What is disability insurance in Canada? – Benefits, types & claims

Understanding what is disability insurance in Canada is crucial if your income supports your household. This coverage provides a steady stream of income if you can’t work because of an illness or injury.

While many people rely solely on government programs like CPP or EI sickness benefits, these plans rarely replace your full earnings. These are examples of government disability programs, which often leave coverage gaps in your financial protection. Private disability insurance fills that gap, ensuring you can keep up with essential expenses like rent, groceries, and debt payments. Affordable disability insurance options are available to help Canadians fill these coverage gaps and protect their income during periods of injury, illness, or mental health issues.

In this guide, you’ll learn how disability insurance works, how much income it replaces, and what options exist if you already receive other benefits.

What is disability insurance?

Disability insurance, or income protection insurance, provides financial protection to individuals who cannot work due to an illness or injury that leaves them disabled. Unlike life insurance, which provides a death benefit, disability insurance offers a portion of the insured person’s income as a regular payment if they become disabled and cannot perform their job duties. A disability policy outlines the terms and conditions of coverage, including eligibility requirements and benefit details.

Disability benefits are generally calculated based on an income replacement ratio. The monthly disability benefit is the regular payment provided to the insured, replacing a portion of their lost income. For example, if the income replacement ratio is 60% and the insured’s pre-disability income is $5,000 monthly, the monthly disability payment would be $3,000.

Disability insurance can be short-term or long-term; the benefit period typically depends on the policy terms. Short-term disability insurance usually provides coverage for a few months up to a year, while long-term disability insurance can offer coverage for an extended period, sometimes until the insured person reaches retirement age.

Does term life insurance cover disability?

Term life insurance does not cover disability. Life and disability insurance are two forms of financial security that safeguard one’s income. However, these two products vary in timing and how they provide coverage. 

Who needs disability insurance?

Disability insurance is crucial for individuals and depends on their capacity to work and earn.

As per the 2017 Canadian Survey on Disability, Over 6.2 million Canadians, comprising nearly 22% of the country’s population aged 15 years and older, have some disability that affects their level of freedom, independence, or overall quality of life. The prevalence of disabilities tends to rise with age. Disabilities can result from a range of causes, including a mental health issue, and eligibility for benefits depends on whether you are considered disabled under the policy’s definition. Approximately 1.6 million Canadians with disabilities faced challenges affording the necessary aids, devices, or prescription medication due to their expense. This highlights the urgent need for disability insurance coverage to support individuals living with disabilities and ensure financial stability during challenging times. (1)

Disability insurance replaces a portion of your regular income, usually from 60% to 85%, up to a specified maximum amount.

Types of disability insurance

Short-term disability insurance

Short-term disability insurance typically covers a shorter duration, such as a few weeks to several months (usually up to six). It provides benefits for up to 6 months if you are sick or injured, ensuring financial support during temporary periods of disability.

Some common examples of covered conditions may include:

• Illnesses: Such as flu, pneumonia, infections, or other short-term medical conditions that require time off for recovery.
• Injuries: Accidents, fractures, sprains, or other physical injuries that hinder the ability to work temporarily.
• Surgeries: Coverage for post-operative recovery periods, where the individual needs time to recuperate.
• Pregnancy: Maternity leave coverage for women during their pregnancy and postpartum recovery.
• Chronic conditions: Certain chronic illnesses or conditions may temporarily worsen and necessitate time off work.

If your employer offers a short-term disability plan, you must submit your claim through that plan. Employers are not obligated to offer paid sick leave, and the policies regarding sick leave can vary from one employer to another. If you have employer-sponsored short-term disability insurance, your claims must be made through that specific plan to access the benefits.

If you do not have short-term disability coverage and your employer does not provide such a plan, you might still qualify for Employment Insurance (EI) sickness benefits. To be eligible for EI sickness benefits, you must have exhausted all your available sick leave and accumulated enough work hours. Canada’s provincial health plans do not replace lost income, which is why disability insurance is important to bridge the financial gap during periods of illness or injury.

Long-term disability insurance

Unlike short-term disability insurance, which covers temporary disabilities for a limited period, long-term disability insurance is designed to provide support over an extended duration, up to two years, or until the individual reaches a certain age (such as retirement). Most long-term disability plans will replace 60% to 70% of your normal income, offering a reliable safety net for prolonged periods of disability. However, after this initial two-year period, you will only receive benefits if your disability prevents you from working in any occupation.

Specific disability insurance policies may offer benefits lasting several years. The insurance will pay a portion of your pre-disability income, usually around 60% to 70%. The benefits are generally paid monthly and continue until the disability period ends or until the policy’s maximum benefit period is reached. Some common examples of covered conditions include:

• Serious illnesses: Chronic conditions like cancer, heart disease, multiple sclerosis, and other severe medical ailments that hinder the ability to work long-term.
• Musculoskeletal disorders: Back injuries, joint disorders, and other musculoskeletal conditions that cause prolonged disability.
• Neurological disorders: Disabilities resulting from neurological conditions like stroke, epilepsy, or Parkinson’s disease.
• Severe injuries: Coverage for disabilities caused by accidents resulting in significant injuries, such as traumatic brain injuries or spinal cord injuries.
• Chronic pain syndromes: Conditions like fibromyalgia or chronic regional pain syndrome that cause prolonged pain and disability.
• Autoimmune disorders: Diseases like lupus, rheumatoid arthritis, or Crohn’s disease, which can lead to long-term disability.

How to add disability coverage to your life insurance policy

Long-term disability policies provide strong income protection if you become disabled and cannot work. However, if you cannot afford a separate disability insurance policy, you can add a disability rider to your life insurance policy. Some riders may offer a living benefit, providing financial support if you become disabled and unable to work. Additionally, certain disability riders or policies may not require a medical exam, making them more accessible for some applicants. These riders require an extra evaluation and may increase your life insurance premium, but they serve as a good alternative if a standalone disability insurance policy is not affordable. Here are some disability riders that you can add to your life insurance policy:

Total disability waiver of premium rider

This rider offers additional protection to the insured in case they become disabled and are unable to pay the insurance premiums. Generally, the insured individual must meet the following conditions:

• They must be incapable of performing the essential duties of their current occupation.
• They must not be employed in any other occupation during the disability period.
• They should be receiving medical treatment for the condition that led to their total disability.

Suppose the insured meets the criteria for total disability as defined in the policy. In that case, the rider will waive the requirement to pay premiums for the base policy, and the insurance company will continue to provide coverage even if the insured cannot make premium payments during the disability period. This ensures that the policy remains in force and provides the intended benefits to the policyholder.

Typically, disability waiver riders provide benefits only after the insured person has been completely disabled for at least four to six months. The premiums can be waived retroactively, even covering the initial waiting period. The rider remains in effect until a specific age, often up to 60 or 65, for the insured individual.

Disability income rider

A disability income rider provides a partial payout from the death benefit to the insured if they become disabled and unable to work due to illness or injury. However, the amount is significantly less than a separate disability insurance policy.

Mortgage disability or Credit disability insurance rider

A mortgage disability rider can be added to a mortgage loan or credit account to provide coverage if the borrower becomes disabled and cannot work, leading to an inability to make mortgage or credit payments.

Suppose the insured individual meets the criteria for total disability as defined in the policy. In that case, the rider will make the mortgage or credit payments on their behalf for a specified period. The coverage typically lasts for up to two years, five years, or up to the age of 65.

Accelerated death benefit rider

This rider allows the insured individual to receive a portion of the death benefit before their death if they are diagnosed with a qualifying terminal illness or a specified critical illness. Common qualifying conditions include terminal illnesses with a life expectancy of one or two years, certain types of cancer, heart attack, stroke, and end-stage renal failure, among others. The amount of the accelerated benefit is typically a percentage of the total death benefit and is subject to policy limits.

The policy will specify the percentage of the death benefit that can be accelerated. It is typically a portion of the total death benefit, such as 50% or 75%. The accelerated death benefit amount is subtracted from the original death benefit. For example, if the policy has a $500,000 death benefit, and the policyholder accelerates $250,000, the remaining death benefit would be $250,000. The accelerated death benefit will reduce the overall death benefit paid to the beneficiaries upon the insured’s passing.

Alternatives to life insurance and disability coverage

If life insurance or disability coverage doesn’t suit your needs or budget, there are some alternative options to consider:

• A robust emergency savings fund can cover living expenses and medical costs during a disability or other emergencies.
• Getting Critical illness insurance that can pay a lump-sum benefit if you are diagnosed with a specified critical illness listed in the policy. Unlike disability insurance, it doesn’t replace your income but provides a lump-sum payment to use as needed.
• Canada offers tax-advantaged savings accounts such as Tax-Free Savings Accounts (TFSA) that can be used for various purposes, including emergency and retirement.
• Group insurance through employers offers group insurance plans that may include life insurance and disability coverage.

Should I apply for life and disability insurance at the same time?

Yes, it is recommended that you apply for life and disability insurance simultaneously to ensure comprehensive coverage and potentially streamline the application process.

What is not covered by disability insurance?

Pre-existing conditions, self-inflicted injuries, disabilities caused by illegal activities, and some mental health conditions may not be covered by disability insurance.

How much disability insurance coverage do you need?

When determining the appropriate amount of disability insurance coverage, consider various factors to ensure adequate protection.

• Determine the income replacement percentage: Begin by deciding the percentage of your current income you would like the disability insurance to replace. A typical range is 50% to 60% of your pre-disability earnings. This percentage represents the portion of your income you would need to maintain your standard of living if you were unable to work due to disability.
• Calculate your monthly benefit: Once you’ve determined the income replacement percentage, calculate the monthly benefit you would receive from the disability insurance policy. Multiply your pre-disability income by the chosen percentage to determine the amount.
• Consider existing coverage: Consider any existing disability insurance coverage, such as through your employer or another policy. Review the terms and coverage limits of these policies to understand how they coordinate with any additional coverage you’re considering.
• Assess additional expenses: Evaluate any additional expenses or financial obligations that need to be covered in the event of disability. This may include mortgage or rent payments, utilities, groceries, medical expenses, and childcare costs. If you are self-employed or a small business owner, also consider ongoing business expenses that may need to be covered during a period of disability. There are disability insurance options tailored specifically for small business owners to help protect their business operations and ensure continuity.
• Evaluate the need for supplemental coverage: Depending on your income and financial obligations, you may determine that additional coverage beyond what is provided by existing policies is necessary. Disability insurance in Canada is subject to coordination of benefits. This means that if you have multiple disability insurance policies, the total benefit amount may be limited to ensure that you do not receive more income while disabled than you would from working. Review the coordination of benefits provisions of any policies you’re considering to understand how they would interact with your existing coverage.

How much does disability insurance coverage cost?

The cost of disability insurance coverage can vary widely based on several factors, including:

• Age: Younger individuals typically pay lower premiums than older individuals, as they are considered at a lower risk of disability.
• Health: If you have existing health issues, you might have to pay more for premiums, or your policy may not cover certain things.
• Occupation: Certain occupations carry higher risks of disability, and individuals in such professions may have higher premium rates.
• Coverage amount: The higher your coverage amount, the higher the premium.
• Elimination period: The elimination period refers to the waiting period before the disability benefits begin. Opting for a shorter elimination period will increase the premium.
• Benefit Period: Longer benefit periods, which offer coverage for an extended duration, will generally result in higher premiums.
• Optional Riders: The premium can be increased by additional riders or features, such as cost-of-living adjustments or residual disability benefits.

On average, disability insurance premiums can range from 1% to 3% of your annual income. For example, if your yearly income is $50,000, the premium could be anywhere from $500 to $1,500 yearly.

Leading providers like RBC Insurance and Canada Life offer a range of disability insurance options with different premium structures, features, and discounts. It’s important to compare plans from these providers to find the best fit for your needs.

How much income does disability insurance replace in Canada?

Most private disability insurance policies replace 60% to 85% of your gross monthly income, up to a specified maximum. The exact percentage depends on your occupation, salary, and whether you have employer or personal coverage.

Government programs like CPP Disability or EI Sickness Benefits provide much less, usually under $1,400 monthly combined, so many Canadians use private disability insurance to bridge the gap. Your total benefits from all sources cannot exceed your pre-disability income, a rule called “coordination of benefits.” High-income earners often choose supplemental private plans to maintain their standard of living during long-term disability.

Who is eligible for disability insurance?

• Age: Most disability insurance policies are available to individuals between a specific age range, usually 18 to 65. Some policies may have more restricted age limits.
• Employment status: Eligibility often depends on your employment status. Employees, self-employed individuals, and certain professionals may qualify for different types of disability insurance coverage.
• Income: Most policies require you to have a minimum level of income to be eligible for coverage.
• Health status: Insurance companies assess your health history and current health status to evaluate the risk of potential disability. Individuals with pre-existing health conditions may face limitations or higher premiums.
• Citizenship and residency: You must be a Canadian citizen or permanent resident to qualify for disability insurance.
• Occupation: Some insurance providers may have specific requirements or limitations, particularly high-risk occupations.
• Contribution to insurance plan: Certain disability insurance plans, such as government-sponsored programs like the Canada Pension Plan (CPP) disability benefit or the Quebec Pension Plan (QPP) disability benefit, require individuals to have contributed to the plan through payroll deductions or self-employed contributions.

Are disability insurance benefits taxable?

In Canada, disability insurance benefits are generally considered taxable income if the premiums for the policy were paid with pre-tax dollars. This means that if your employer paid the disability insurance premiums or you paid them through a pre-tax payroll deduction, the benefits you receive from the disability insurance policy will be taxable.

However, if you paid the disability insurance premiums with after-tax dollars, your benefits would typically be tax-free. This is because you have already paid income tax on the money used to purchase the policy.

What to ask when buying disability insurance?

When purchasing disability insurance, it’s crucial to ask the following questions to ensure you understand the coverage and find the policy that best suits your needs:

• General terms and conditions
• What is the definition of disability in the policy?
• Are there any exclusions or limitations in the coverage?
• Are there any medical underwriting requirements or limitations to pre-existing conditions?
• What are the waiting periods before benefits begin?
• Is the policy non-cancelable or guaranteed renewable?
• Premiums
• How much are the premiums, and are they fixed?
• Are you required to continue paying premiums while you are disabled?
• Benefits
• What percentage of your income will the policy pay in the event of a disability?
• How long will the benefits last (short-term or long-term coverage)?
• Is there a cost-of-living adjustment to account for inflation?
• Are there any additional benefits, such as partial disability or rehabilitation benefits?
• What are the conditions for receiving benefits, such as how long you must be disabled before benefits begin, and are there any exclusions or specific situations where benefits would not be paid?
• Individual plans
• Can you customize the coverage to suit your specific needs?
• Is the policy portable, allowing you to keep the coverage if you change jobs?
• Group plans
• Is the disability insurance part of an employer-sponsored group plan?
• What are the differences between group and individual disability coverage?
• Will the coverage continue if you leave your current employer?

Other sources of disability benefits

Additional disability benefits may be accessible through the CPP and the QPP if you have contributed to these plans and cannot work regularly at any job due to a disability.

Is disability insurance included in term life insurance?

No, term life insurance and disability insurance are separate products. Term life pays a lump-sum death benefit to your beneficiaries if you die during the policy term, while disability insurance pays you a monthly income when illness or injury prevents you from working.

That said, some life policies include riders (add-ons) such as a waiver of premium or disability income rider, which provide partial income protection or premium forgiveness if you become disabled. However, these riders don’t replace the comprehensive coverage offered by a standalone disability insurance plan. For full protection, most Canadians pair both life and disability policies.

Can’t I rely on workers’ compensation or CPP Disability Benefits?

While the government-sponsored disability benefits provide some financial support, the amount may be modest and not fully replace your income. Additionally, the application process for CPP or QPP disability benefits can be lengthy, and approval is not guaranteed.

• Workers’ compensation:
  • Employees who experience injuries or illnesses related to their work usually have access to workers’ compensation benefits. These benefits cover medical expenses and provide partial wage replacement during the recovery period.
  • If your disability is not work-related, you may not qualify for these benefits.
  • The coverage period is usually limited, and the benefits may stop once you have recovered or reached maximum medical improvement.
• CPP Disability Benefits:
  • CPP disability benefits are for people who have paid enough into the CPP and can’t work because they have a serious and long-lasting disability.
  • The amount of CPP disability benefits is modest and may not be enough to maintain your pre-disability standard of living.
  • The application process for CPP disability benefits can be complex, and approval may take time.

Disability insurance Canada – Conclusion

Disability insurance safeguards your income when unexpected illness or injury interrupts your ability to work. It’s one of the most overlooked yet vital parts of financial planning in Canada.

To find coverage that fits your budget and replaces enough of your income, get a personalizeddisability insurance quote with Oneday. Quotes are free for eligible applicants and subject to underwriting and provincial regulations.

Frequently asked questions about what’s disability insurance

Sources:

Statistics Canada “Canadian Survey on Disability, 2017“