian Life and Health Association, there’s more than one-in-four chance of you becoming disabled for 90 days or longer before reaching the retirement age.
Ask yourself: If you can’t earn a paycheck for a few months or more, would you be able to support yourself and your family without depleting your savings?
If the answer is no (as it is for most of us), you should care for disability insurance.
Disability insurance acts as an income replacement tool if you lose the ability to earn a paycheck due to illness or injury. By providing you with a regular stream of income, it ensures you will not suffer financial hardship on top of your disability.
Different types of disability insurance
Disability insurance plans are of two types: Short-Term Disability (STD) or Long-Term Disability (LTD).
Short-Term Disability Insurance
Short-term disability insurance provides you with replacement income if you are temporarily unable to work. An STD insurance plan covers temporary disabilities and kicks in almost immediately. Depending on the insurer, there may be no waiting period or a waiting period of up to 2 weeks.
Generally, STD insurance pays benefits for up to three to six months, but there are policies that have a 12-month payout period. The longer the benefit period, the higher the insurance premiums will be. If the payout period of your STD insurance plan is coming to an end and you are still not fit enough to resume work, you may be able to access long-term disability benefits, if you have this coverage.
Typically, individual STD insurance plans cover anywhere between 60% and 80% of your pre-disability salary. However, those offered by employers as part of the employee benefits package may replace up to 100% of the monthly income.
With the average disability lasting roughly three years, buying short-term disability insurance in place of a long-term disability insurance policy is not a good idea. However, a STD insurance policy can be a beneficial add-on to a long-term policy. It starts paying out benefits almost immediately after a disability and can cover daily expenses until your long-term policy becomes active.
Long-term Disability Insurance
Long-term disability insurance issues monthly benefits if you cannot work due to illness or injury. The payout period can last two, five, or 10 years, or until you reach a certain age, like 65. Some plans may make monthly payments for as long as you live if your disability is permanent.
The monthly payout is fixed and usually not more than 60% to 70% of your gross salary before disability. The benefits don’t kick in immediately following a disability. Rather, you need to survive a certain period (called the waiting period) before they commence. The waiting period for long-term disability benefits is typically 30, 60, 90, 120, 180, or 365 days.
Keep in mind not all long-term disability policies define total disability the same way. How your policy defines disability is important because this impacts not only the premium rates but also when you can claim benefits. Disability insurance policies define total disability as either own-occupation or any-occupation.
Let’s take a look at both these definitions and how they work.
Own-occupation disability insurance
Own-occupation disability insurance pays benefits if you are unable to work in your own occupation due to a disability. It pays out even if you can work another job for which you are reasonably qualified based on education or experience.
Let's say a surgeon loses an arm because of a road accident, making it impossible for him to perform surgery. If he has an own-occupation policy, he is eligible for disability benefits, even if his injury doesn’t prevent him from taking up a teaching or consulting job.
Own-occupation disability insurance plans are a good fit for professionals with high-paying jobs, such as lawyers and doctors. The reason being they will likely experience a significant income loss if they work in any profession other than their own.
Since own-occupation disability insurance provides more comprehensive coverage, it is pricier than policies that define total disability as any-occupation.
Any-occupation disability insurance
Any-occupation disability insurance pays benefits when you are unable to work in a job suitable for you based on education and experience. Continuing with the example above, if the surgeon has any-occupation disability insurance, he will not be eligible for benefits. That’s because he is still capable of working, even if it is at a significantly lower-paying job.
What factors affect the cost of disability insurance?
So, how much does disability insurance cost? The cost of coverage depends on many factors, such as:
The older you are when you take out a policy, the higher your premiums will be. Like life insurance, disability insurance costs more as you age. Statistically speaking, older people have an increased risk of suffering an injury or illness than younger people.
Women often pay higher premiums than men, in part because women file more disability claims than men and in part because their claims tend to be more expensive than those filed by men.
Insurance companies assess your height, weight, cholesterol levels, blood sugar, blood pressure, as well as any pre-existing condition, like asthma. A pre-existing condition that increases your risk of becoming disabled in the future will likely increase your premium rate.
4. Waiting period
Disability benefits do not kick in immediately following a disability. Instead, they start after you survive a certain number of days, known as the waiting period. The length of the waiting period varies from one policy to another, but the typical range is 30 to 365 days. The shorter the waiting period, the higher the disability insurance premiums, all other things being equal.
5. Annual salary
Your annual salary also impacts your disability insurance cost. Expect to pay more for coverage if you are a high earner, since you will need to protect more money.
6. Payout period
Depending on your disability insurance policy, the payout period (i.e. the maximum period for which you can receive disability benefits) can be one, two, five, ten, or twenty years, until you reach age 65, or for life. The longer the payout period — also known as the benefit period — the greater the coverage cost.
A dangerous hobby, like sky diving or bungee jumping, will considerably increase the cost of coverage.
8. The definition of a disability
How your policy defines disability impacts your premium rates. Since own-occupation policies allow you to receive monthly benefits even if you are able to earn a paycheck doing something other than your last job, they are costlier than any-occupation plans. Any-occupation policies, in contrast, only pay out if you’re unable to work at all.
Riders are optional benefits that you can add to your base disability insurance plan—usually by paying a flat extra fee. The more riders you purchase, the greater the cost of insurance will be.
How much does short term disability insurance cost?
The cost of disability insurance premiums depends on many factors, including how much benefit you buy, age, health, and gender. Having said that, typically disability insurance costs 1% to 3% of your salary. The cost of short-term plans is pretty much the same as long-term policies, but since these plans provide benefits for a very limited period, they may not be a cost-effective choice for most people.
How much does long-term disability insurance cost?
How much you will pay for long-term disability benefits depends on many factors, but the premiums tend to cost 1% to 3% of your salary. So, if you earn $60,000, expect to pay anywhere between $600 and $1,800 each year for long-term disability insurance.
What percentage of your income is covered by disability insurance?
Disability insurance protects your income and can help you cover living expenses when you can’t work. Typically, these policies replace between 50% and 80% of your pre-disability income for a specific period.
Does disability insurance pay you monthly?
Long-term disability benefits are paid monthly, while short-term disability benefits may be paid bi-weekly or weekly. The benefits are paid until the end of the payout period or until you recover, whichever is earlier.
Disability insurance pays a monthly benefit if an illness or injury prevents you from working. Disability benefits replace a portion of your pre-disability income (usually between 60% and 80% of your salary) and you can use this money however you wish.
As a general rule of thumb, disability insurance costs 1% to 3% of your salary, but the exact cost will depend on the type of disability insurance plan you buy and various other factors.
A Dundas Life expert can give you an idea of what different types disability insurance policies cost and help you pick a plan that best suits your unique needs. Schedule your free consultation call today.
Frequently Asked Questions
How much disability insurance should I have?
You need enough disability insurance to maintain your standard of living if you are unable to work due to disability. Your policy should also cover your outstanding debts. For most people, a policy that replaces 60% to 70% of their pre-tax salary is good enough. However, if you have a lot of debt and little savings, you may need more coverage.
Are disability insurance premiums tax-deductible in Canada?
Disability insurance premiums, like life insurance premiums, are not tax-deductible for individuals or businesses.
Can I get life insurance while on disability?
A disability doesn’t automatically disqualify you from buying life insurance. If your disability doesn’t affect your life expectancy, you will likely have no problem in securing traditional life insurance coverage. If your disability impacts your life expectancy, it could lead to higher premiums or limit your options.
However, if your disability is severe, or if you have one or multiple pre-existing conditions, you may not qualify for traditional life insurance at all. Your only option for securing coverage will be guaranteed issue life insurance, which is a small whole life insurance plan for which you cannot be turned down.
Does term life insurance cover disability?
Term life insurance doesn’t cover disability by default, but you can add disability riders to your term life plan for more comprehensive protection. These riders will increase your life insurance premiums, but they are the second-best for those who do not want or cannot afford a separate disability insurance policy.
Some of the common disability riders you can add to your term life plan are:
- Disability income rider: It provides a fixed monthly benefit (usually a set percentage of your policy’s face value) if you cannot work due to injury or illness.
- Waiver of premium rider: It allows you to defer premium payments if you are unable to work due to a disability.
- Accelerated death benefit rider: If you develop a terminal illness, the accelerated death benefit rider will allow you to access a portion of your death benefit.
- Critical illness rider: It allows you to access the policy’s death benefit while still living in the event of a covered illness.
How much does disability insurance pay out?
On average, long-term disability benefits range from 60% to 80% of your pre-tax salary.