Disability can happen to anyone, and it can have a significant impact on your life. If you can’t work due to a serious illness, you won’t be unable to support yourself and your family. That’s where long-term disability insurance comes in.
Here we will discuss what long-term disability insurance is and how it works. We will also discuss why you need it and important things to consider before choosing the insurance. Read on to find out more!
What is Long-Term Disability Insurance?
Long-term disability insurance is an insurance policy that provides income replacement if you are unable to work due to an illness or injury for an extended period.
This type of insurance is designed to help you maintain your standard of living and pay your bills if you become disabled and unable to earn an income. It gives you tax-free income on a monthly basis.
This type of insurance is especially important in Canada, where the government provides only limited support to those who become disabled.
How Does Long-Term Disability Insurance Work?
When you opt for a long-term disability insurance policy, you pay a monthly premium to the insurance company. In return, the insurance company agrees to pay you a portion of your income if you become disabled and unable to work for an extended period.
The amount you receive is typically a percentage of your pre-disability income, and the payments continue until you can return to work or until the policy’s benefit period ends.
Many long-term disability insurance policies have a waiting period before benefits begin. This waiting period is usually 90 days, and it is designed to ensure that the policy only pays benefits for long-term disabilities, not short-term illnesses or injuries.
Once the waiting period is over, you will begin receiving monthly benefit payments.
Why Do You Need Long-Term Disability Insurance?
The need for long-term disability insurance in Canada is significant. According to the Canadian Life and Health Insurance Association, one in three Canadians will experience a period of disability lasting longer than 90 days before the age of 65. If you can’t work due to an illness, the financial consequences can be devastating.
There are a few main reasons why you need long-term disability insurance:
1. Protects Your Income
Your income is your most valuable asset. Without it, you may not be able to pay your bills, support your family, or maintain your lifestyle. Long-term disability insurance protects your income by providing income replacement if you become disabled and unable to work for an extended period.
2. Employer-Provided Disability Insurance May Not Be Enough
Many employers offer disability insurance as an employee benefit. However, employer-provided disability insurance may not be enough to cover all your expenses if you become disabled. Most employer-provided disability insurance policies only cover a portion of your income, and the benefits may be taxable. Also, if you leave your job, you may lose your disability coverage.
3. CPP and QPP are limited
Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) are government-based pension plans that provide assistance and insurance to the disabled. But there are two downsides to these plans.
First, the definition of disability in CPP and QPP is very strict, meaning you have to have a prolonged and severe illness to be able to qualify. It can be either a physical or mental illness.
Secondly, they provide limited benefits. On average, CPP provides a monthly benefit of $950. The maximum was $1,362.30 in 2019. As of 2023, the maximum amount is $,1540.
4. Peace of Mind
Finally, long-term disability insurance provides peace of mind. Knowing that you have income replacement if you become disabled can reduce stress and anxiety and help you focus on your recovery.
How to Choose a Long-Term Disability Insurance Policy in Canada?
When choosing a long-term disability insurance policy in Canada, there are several important factors to consider:
Definition of Disability – As mentioned earlier, the definition of disability can vary between policies. Make sure you understand how your policy defines disability and what conditions you must meet to qualify for benefits. For instance, Canada Life insurance has a simpler definition of disability than the CPP.
Benefit Amount – The benefit amount is the percentage of your pre-disability income that the policy will pay. Make sure you choose a policy that provides a benefit amount that meets your financial needs.
The monthly benefit amount for disability insurance typically ranges from 50-70% of pre-disability income. The maximum monthly benefit amount available for disability insurance varies by policy and can range from $1,000 to $25,000 per month.
Benefit Period – This is the length of time that the policy will pay benefits. Choose a policy with a benefit period that is appropriate for your needs.
Waiting Period – This is the amount of time you have to wait after becoming disabled before you can start receiving benefits. Make sure you choose a policy with a waiting period that you can afford. On average, the waiting period is 90 days. But it ranges from 30 days to a year.
Premiums – Premium is the amount you pay to register for the insurance policy. The cost of premiums can vary significantly between policies. Make sure you choose a policy that provides good value for your money.
On average, premiums range from 1-9% of your salary. But coverage amount, benefit period, waiting period, age, your health, and occupation are all considered to determine your premiums.
Final Thoughts
Long-term disability insurance can give you peace of mind that if you’re prevented from earning an income due to disability, you’ll won’t be in financial peril. It’s a wonderful safety net that has allowed thousands of people to maintain their quality of life, even after disability.
