Disability insurance

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Benefits
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Employee benefit

Disability insurance is an policy that pays benefits to a beneficiary when the policy holder suffers a disability that impacts their ability to work.[1] Essentially disability insurance is designed to protect you from the possible loss of income. Disability insurance is a very important part of your insurance coverage:

  • A typical 30-year-old is four times more likely to become disabled than die before age 65.[2]
  • One in six Canadians will be disabled for three months or more before age 50,[2] and one in three before age 65.[1][3]
  • The average length of a disability that lasts over 90 days is 2.9 years.[3]

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.[1][4]

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 $650 week.[5]

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 disability that "prevents them from working regularly at any job that is substantially gainful", that is "long-term and of indefinite duration". Another condition is to have contributed "enough" to CPP, meaning that that you have contributed:[6]

  • 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 2023, the basic monthly amount is about $550 and the average paid is about $1100 a month.[7] 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".[8] For the QPP benefits, sufficient contributions can be either:[8]

  • 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 $13k, 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

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.[1] 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.[9]

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.[1][10]

This coverage starts when your short-term disability (or EI) benefits run out.[1] Typically, the goal is to replace 60 to 70 per cent of your normal income, but there is always a maximum dollar amount.[1][4]

Definitions of occupation

In general, there are three possible definitions of "occupation" in disability insurance policies:[10]

  • "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",[10] on top of your wages. (This rider is only available for certain professions, e.g. see [11].)
  • "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 plans.

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.[12]

Tax considerations

Some plans pay tax-free benefits while others are taxable.[13][14]

If you pay the premiums of an individual plan yourself, benefits will be received tax-free.[1]

For a group plan, if the employer pays part of the premiums, the benefits may be taxable.[13]

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.

Buying disability insurance

Individual disability insurance plans are purchased through life and health insurance agents and brokers.[4] The agent will fill out a form and send it out to the insurance company for approval. The form will include "details on your health, job, earnings and hobbies".[1] A medical exam may be required.[1]

If your employer does not provide disability insurance, and you are looking at getting an individual plan, also look at group insurance offered through a union, guild, or professional or alumni association.[4]

When comparing different long term disability plans, things to keep in mind include:[15][16]

  • 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:[17]

  • 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)

An often quoted ballpark figure for premiums of individual disability insurance plans is 1-3% of annual income.[17]

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.[18] Obviously, should you become disabled, you will still have other living expenses beyond your mortgage, so normal disability insurance makes more sense.

Critical illness insurance

Critical illness insurance pays a tax-free lump sum if you are diagnosed with an illness covered by your policy.[19]

Critical illness insurance is costly and the situations it covers are limited. Typical premiums for a $200,000 policy for a 40-year-old non-smoker add up to $2,000 a year for a 10-year term. More problematic is the fact that the policies are not standardized and problems often arise when payouts have to be made. For instance, some policies will cover only five illnesses, while more comprehensive ones cover up to 25. Such policies can also have stringent requirements regarding survival periods that have to be met after the disability is sustained before a payout is made. If your illness doesn’t meet the requirements exactly, the policy may not pay out a dime.[19]

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.[20]

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."[21]

See also

Further reading

References

  1. ^ a b c d e f g h i j Canadian Life and Health Insurance Association (CLHIA), A guide to disability insurance, viewed February 14, 2021.
  2. ^ a b Julie Cazzin, The only insurance guide you need, MoneySense, February 4, 2015, viewed January 24, 2017
  3. ^ a b Rino Racanelli, Disability Insurance (Part 1), Canadian MoneySaver, October 2008 issue, viewed January 21, 2017
  4. ^ a b c d Financial Consumer Agency of Canada, Disability insurance, updated June 13, 2018, viewed February 14, 2021.
  5. ^ Employment and Social Development Canada, EI sickness benefits: What these benefits offer, viewed July 7, 2023.
  6. ^ Employment and Social Development Canada, About the Canada Pension Plan Disability Benefits, viewed February 14, 2021.
  7. ^ Employment and Social Development Canada, Canada Pension Plan disability benefits: How much you could receive, viewed February 14, 2021.
  8. ^ a b Disability pension under the Québec Pension Plan, viewed February 14, 2021.
  9. ^ Employment Insurance Sickness Benefits, viewed February 15, 2012.
  10. ^ a b c Rino Racanelli, Disability Insurance (Part 2), Canadian MoneySaver, Nov/Dec 2008 issue, viewed January 21, 2017
  11. ^ RBC Insurance, Disability Income Protection Standard Issue Plans - Riders available on your plan, viewed March 2, 2021.
  12. ^ Rino Racanelli, Three Cost-effective Ways to Supplement Your Group Long Term Disability Coverage, Canadian MoneySaver, February 2013 issue, viewed January 21, 2017
  13. ^ a b TaxTips.ca - Disability Insurance, viewed January 11, 2016.
  14. ^ Canada Revenue Agency, IT428 - ARCHIVED - Wage Loss Replacement Plans, viewed January 11, 2016.
  15. ^ LSM Insurance, Disability Insurance in Canada:5 Essential Buyers Tips, updated November 9, 2020, viewed February 28, 2021.
  16. ^ retirehappy.ca, Disability insurance 101, updated January 7, 2020, viewed February 28, 2021.
  17. ^ a b PolicyAdvisor Brokerage Inc (on Ontario insurance broker), What is disability insurance?, viewed March 3, 2021.
  18. ^ LSM Insurance (an Ontario insurance broker), Disability Insurance: Everything You Must Know, updated June 10, 2020, viewed February 14, 2021.
  19. ^ a b MoneySense, What you need to know about disability insurance, May 17, 2019, viewed March 6, 2021.
  20. ^ Moneysense, When buying critical illness insurance makes sense, July 13, 2017, viewed March 6, 2021.
  21. ^ Advisor's Edge, Faceoff: How critical is CI insurance?, February 1, 2012, March 6, 2021.

External links

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