If an illness or injury were to keep you out of work for a few months, would you be able to support yourself without dipping into your savings?
The risk of suffering a disability is much greater than many think. Research shows that one in every five Canadians aged 15 and over has experienced some form of disability. For most of us, a serious injury or illness can have serious financial consequences. For these reasons, disability insurance should be a part of an overall long-term financial strategy for anyone who earns a paycheck.
Disability insurance pays out a benefit each month should you become disabled. This regular stream of income can help you put food on the table and pay for everyday living expenses.
So, is disability insurance worth it?
For most people, the answer is yes. It protects your most valuable asset: your ability to earn a living. Keep reading to find out more about disability insurance and why you need it.
What is disability insurance?
A disability insurance policy is a financial product that pays you a fixed monthly benefit amount if you cannot work due to illness or injury. You do not have to submit any bills to receive the monthly disability insurance benefits and are free to use it as you like. You can use the cash benefit from a disability insurance plan to purchase groceries, cover daily expenditures, and pay for medicines while you are unable to work.
If you become disabled, the policy will start paying out after the waiting period. This is a small period you must wait after the onset of your disability before you can start collecting monthly payments. The waiting period varies by policy and can be as short as a week or as long as 90 days.
Generally, disability insurance costs anywhere between 1% and 3% of your annual salary. That said, premium rates depend on your risk profile; the higher the risk the insurer assumes by covering you, the greater the cost of disability insurance.
Common factors that affect the cost of disability insurance are:
The length of the waiting period
The length of the waiting period for your disability insurance plan is inversely related to your premium rate. The shorter it is, the higher the premium.
Monthly benefit amount
Generally speaking, a disability insurance policy pays out a percentage of your pre-disability income. The payout usually ranges from 40% to 80% of your income. The higher the monthly payout, the greater the cost, other things being equal.
This refers to how long the disability insurance plan will payout for. Typically, disability insurance plans that issue benefits over a longer period cost more. For instance, a policy that pays a monthly amount for 10 years is likely to be more expensive than a plan with a one-year payout period.
Definition of disability
Disability insurance policies generally define disability as either own-occupation or any-occupation. Own-occupation defines disability more broadly than any-occupation, and as such these policies cost more.
- Own-occupation: With own-occupation, you receive monthly payouts if your illness or injury prevents you from working in your chosen profession, even though you can do other jobs for which you are suitably qualified. For instance, say you are a surgeon and suffer a severe injury on your right hand. Because of the hand injury, you cannot work in your specific occupation performing surgeries but are fit to perform duties of other professions, such as a lecturer. If you have own-occupation disability insurance, you will nevertheless receive the benefit payments.
- Any-occupation: The benefits kick in only if the disability prevents you from working in any gainful occupation for which you are qualified. Continuing with the above example, if you can work as a lecturer or a medical administrator given your education, experience, or training, you will not receive benefits. Keep in mind whether or not you take another job does not matter. If the insurer decides you are fit to perform duties of a comparable occupation, it can deny benefits.
Age, health, and gender of the insured
Younger people are less likely to suffer a disability than older people and therefore receive better rates. Likewise, healthy applicants for disability insurance are rewarded with lower premiums. Apart from your age and health, the insurer will also look at your gender. Even though women live longer than men, they file more claims and consequently pay more for disability coverage.
What you do for a living can impact your cost of disability insurance. If your job has a higher injury rate, brace yourself for higher premiums.
What does disability insurance cover?
Disability insurance covers illnesses and injuries that can prevent you from earning a paycheck. These include, among others, the following:
- Injuries and fractures
- Cardiovascular diseases
- Circulatory diseases
- Back disorders
- Joint disorders
- Muscle disorders
- Bipolar disorder
- Spine-related disorders
Contrary to what many think, most disabilities are caused by illnesses and are not accident-related. Whether you are laid up due to an injury sustained in an accident or an illness, your policy will pay the monthly amount, as long as your condition meets your insurer’s definition of disability.
Who needs disability insurance?
If you are the primary earner of your family, you probably need disability insurance. You may also need it if you are single but will find it difficult to sustain yourself if you are laid up and cannot work for a few months.
Disability happens to more people than you may think. Furthermore, more disabilities are caused by illnesses than physical injuries. Here are some stats that prove this.
- One in every five Canadians aged 15 years and over have a disability
- Nearly 70% of Canadians feel they will be under serious financial stress if they were laid up and could not work for three months or more
- 90% of disabilities are caused by illnesses rather than accidents
In short, if you rely on your monthly income, disability insurance is for you, notwithstanding the nature of your job.
Types of disability insurance
Disability insurance plans are either short-term or long-term.
Short-term Disability Insurance
Short-term disability insurance is a binding contract between you and the insurer. In exchange for premiums, the insurer promises to pay a specific benefit amount each month if you cannot work temporarily because of an injury, illness, or psychological disorder.
A short-term plan covers virtually all conditions that can prevent you from temporarily earning a paycheck, provided your condition meets your provider’s definition of total disability. Keep in mind that pregnancy does not qualify as a disability, but you can receive the monthly payments if you are unable to perform duties of your chosen profession because of pregnancy-related complications.
Short-term plans usually have a small waiting period, usually one or two weeks. The benefit period is generally three to six months, but some plans pay up to a year. If you are still unable to return to work, the coverage terminates. You then have the option of applying for social security disability insurance or moving to long-term disability insurance. Typically, the benefit amount is up to 60% - 80% of your regular earnings, but some policies may pay up to 100% of your income.
Many employers in Canada offer their workers short-term disability insurance. But if you do not have access to it through work, you can purchase an individual plan. While each short-term disability policy is different, all of them will clearly spell out the following information:
- The waiting period (Also, known as the elimination period, it is usually one or two weeks for this disability insurance plan)
- The benefit amount (generally, 60% to 80%of your pre-disability income)
- The maximum benefit amount each month (Short-term disability policies have a pre-defined monthly limit. Let’s say, your plan pays up to 80% of pre-disability earnings, but the monthly amount is capped at $4,000. If 80% of your income is more than $4,000, you will receive the latter.)
- How the insurance provider defines ‘total disability’
- The benefit period (That is, for how long the life insurance company will pay the benefits)
- Exclusions (Some insurers may exclude certain pre-existing conditions, like depression and anxiety, from coverage.)
Long-term disability insurance
A long-term disability insurance policy provides a steady stream of monthly income — typically, up to 80% of your pre-disability earnings — if you are unable to work for an extended period of time. These plans have longer waiting periods than short-term plans. Generally, you need to wait for 90 days before you can start receiving benefits, but your insurer may agree to lower the premiums in return for a longer waiting period.
You will receive the monthly payments until the benefit period expires or you return to work, whichever is earlier. The benefit period is usually 2, 5, or 10 years or up to age 65. Your plan will clearly outline details such as the benefit amount for each month, the benefit period, the waiting period, how the insurer defines ‘total disability, and exclusions (if any).
Is disability insurance worth it?
Yes, it is. Disability insurance can keep you and your family financially stable if you are unable to earn a paycheck due to illness or injury. Barring a few exceptions — such as self-inflicted injury or injury sustained while committing a crime — disability insurance covers all types of injuries and illnesses. With a disability insurance plan in place, you can rest easy knowing you will receive a steady monthly income until you are fit enough to resume work.
Disability insurance covers your paycheck. It pays a benefit each month if you become disabled and cannot work. Disability insurance policies are either short-term or long-term. Whether you are looking for short-term, long-term disability insurance, or both, Dundas Life can recommend affordable solutions for you.
Why is it important to get disability insurance?
Disability insurance is an important part of any financial plan because it protects your ability to earn income. It helps cover living expenses like mortgage or rent payments, car loans or leases, childcare costs such as infant care centres; groceries bills -- all those little things add up quickly! Disability coverage provides peace-of-mind knowing that should anything happen tomorrow morning then you will still have money to cover living expenses without an income.
What is the cost of disability insurance?
Disability insurance can be expensive, but if you’re an employee with coverage through your company or are buying it on behalf of yourself then the price will vary. The average cost for individual plans range from 1% to 3%. However, many employers offer this benefit at reduced rates—so make sure that they do before purchasing any policies!
Why should you get disability insurance?
It is important to purchase disability insurance because it replaces a portion of your pay check should you become disabled. This will help with living expenses and prevent having savings taken away from being used on medical bills that could have been prevented by getting this type coverage earlier in life.
Steven has a deep background in life insurance. At Dundas Life, he's helped 1000s of clients find the right insurance coverage while also training dozens of insurance advisors during his career. Previously at Finaeo, Steven oversaw compliance and coaching for over 350 independent insurance brokers. Steven is also rated the #1 Insurance Agent in Toronto on Rate-My-Agent.