What is Disability Insurance?
Disability insurance is designed to replace a portion of your income if you become disabled and are unable to earn an income. A disability can result from a number of causes, including an injury, a serious illness or a mental health issue. And the duration of a disability can be either short- or long-term.
There are different kinds of disability insurance coverage, including individual insurance plans and group insurance plans, as well as government plans such as workers’ compensation and benefits provided under the Canada Pension Plan.
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Types of disability insurance
There are two main types of disability insurance — short-term and long-term coverage. Both replace a portion of your monthly base salary up to a cap, such as $10,000, during disability. Some long-term policies pay for additional services, such as training to return to the workforce.
SHORT TERM VS. LONG-TERM
|Short-term disability insurance||Long-term disability insurance|
|Typically replaces 60% to 70% of base salary||Typically replaces 40% to 60% of base salary|
|Pays out for a few months to one year, depending on the policy||Benefits end when the disability ends. If the disability continues, benefits end after a certain number of years or at retirement age.|
|May have a short waiting period, such as two weeks, after you become disabled and before benefits are paid||A common waiting period is 90 days after disability before benefits are paid|
Disability policies vary in how they define “disabled.” Some policies pay out only if you can’t work any job for which you’re qualified. Others pay out if you can’t perform a job in your occupation. Some policies cover partial disability, which means they pay a portion of the benefit if you can work part-time. Others pay only if you can’t work at all.
Disability policies have two different protection features that are important to understand:
- Noncancelable means the policy cannot be canceled by the insurance company, except for nonpayment of premiums. This gives you the right to renew the policy every year without an increase in the premium or a reduction in benefits.
- Guaranteed renewable gives you the right to renew the policy with the same benefits and not have the policy canceled by the company. However, your insurer has the right to increase your premiums as long as it does so for all other policyholders in the same rating class as you.
How to get disability insurance
Here are ways to get coverage:
- Buy disability insurance through the workplace. Some employers don’t pay for disability coverage but offer it as a voluntary benefit. This lets employees buy coverage through the employer’s insurance broker at a group rate.
- Buy an individual disability insurance plan. You can get it from an insurance broker. Most individual disability policies sold are for long-term coverage, although some companies also offer short-term policies.
In addition to the traditional disability policies, there are several options you should consider when purchasing a policy:
- Additional purchase options
Your insurance company gives you the right to buy additional insurance at a later time.
- Coordination of benefits
The amount of benefits you receive from your insurance company is dependent on other benefits you receive because of your disability. Your policy specifies a target amount you will receive from all the policies combined, so this policy will make up the difference not paid by other policies.
- Cost of living adjustment (COLA) The COLA increases your disability benefits over time based on the increased cost of living measured by the Consumer Price Index. You will pay a higher premium if you select the COLA.
- Residual or partial disability rider This provision allows you to return to work part-time, collect part of your salary and receive a partial disability payment if you are still partially disabled.
- Return of premium
This provision requires the insurance company to refund part of your premium if no claims are made for a specific period of time declared in the policy.
- Waiver of premium provision This clause means that you do not have to pay premiums on the policy after you’re disabled for 90 days.