How Much Disability Insurance Do I Need?

Disability insurance is a legally binding contract between you and the insurer. In return for premiums, the insurer promises to pay a part of your income if you are unable to work due to injury or illness. You can use the cash benefit anyway you like to maintain your lifestyle, from paying groceries or energy bills to childcare expenses and out-of-pocket medical bills.  

The amount of money you receive is fixed. Generally speaking, disability benefits are anywhere between 40% and 80% of your gross monthly income. If you become disabled, the benefit payments will start after the waiting period. The waiting period may vary from one insurer to the next, but it is usually not greater than 90 days. 

Types of disability insurance

Disability insurance is either short-term or long-term.

Short-term Disability Insurance

Short-term disability insurance pays a percentage of your salary — usually 40% to 60% — if you are unable to work because of injury or illness. It covers almost all conditions that can prevent you from earning an income, though what is actually covered depends on how your policy defines total disability. Pregnancy is generally not covered by short-term disability, although complications resulting from pregnancy are covered.

Short-term disability coverage usually starts between one and 14 days after you are unable to work. To bridge the gap until the coverage starts, you can use sick days. Typically, a short-term disability insurance policy pays out for three to six months; some plans, however, may issue compensation for up to a year. If your disability extends beyond this period, you can use your long-term disability insurance coverage.  

Long-term disability insurance

Long-term disability insurance replaces a portion of your gross monthly income if you cannot work as a result of an injury or illness. Long term disability insurance has a much longer waiting period than short-term disability insurance. The waiting period is typically 90 to 120 days, but some plans may give you the option to choose a longer waiting period in return for lower premiums.  

The benefit period is usually two, five, or 10 years, or until age 65. For most people, a five-year benefit period is likely to suffice, since the average duration of a long-term disability is three years. If you become disabled, you will receive a fixed compensation each month until the benefit period expires or you resume work, whichever is earlier.  

Why do you need it?

If you were unable to work due to illness or injury, would you and your family be able to cope?  

A disability can cause not only physical distress but also financial hardship. Financial hardship, however, is easily preventable. Disability insurance cover ensures you will have a steady stream of income if you lose your ability to work because of injury or illness and provides you security and peace of mind. With this money, you can keep yourself or your family afloat until you are fit enough to return to work.  

The risk of disability is greater than you may think. One in five people in Canada aged 15 and older have a disability. More disabilities are caused by illness than accidents, with illness accounting for nearly 90% of all disabilities. Therefore, even if you have a desk job, you are still at risk of disability. Disability insurance is for everyone, regardless of your job — whether you are a truck driver or a computer engineer.  

How much disability insurance should you buy?

People looking for insurance coverage often ask, “How much disability insurance do I need?”

There is no one-size-fits-all answer to this question because it depends on several factors. The following guidelines will give you an accurate estimate of the amount of financial assistance you will need if you lose the ability to work.  

• Calculate how much you spend per month on living expenses

Keep in mind if you become disabled, you are not likely to spend as much as you did when you worked. Some expenses that you may save on include commuting costs, a professional wardrobe, or eating out.  

Important expenses that you must include in your calculations include:  

• mortgage or rent

• groceries
• utilities
• childcare
• education expenses
• health insurance

• car expenses such as auto insurance, car maintenance, and petrol
• household maintenance
• travel expenses
• clothing expenses
• debt payments

• saving and retirement contributions.

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• Calculate the income you will continue to receive

Calculate how much income you will continue to receive from sources such as savings and investments.  

• Subtract the second number from the first

The difference between the first and second figures is the amount of disability coverage you need.  

How do I get disability insurance?

You can purchase disability insurance either as an individual or through your employment.  

Your employer may offer short term disability insurance or long term disability insurance or both as part of their employee benefits package. Self-employed individuals may be able to buy disability insurance through a professional association. If group disability insurance is available, this is an attractive option because the premiums are typically lower than individual plans. Sometimes, the coverage may even be available for free.

Keep in mind that if your employer pays the insurance premiums, the benefits will be taxable. For example, if your group policy replaces 60% of income, you may actually end up with 45% or 50% of your earnings, depending on your tax bracket. This is one of the reasons why relying solely on your group disability insurance plan may not give you adequate protection. The other reason is lack of portability. Group disability insurance is tied to your job. If you change jobs, the coverage will end.  

In contrast, the payout of an individual policy is not taxable since you pay the premiums with after-tax dollars. As such, you know exactly how much money you will receive on a monthly basis. Also, unlike a group policy, you can customize an individual disability insurance plan. You can tweak the coverage to meet your specific needs by adding relevant riders. (See below for more information on riders.)

If you are looking for an individual disability insurance policy, it is a clever idea to get as many quotes as possible. With premium rates varying from one provider to the next, you may be able to cut down your costs considerably by shopping around. Because many Canadian insurance companies still do not offer online quotes, consider working with an independent broker. An independent broker will assess your disability needs and recommend the best coverage for your specific needs.  

How much does disability insurance cost?

Usually, disability insurance costs 1% to 3% of your income. Exactly how much you will pay depends on your risk profile. The riskier you are to insure, the higher the monthly premiums. Your life insurance company will look at various factors to accurately assess your risk profile, including:  

• Age

Like life insurance, disability insurance becomes more expensive with age. Older people are at a greater risk of injury or illness than younger applicants.  

• Gender

Women pay more than men for disability insurance, partly because women file more claims and partly because their claims tend to be more expensive. How much more? As a woman, you could expect to pay up to 40% more than a male counterpart for the same level of disability insurance coverage.  

• Health

The healthier you are, the more affordable disability insurance will be. Unhealthy behaviours such as smoking can push up your contribution rates, as can pre-existing conditions such as high blood pressure. The underwriter will take these into account when assessing your application.  

• Benefit amount

The more coverage you need, the costlier disability insurance will be. Someone who earns a six-figure salary will need more coverage than someone who earns less, and hence will have to pay more in premiums.  

You may be wondering: “How much disability insurance do I need?” For most people, 60% to 70% of the gross salary is a sweet spot for income replacement. Since the benefit payments of individual disability plans are tax-free, 60-70% will be approximately equivalent to your current take-home salary.  

• Waiting period

The waiting period — also referred to as the elimination period — is a short period between when you become disabled and when the benefit payments become payable. The longer the waiting period, the lower the premium rates.  

• Benefit period

The maximum period for which a disability insurance policy pays monthly benefits also impacts premium rates. For example, if your policy has a benefit period of six years, it will issue benefit payments for six years or until you are fit enough to work, whichever is earlier. Generally speaking, the longer the benefit period — also called the payout period — the greater the cost.  

• The definition of disability

Disability insurance policies define total disability as either own-occupation or any-occupation. Own-occupation defines disability more broadly, hence these policies cost more than comparable any-occupation disability plans.  

With own-occupation, you are eligible for compensation if your injury or illness prevents you from performing the main duties of your chosen occupation, even if you could work in other suitable professions based on your education, experience, and professional training. In contrast, an any-occupation disability insurance policy pays out only if you cannot work in any occupation for which you are reasonably qualified.  

• Occupation

Even though more disabilities occur due to illness than accidents, the nature of your job affects the price of your premiums. . Certain jobs, for example, logging, are more dangerous than others. If your profession has a higher fatal injury rate, expect higher disability insurance premiums.  

• Riders

Riders are optional provisions that you can add to your policy at affordable rates to enhance your benefits or coverage. Many life insurance companies in Canada offer disability insurance coverage with riders so that you can customize the policy according to your needs. The more riders you add to your base policy, the higher the monthly premium.  

Some of the common additional benefits offered with disability insurance include:  

• Future increase rider: This rider allows you to increase your disability insurance coverage each year as your income increases. You will not have to go through medical underwriting to enhance cover, but your premiums cost will go up.  
• Cost of living adjustment (COLA) rider: This rider increases the monthly disability payout by a fixed percentage every year to offset inflation. Therefore, if you are unable to work due to a disability, you will receive increasing benefits every year.  
• Basic or enhanced partial disability benefit rider: Both basic partial and enhanced partial riders can compensate income loss if you sustain an injury or develop an illness that restricts your ability to work. These options pay you if:

• You cannot perform some of the duties of your chosen profession.
• You cannot be as productive as you were before your disability.  

• You can only work reduced hours.
• You have recovered from your disability but continue to suffer loss of income.  

The basic partial disability benefit rider kicks in when you suffer a loss of income of 20%, or cannot work as many hours as previously, or cannot perform all the duties of your job. The enhanced partial disability benefit pays monthly benefits as long as you suffer at least a 15% loss of income because of disability. The enhanced partial disability benefit also pays benefits if you resume work full-time but are yet not earning your pre-disability salary.  

• Student loan protection rider: If you buy this rider, you will receive some extra money to help you pay off your student loan if you cannot work due to disability.
• Return of premium rider: The insurer will pay you back some or all or your premiums if you never file a claim.  

What are the benefits of disability insurance?

If you experience an illness or injury and cannot work, disability insurance can help pay for essential expenses such as groceries, utility bills, mortgage payments, and car insurance. Except in rare situations — for example, if you sustain a self-inflicted injury — disability insurance covers all illnesses and injuries that can result in total disability. With a robust disability insurance protection, you can rest assured knowing you will not face financial hardship if you cannot work and it will provide you with security and peace of mind.  

What if you have group long-term disability insurance?

Some Canadian employers offer their workers disability insurance coverage as part of the employee-benefits package. If you have access to group long-term disability insurance, you might be wondering if you still need an individual policy. Assessing whether you need an individual policy depends on a  the following:  

• How much disability insurance coverage the group plan offers. It is possible that group policy insurance may not be sufficient for your needs. If so, it might be a good idea to purchase an individual disability insurance policy.  

• Can you rely solely on the group plan? Group disability insurance policies are usually not portable. If you leave or lose your job, you will lose the coverage. Also, if your health at the time you leave or lose your job is not as good as it is now, you may have to pay a hefty premium for a new policy.  
• As the group disability coverage is usually offered as a part of the employee benefits package, the employer can discontinue or lower the benefits without warning. Therefore, you may want to consider an individual policy even if your group disability insurance plan is adequate for your current needs.  

Are their government disability benefits?

Government disability benefits are available in Canada, but for most people, they are not likely to be enough. Government disability benefits include the Canada Pension Plan (CPP) disability benefit, Employment Insurance (EI) sickness benefits, and Workers’ Compensation.  

• CPP disability benefit: This benefit offers monthly payments if you have contributed to CPP and cannot work as a result of severe injury or personal illness. CPP disability benefits payments are available until the age of 65.  
• EI sickness benefits: This benefit provides temporary financial assistance if you are unable to work because of medical reasons. You can receive weekly benefits for up to 15 weeks. The payout is 55% of your income or $638 a week, whichever is less.  
• Workers’ compensation: This benefit provides medical treatment and salary protection if you suffer a work-related injury or illness.  

Each of these programs has one or more limitations. For example, CPP disability benefit payments are quite small, so you are likely to find it hard to maintain and support your lifestyle with this benefit alone. EI sickness benefits only offer short-term disability coverage and are therefore inadequate in the event of long-term disability. Workers’ compensation provides the most comprehensive coverage of the three, but it is only available for workplace related injuries and illnesses, which account for only a small percentage of all disabilities.  

Conclusion

Disability insurance is insurance for your pay check. If you cannot work because of a disability, your policy will replace a portion of your pre-disability income. Most financial experts recommend you should aim for disability insurance coverage of 60% to 70% of earnings. A Dundas Life expert can help you assess your exact disability coverage needs and find the best coverage at the lowest possible rate and provide you with proper security and peace of mind.  

Frequently Asked Questions

Can you buy a disability insurance policy that replaces 100% or more of your salary?

No, you cannot. Insurance providers do not offer disability insurance plans that cover 100% of pre-disability income. Generally speaking, these policies cover 40% to 80% of salary. However, since the monthly benefits are usually not taxable in the case of an individual disability policy, 60% or 70% is likely to be very close to take-home pay.

How does disability insurance work?

If you are unable to earn a pay check because of injury or illness, your disability coverage will pay you a fixed amount of money each month. You can use the cash benefit anyway you like and do not need to submit any bills to receive it.  

Can you buy disability insurance if you are unemployed?

You cannot buy disability insurance if you are not currently working. If you find yourself in this situation, critical illness insurance — which pays a lump-sum if you are diagnosed with a covered health condition — might be worth considering.  

Should I buy a short-term disability insurance policy if I have long-term disability insurance?

The answer to this question depends on whether you can support yourself and your family if you were unable to work for three or six months. If you cannot, consider buying short-term disability insurance. Long-term disability coverage typically takes 90 to 120 days to start payments. During this time, a short-term disability insurance policy can keep you afloat.  

What does disability insurance cover?

Disability insurance usually covers any illness or injury that causes total disability. although how total disability is defined and what is actually covered will depend on your policy. Some disability insurance plans also provide financial assistance in the event of presumptive disability and partial disability. Different disability insurance plans will vary in cost.

Who needs disability insurance?

Disability insurance is for everyone who will find it difficult to maintain and support their lifestyle if they cannot work due to a disability. People with dependents and/or outstanding debts should also consider taking a disability insurance policy.