Disability insurance is an essential financial safeguard that provides income protection in case an illness or injury prevents you from working. As the likelihood of experiencing disability before retirement is higher than most people realize, securing appropriate coverage is a crucial component of a comprehensive financial plan. This Canadian specific guide will help you navigate the landscape of disability insurance in Canada and make informed decisions when it comes to securing your financial future.
The Need for Disability Insurance
Disability insurance serves as a financial buffer, ensuring you have the support necessary to manage expenses and maintain your standard of living in case of a disability. To assess your needs, consider your financial obligations, such as living expenses, mortgage or rent payments, debt repayment, children’s education, and retirement savings.
Types of Disability Insurance
There are two primary forms of disability insurance available in Canada:
- Short-term disability (“STD”) insurance: This type of coverage provides financial assistance for a limited period, typically up to six months. It helps cover immediate expenses during the initial recovery phase following an illness or injury.
- Long-term disability (“LTD”) insurance: Long-term coverage offers financial support for an extended period, usually several years or until retirement age. This type of insurance is essential for individuals who may be unable to return to work for a prolonged period due to a severe illness or injury.
- Likely the best plans (and the most common plans) for the average working-Canadian his both STD and LDT insurance under one coverage. Eligible claimants in this model go on STD, in most cases, with little hassle, as soon as the illness or injury happens and then transition into LDT, for as long as it takes, with admittedly far more hassle (sometimes lawyers have to get involved here).
There are two ways disability insurance is sold in Canada (by insurance companies, but call a broker for different quotes from all providers):
- Group Disability Insurance: Often provided by employers, associations, or unions, group plans offer coverage for multiple individuals under a single policy. These plans may include short-term, long-term, or both types of coverage and are typically more affordable than individual policies. However, group coverage may not be tailored to your specific needs, and benefits may be limited or subject to taxation.
- Individual Disability Insurance: Personal policies purchased directly from an insurer, individual plans can be customized to your unique needs and offer more comprehensive coverage and flexibility compared to group plans. While premiums for individual policies may be higher, they provide greater security and control over your coverage. Also they are the only way to buy disability insurance if your employer doesn’t offer it (or if you are self employed, etc.).
Key Features of Disability Insurance Policies
When reviewing disability insurance policies, consider the following critical aspects:
- Definition of disability: The conditions under which you are eligible to receive benefits.
- Waiting period: The time between becoming disabled and when benefits begin.
- Benefit period: The duration for which benefits are paid.
- Benefit amount: The percentage of your income covered by the policy (typically around 75%, more or less).
- Non-cancelable and guaranteed renewable: These features ensure your policy cannot be canceled or altered by the insurer as long as you pay the premiums.
- Cost of living adjustment (COLA): An optional feature that adjusts benefits for inflation.
- Residual benefits: A provision that allows for partial benefits if you can work but at reduced capacity.
- Future insurability option: The ability to increase coverage in the future without medical underwriting.
In addition to private insurance options, the Canadian government offers several programs to support individuals with disabilities. These programs include:
- Canada Pension Plan (CPP) Disability Benefit: A taxable, monthly payment for eligible individuals who have contributed to the CPP and are unable to work due to a disability.
- Employment Insurance (EI) Sickness Benefit: A temporary financial support for eligible individuals who are unable to work due to illness, injury, or quarantine.
- Provincial and territorial disability programs: Specific programs and benefits vary by province or territory and may include financial assistance, health care, and employment support.
Understanding the importance of disability insurance, assessing your needs, and familiarizing yourself with the types and features of policies are crucial steps in securing your financial future. By navigating the landscape of disability insurance in Canada, you can make informed decisions about coverage, ensuring you have the necessary support in the event of an illness or injury.
If you are ever insured and eligible to go on disability insurance, and need to make a claim, and you are overwhelmed to apply or if your claim is denied, contact a lawyer. In my experience, lawyers in this area of the law generally all provide a free consultation and they often provide various fee arrangements if you retain them, including deferrals.
Jeff is a lawyer in Toronto who works for a technology startup. Jeff is a frequent lecturer on employment law and is the author of an employment law textbook and various trade journal articles. Jeff is interested in Canadian business, technology and law, and this blog is his platform to share his views and tips in those areas.