Disability Insurance

What is the purpose of disability insurance?

Disability insurance replaces your income if you experience a disability. You pay a periodic premium to the insurance company, and in exchange, if you become disabled, you receive a monthly tax-free cash payment that replaces your income.

What is a disability?

A disability is a condition that prevents you from working. In Canada, the most common forms of disability result from mental disorders, including depression and substance abuse. This is followed by cancer, and cardiovascular diseases.

About one in three Canadians will become disabled, and unable to work, before the age of 65.  A disability can emerge unexpectedly, and the average length of a disability is between 2-3 years.

What does a disability insurance policy cover?

Generally, disability insurance replaces between 60% and 85% of your income for a specified time if you temporarily cannot work or become permanently disabled from an injury or illness. The payments are usually made on a monthly basis, and can be used to meet your personal financial expenses or business expenses.

Do you need disability insurance if self-employed?

If you do not have the emergency savings to supplement your income for at least 2-3 years, the average length of a disability, then you should consider disability coverage. If you also financially support your family, or have debt, then disability insurance is critical.

Can you get disability insurance coverage if self-employed?

There are specific disability insurance products that are tailored to self-employed individuals. Under these policies, you would be eligible for disability claims in case of illness or injury, even if you are in between contracts.

What is a benefit period?

A benefit period is the maximum number of years that a policy will make the monthly payments, in case of a disability. A benefit period can be for a specific term, like 2, 5 or 10 years, or up until a specific age, like 65. Under some policies, a benefit period may last a lifetime.

What is a waiting period?

Most disability insurance policies have a waiting period. This is the time frame between the start of your disability and the start of your benefits.  Most policies have a waiting period of 90-days, but shorter waiting periods are also available, usually at a higher cost. If you choose a longer waiting period, ensure that you have the emergency funds in place to cover that period of no income.

How much disability insurance should you purchase?

Disability insurance policies pay a tax-free payment every month. This means that you only need to replace a portion of your income every month. Insurance companies often put a cap on the percentage of income that you can replace, which is often based on your history of earnings.

You should consider your monthly recurring costs, including your bills, mortgage and other debt payments, and purchase enough insurance to at least cover these costs in case of a disability.

How much does it cost?

A disability insurance policy usually costs 1-3% of your annual income. The cost of disability insurance is affected by personal factors like your age, health and occupation, as well as the policy itself, including the benefit period and coverage amount you choose. The earlier you purchase disability insurance, the more affordable it will be.

If budget is an issue, and you would like to minimize the cost of insurance, you can lower your coverage amount, and pair your disability insurance with a growing emergency fund. If the emergency fund is large enough, the combination of the two, should be able to hold you over if you become unable to work for at least a year.

What is a premium?

A premium is the amount of money you pay for an insurance policy. If you pay your premium, and have an active insurance policy, the insurance provider is contractually obligated to pay you the monthly benefit in case you become disabled.

Do you need disability insurance if you make EI or CPP contributions?

Government programs have several limitations. For the Canada/Quebec Pension Plans (CPP/QPP), employment insurance (EI), the benefit amount is often capped, and might be lower than what you need to meet your ongoing expenses. For CPP, your disability must be severe and prolonged for you to receive the benefit, and for EI, the benefit is received for only a short term (up to 15 weeks).   

Getting comprehensive coverage to either replace or fill the gaps on government benefits is especially important if you’re self-employed, since you’re already exposed to employment risks such as unsteady income and a lack of employer-provided benefits.

And beyond that, you don’t have an employer to pay for your business expenses while you’re unable to work. You can use the benefits to hire or train someone to take over while you step away from work, pay off business expenses, and subsidize any drop in revenue. Disability insurance can help protect both your personal financial health and your business.

How is it different from critical illness insurance?

Critical illness insurance pays out a one time, and tax-free payment, if you are diagnosed with a serious medical condition. The conditions covered are more limited than disability insurance plans. The benefit is usually paid out after 30 days. Disability insurance pays a recurring monthly payment for the period that you are disabled, or for the benefit period stated in the insurance policy.

Pairing disability insurance and critical illness insurance

If you can afford both disability and critical illness insurance, it could provide you with the most comprehensive coverage. This would cover you against the broadest range of illnesses and address both short- and long-term gaps in your income. If you are interested in learning more about the right solution for you, contact us at Bounc3.