Let me guess: you stumbled upon this article after searching “What is disability insurance?” If so, you are in the right place! In this blog post, we are going to overview everything you need to know about disability insurance, including how it works, what it covers, the different types of disability insurance benefits and more!
Let’s dive in!
What is disability insurance? Our disability insurance definition
What is the definition of disability insurance? Disability insurance is a type of insurance that provides protection in the event that you become disabled and unable to work. You can be covered by your employer or purchase coverage on your own. Typically, it pays 60% to 85% of your income.
When people search “disability insurance meaning,” they may, however, be looking for information about eligibility. Each disability insurance policy varies, so it’s difficult to provide blanket statements about who qualifies. However, typically, approval is based on whether you have a disability that renders you unable to work.
How does disability insurance work?
In a nutshell, disability insurance is an agreement or contract between you and the insurance company. You or your employer pay them money (via monthly premiums), and in exchange, the insurer pays you your monthly benefits if you ever become disabled and are unable to work.
The following is a simplified version of how disability insurance typically works:
- You start a new job, and your employer provides all employees with a group disability insurance plan with short and long-term disability benefits.
- You develop a chronic illness that impedes your ability to work effectively.
- Despite struggling for months, you find yourself unable to perform the essential duties of your own occupation.
- Your doctor advises you to take sick leave and provides a medical note.
- You go on sick leave and receive short-term disability benefits through your group insurance plan.
- After three months, your short-term disability benefits cease, and you transition to receiving long-term disability benefits.
- Two years later, the definition of disability shifts to require impairment in “any” occupation.
- Your doctor confirms that you’re unable to perform any occupation.
- You continue to receive monthly long-term disability payments until you can either return to work or reach the age of 65.
What are the benefits of disability insurance? There are several benefits associated with having disability insurance coverage. To start, they provide you with peace of mind in case of an accident or illness. They also provide you with a monthly income to help pay for groceries, housing and other basic needs. All in all, disability insurance is always a great investment, as you can never predict what could happen in the future.
What does disability insurance cover?
Nearly any medical condition or injury can qualify for disability insurance coverage. Approval is NOT based on your diagnosis; rather, it is based on how your condition and your symptoms prevent you from working. In short, to get approved, you need to focus on how your condition affects you.
According to a 2019 insurance industry study, the following are the most common diagnoses for disability claims:
- Mental Disorders (30%)
- Musculoskeletal (21%)
- Cancer (13%)
- Circulatory (7%)
- Nervous System (7%)
- Accidents (9%)
- All others (13%)
The following are some common examples of conditions that qualify for disability insurance benefits:
- ADHD
- Anxiety
- Autism
- Back Problems & Conditions
- Bipolar Mood Disorder
- Carpel Tunnel Syndrome
- Chronic Fatigue Syndrome
- Chronic Pain
- Complex Regional Pain Syndrome
- Crohn’s Disease
- Depression
- Fibromyalgia
- Heart Disease
- Headache and Migraine
- Irritable Bowel Syndrome (IBS)
- Knee Disorders
- Long COVID
- Lupus
- Lyme Disease
- Multiple Sclerosis
- Neck and Cervical Disorders
- OCD
- Psoriatic Arthritis
- Schizophrenia
- Sleep Disorder
- Vestibular Disorders
- Visual Disorders
Please note this is NOT a comprehensive list; just because your medical condition isn’t listed doesn’t mean you won’t qualify for benefits.
What are the different types of disability insurance?
In this section, I review the two main types of disability insurance in Canada: government and private. To get disability benefits, you must be covered under one of these.
Let’s dive in!
Government disability insurance
In Canada, there are four main types of government-funded disability benefits. Keep reading to see if you qualify.
- Workers’ Compensation benefits provide compensation to workers who suffer a workplace injury or illness. Each province in Canada has its own worker’s compensation system, so to learn more about it, visit the WCB website in your province, or our article which directly explains: How does workers compensation work?
- Canada Pension Plan Disability (CPPD) is an income replacement program administered by Service Canada. It provides disability benefits to eligible individuals based on age, contributions, and disability criteria. To qualify, you must submit an application to Service Canada, which will review and either approve or deny your claim. If approved, you’ll receive monthly payments until age 65.
- Provincial disability benefits each Canadian province offers its own disability income program for eligible residents, serving as a safety net for those who do not qualify for other forms of disability income (i.e., the Ontario Disability Support Program (ODSP) in Ontario. These programs assess eligibility based on disability and financial criteria, meaning individuals can only qualify if their personal and family income, as well as assets, are below certain thresholds.
- EI Sickness benefits offer temporary income replacement benefits to eligible workers for a maximum of 26 weeks. To qualify, your income must have decreased by at least 40%, you need to be employed by a qualifying employer, and you must have accumulated 600 hours of insurable employment. EI Sickness is a federal program run by Service Canada.
Private disability insurance
In this section, we review the three different types of private insurance: group, individual and special purpose. This type of coverage isn’t funded by a government program. Instead, the premiums are paid by the policyholder.
Let’s dive in!
1. Individual disability insurance plans
Individual disability insurance is sold directly to consumers by insurance brokers. Unlike group disability insurance, this coverage is solely for the individual and is independent of employment status. It offers portability, meaning you can maintain it even if you switch jobs. However, acquiring individual insurance involves a more thorough application and medical screening process.
Individual insurance is common among high-income earners, professionals, business owners, and executives. These policies provide a fixed monthly payment rather than linking it to a percentage of your earnings.
Benefits disbursement can be contingent on income reduction rather than total disability. Payouts may be for a set duration (e.g., 2 or 5 years) or until age 65, with some policies extending beyond that age.
You will know if you have this type of policy because you would have to buy it through an insurance broker and pay ongoing premiums. Since you cover the entirety of premiums, long-term disability payments under individual insurance plans are exempt from income tax.
Benefits of individual insurance plans:
- Individual plans are extremely beneficial to high-income earners and professionals as coverage is more personalized and tailored to the individual
- Many individual policies only cover disability from “own occupation,” meaning you don’t have to prove your disability prevents you from doing “any occupation,” unlike most group policies
- You can maintain coverage even if you switch jobs
- Unlike most group plans, many individual plans cover partial disability. This is where a claimant may still be able to work but not to the degree to which they did before the disability, so the insurer will allow them to collect partial disability benefits
- Depending on your policy, benefits could go beyond age 65
- Disability payments are exempt from income tax
Disadvantages of individual insurance
- These plans are usually much more expensive compared to group plans
- More in-depth application process and medical screening
- You are required to pay all of the premiums (i.e., no help from your employer)
- Many individual policies provide a fixed monthly benefit amount (i.e. $2,000 a month). This fixed amount is tied to your regular income at the time you purchased the policy, not when you became disabled. This can be a positive or negative thing depending on whether you made more income at the time you purchased it or later on.
2. Group disability insurance plans
Group insurance differs from individual policies as it is designed for a group of people rather than a single individual. Typically, the purchaser is an entity such as an employer, union, or professional association. In Canada, approximately 10 million individuals are covered by long-term disability plans through group insurance schemes.
To access long-term disability coverage of this kind, enrollment in a group plan offered through one’s employment, union, or professional association is necessary.
Group insurance plans typically offer two categories of disability benefits:
- Short-term disability: These benefits provide a percentage of your income, typically around 70%, for a specified duration, such as 15, 26, or 62 weeks. Roughly 4.6 million Canadians benefit from group short-term disability coverage.
- Long-term disability: Long-term disability benefits within group insurance plans have a waiting period, often referred to as an elimination period. These benefits commence once short-term disability or Employment Insurance Sickness benefits expire. They are designed to cover 60 to 70% of your income, up to a predetermined maximum (e.g., $5,000). Hence, for high-income earners, group LTD benefits may not fully cover their income percentage. Supplemental individual insurance can be purchased to augment protection to 70% of income.
Group LTD benefits are provided for two years if you are unable to perform the essential duties of your own occupation. Subsequently, benefits are continued only if you are incapable of performing the duties of any occupation. The term “any occupation” holds legal significance and should be interpreted accordingly. During this phase, benefits can be received until reaching the age of 65.
It is customary for LTD payments to be offset by other payments received, including CPP disability benefits, WSIB, and employment severance. The specifics of these reductions vary from one plan to another, necessitating careful scrutiny of the plan details.
Group LTD benefits become taxable income if the employer contributes partially or fully to the premiums. Conversely, if you cover 100% of the premiums, your benefits are disbursed tax-free.
Benefits of group insurance:
- Much cheaper than individual insurance policies.
- You usually aren’t responsible for paying all of the premiums.
- Group plans typically have a more laid-back screening process.
Disadvantages:
- Coverage is less personalized. Tailored to a group, not a person.
- Group plans typically only pay disability benefits to people who are “totally disabled,” not to those who are “partially disabled.”
- If you quit or get fired before you apply for benefits, you will no longer be covered under the plan
- Own occupation coverage typically only lasts for two years, after which the test for disability becomes “unable to perform the essential duties of “any occupation.”
- Not well suited for high-income earners as there is a pre-determined maximum benefit amount
3. Special Purpose Insurance
Specialized plans offer coverage for various circumstances when your income is affected by disability:
- Auto Insurance: Provides income loss benefits if you’re unable to work following a car accident.
- Creditor’s Insurance: Covers visa, loan, or mortgage payments if a disability prevents you from working.
- Dismemberment Coverage: Offers a lump sum payment if you lose the use of a limb, hearing, or vision.
- Critical Illness: Provides a one-time lump sum upon diagnosis of a critical illness.
- Business Overhead: Offers either a one-time payment or monthly payments to cover business overhead and expenses.
- Travel Health Insurance: Reimburses medical expenses incurred while travelling.
Types of private disability insurance policy coverage
There are three main types of coverage offered under private disability insurance policies: sick leave, short term disability and long term disability. We will discuss each type in depth in the headers below.
Sick leave
Most private disability insurance plans provide employees with a specified amount of sick days. These sick days usually are full pay for a very short amount of time, i.e., a few days to a couple of weeks).
Short term
Many private disability insurance plans provide short term disability insurance benefits or salary continuation benefits, offering financial support to individuals requiring time off work for 1-3 months due to disability. The duration of these benefits varies depending on the terms outlined in the disability policy of each respective plan. It’s important to note that not all plans provide these benefits, so make sure to read your benefits booklet or talk to your plan administrator.
Long term
The other main type of coverage offered under private disability insurance plans is long term disability benefits. These benefits are meant to provide income for a more extended period of time — hence the name. These benefits provide disability replacement income for multiple years, often extending until the individual reaches the age of 65. Eligibility for long term disability insurance benefits requires coverage under a disability plan or insurance policy. This coverage may be through a group policy offered by your employer or union or through an individual disability insurance policy purchased independently.
Final thoughts about the different kinds of disability insurance
Disability insurance is something every worker should have. Whether it is a group or individual coverage, every Canadian should have some kind of protection against loss of income due to disability. Without disability insurance, you have limited options for long-term income support. You may qualify for CPP disability benefits, but those payments get capped at $1,606.78 per month in 2024. So, if you’re on the fence about whether paying the premiums is worth it, this article should be your sign to invest in your long-term health and financial stability.
If you need legal support, don’t hesitate to contact us today so we can discuss your situation in more detail.
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