The Ultimate Guide to Disability Insurance in Canada

Is disability insurance a good idea? Life has a way of throwing curve balls. No one wakes up on a good day expecting to be involved in an accident or unable to work due to an illness. But it happens even more often than we would like to admit. Disability insurance helps to cover expenses should the unexpected happen.

When you find yourself in a situation where you can not keep earning income due to an injury or illness, this can lead to financial anxiety. Bills do not stop. You have to pay for living expenses and/or provide for dependents. If you have disability insurance, you can get some financial relief.

Keep reading to find out everything you need to know about disability insurance in Canada. 

Disability insurance explained

What is disability insurance? Like any other insurance, disability insurance provides financial relief if an eligible illness or accident occurs. 

If you cannot work to earn an income due to a certain illness, accident, or injury, you can receive income replacement with disability insurance. This type of insurance provides coverage if you’re incapable of working for reasons covered by the policy.

Amount of coverage

Disability insurance plans can provide up to 85% of your pre-tax income, or sometimes even more. The amount you receive depends on your coverage and plan provider. 

Length of coverage

You can get short-term or long-term disability insurance depending on how long you need to be off work due to your injury or illness. Some employers provide short-term disability and long-term disability benefits. 

Premiums & employment conditions

However, some employer-provided disability benefits require you to pay some money from your paycheque for a group plan. Your employer may cover all or a portion of your disability insurance premium. Your employer benefits may depend on your position, and time with the company.

Also, it is important to note that most disability insurance coverages with an employer are only valid if you are actively employed. When you leave an employer, your disability insurance plan may expire.

If you don’t have coverage

If you do not have disability insurance coverage from your employer, are self-employed, or are a contractor, you may need to purchase your own disability insurance from a plan provider.

Short-Term Disability Insurance

Short-term disability (STD) insurance provides financial coverage when you cannot work for weeks or a few months due to sickness and/or injuries. If you are employed and have exhausted your paid sick leave with your employer, you can use short-term disability insurance for short periods of up to 6 months or even a year, depending on your plan. 

Short-term disability insurance plans are only for temporary situations until you recover and return to work within a short period.

Long-Term Disability Insurance

Some illnesses or injuries put you out of work for a very long time. Long-term disability (LTD) insurance provides for more permanent or longer-lasting illnesses and/or injuries. A long-term disability plan can span up to one year or more. Some coverage plans allow you to claim long-term disability benefits until you turn 65 or 70 years old. 

Long-term disability benefits usually start when you have exhausted your sick leave and short-term disability coverage. Some long-term disability insurance plans provide rehabilitation to help you recover and return to gainful work.

Employment Insurance vs Disability Insurance

Most people without an employer disability coverage plan often stall in getting a private disability insurance plan because they think they can rely on employment insurance.

Employment Insurance (EI)

The Government of Canada provides sickness benefits through Employment Insurance (EI). If you are employed, chances are that payroll already deducts EI payments and remits to the government. If you are self-employed, you can opt for Employment Insurance and make the required monthly payments until you reach the maximum contribution in a year. 

EI time limit

With Employment Insurance, you can only get 15 weeks of financial relief for not being able to work due to medical reasons. Also, Employment insurance only covers 55 percent of your pre-tax income, and you can not receive more than $638 per week. 

EI coverage amount

If you do not have short-term or long-term disability coverage, a disability that spans more than 15 weeks may leave you financially vulnerable. Also, compared to some disability insurance payouts that provide up to 85 percent of your earnings, 55 percent from Employment Insurance may not be sufficient for your family’s needs.

Other federal government disability assistance

Don’t fret if you do not have long-term disability insurance coverage. You may be eligible for government-assisted coverage through your pension.

CPP & QPP

Generally, if you are not 65 years of age yet, and you suddenly cannot work due to a physical or mental disability, you may qualify for Canada Pension Plan (CPP) disability benefits or the Quebec Pension Plan (QPP) disability benefits. 

Coverage

Both plans pay you monthly in the event of a disability that stops you from earning income, provided you made the required contributions to CPP or QPP. Canada Pension Plan disability benefits and Quebec Pension Plan disability benefits provide financial assistance for long-term disabilities or terminal illnesses. 

Age restrictions

If you are between the ages of 60 to 65 and have already started collecting pension payments, you may qualify to receive monthly CPP post-retirement disability benefits.

Dependants

When applying for the pension plan disability benefits, check to see if your children or dependants also qualify to receive the Canada Pension Plan (CPP) Children’s benefit. To become eligible, your children must be under 18 years. If older, between 18 and 25, they must be attending school full-time to qualify. 

Documents & application

When getting Employment Insurance or other types of government-assisted disability payments, you need to provide a medical report that backs up your application to receive payments. 

Disability pension benefits take a long time to process. Your application can take up to four months. To stay afloat when you can not work to earn income, ensure you have an emergency fund saved up or other means of coverage.

If you are currently employed, you may have broader disability coverage and higher payments with your employer, so check with your human resources department to see what your disability benefits include. 

Claiming disability insurance benefits or Worker’s Compensation

Some severe health conditions are directly caused by the work you do for an employer. For example, if you work in a manufacturing company and get injured by equipment on site, that is considered a work-related injury. 

Your employer may provide insurance for work-related injuries and illnesses. If your employer pays Worker’s Compensation premiums and you sustain a work-related injury or illness, you can get benefits through your provincial Worker’s Compensation Board. 

If you receive Worker’s Compensation Board payments due to an injury caused by your occupation, you may not be entitled to full Employment Insurance (EI) benefits or disability insurance coverage.

How to get disability insurance in Canada

Employers may provide disability insurance coverage through a group plan when you become employed. Some employer-provided disability group plans require you to work for months before joining the insurance plan. 

Private insurance

If you do not belong to an employer-provided disability group plan, you can buy private disability insurance from any insurance company that provides that insurance coverage. 

Application process

Some insurance providers allow you to apply online. For others, you may need to walk into a physical branch to apply for a disability insurance plan.

Premiums

Since disability insurance replaces your income if you are not able to work due to medical reasons, you must ensure that you get a good plan that provides enough for your living expenses. A good disability insurance plan may be more expensive, but it gives you peace of mind in the event of a long time away from earning income. 

Do your research to compare insurance providers and review their plan coverages and costs to determine what works best for you.

Medical history & exam

When you choose an insurance provider and send in an application, they will usually request personal and medical history information to assess your application. Some insurers require a medical examination and provide disability insurance limitations.

Federal benefits

If your employer deducts Employment Insurance premiums from your paycheque up to the required maximum and you have worked for the required hours in a year, you can get access to Employment Insurance benefits. You need to send in a sickness EI application, which you can do online.

When applying for sickness EI, you must provide your social insurance number (SIN), address, records of employment (ROE), medical certificate, and other required documents.  

Provincial benefits

As long as you make sufficient contributions to the Canada Pension Plan or Quebec Pension Plan in the year, you can get financial relief when you can not continue gainful work due to an illness or injury. You may also qualify for provincial disability benefits and assistance if no one in your household earns income. 

Types of coverage

The disability insurance coverage you get can vary across insurance providers and plans. Coverage can be defined as ‘any occupation’ or ‘own occupation.’

Any Occupation

When you have an ‘any occupation’ disability insurance coverage, it usually means you can receive disability benefits provided you can not work for any employer or any other job. You must be unable to perform any kind of work. If your illness or injury allows you to work elsewhere from your current employer, you may not qualify for disability insurance payments. 

Own Occupation

‘Own occupation,’ sometimes called ‘Regular occupation,’ provides disability insurance benefits if you can not continue with the current job you had before you became unable to work due to an injury or illness. 

If you have “own occupation” disability coverage, being able to work with a different employer or in a different job does not entirely disqualify you from receiving disability insurance benefits. Check with your insurer to ensure you can receive benefits if you work at a different job while claiming disability insurance.

Group vs private coverage

Some employer-provided. also called group benefits, disability insurance plans provide ‘own occupation’ disability insurance coverage, which changes to ‘any occupation disability coverage after some time. 

When you purchase private disability insurance, you can choose if you want an ‘own occupation’ or ‘any occupation’ coverage. Generally, ‘own occupation’ disability insurance plans cost more than ‘any occupation’ plans.

Your type of work, education, training, and skills will determine which disability insurance coverage is more beneficial for you.

How much coverage will I receive?

The amount you receive from an employer-provided disability insurance plan is not set in stone. 

Employer coverage

Most employers try to provide benefits that exceed the Employment Insurance benefit of 55 percent. Generally, disability coverages range from 65 percent to 85 percent. 

Some employers provide a fixed percentage of your gross earnings up to a maximum amount, and others may offer a stepped-benefit plan with percentages changing after a certain amount. 

For example, you may get 75 percent of your gross earnings on the first $3,000 and 66.7 percent on the amounts you receive after that. 

Also, the number of weeks of coverage you get for short-term disability insurance varies across employers and insurance providers. You may get short-term coverage of up to 17 weeks and long-term coverage of up to 2 years.

It is important to note that some insurance providers reduce your disability insurance benefits if you receive additional income from other sources. Generally, you can not get more than a certain amount in total if you have coverage from two or more insurance plans.

Supplemental coverage

For a higher premium, you can purchase additional coverage for loan and credit card repayments, including your mortgage payments, when you stop working due to an illness or injury. 

The disability amount you receive may vary based on how much you paid into the Canada Pension Plan.

Federal & provincial coverage

As of 2022, the CPP retirement disability benefits pay an average amount of $1,053.20 up to a maximum amount of $1,464.83. The CPP Post-retirement disability benefit pays up to $524.64.

The CPP child benefit is a flat rate that gets adjusted annually. The 2022 CPP child benefit rate is $264.53.

The Canadian government reviews the monthly Canada Pension Plan every month and reviews it annually to account for an increase in the cost of living. With higher inflation rates, this review could come in handy.

Taxes on disability benefits 

You may need to report certain disability benefits when you file your income tax return.

The Canada Revenue Agency taxes disability benefits you receive from the Canada Pension Plan (CPP) disability benefit and Employment Insurance. 

Employer benefits

For employer-provided disability insurance plans, you may need to pay taxes on payments you receive when you claim disability benefits. When an employer pays your full or partial disability insurance premiums, this is a taxable benefit.

Private plan benefits

If you purchase a private disability insurance plan and pay all your premiums, the CRA generally will not tax your disability benefits. If you are unsure about taxes on your disability insurance benefits, you can always contact the Canada Revenue Agency for clarification.

Tax credits

You can claim disability tax credits (DTC) when filing your taxes. You do not automatically qualify for this tax deduction, and you will need to apply for it. If you are eligible for disability tax credits, you can also open a registered disability savings plan (RDSP) to save and invest in a tax-advantaged account.

Benefits of disability insurance

Disability insurance ensures you are not stranded when you can not work due to health reasons. At such a critical moment of your life, being able to receive benefits to cover your bills and expenses, and take care of your loved ones can help reduce anxiety. 

Housing expenses, groceries, and children’s expenses make up a substantial portion of monthly household expenses. Disability insurance can help offset these costs when you are vulnerable and unable to earn income. 

Some payments from disability insurance benefits are tax-free. Paying your full disability insurance premium out of pocket may give you access to benefits without tax.

How much coverage do I need?

With disability insurance, you may be getting too little or too much coverage. The amount of coverage you should get depends on many factors.

Do you have group benefits through work?

For example, you need to consider if you already have a disability insurance plan with your employer. If your employer group plan is sufficient for your financial needs when you can not earn income, you may not need additional coverage.

However, leaving your employer may strip you of any disability insurance benefits. Likewise, if you start working for a new employer, you may have a few months without disability insurance benefits. For this reason, some people buy private disability insurance coverage. 

What percentage of your income is covered?

Employer-provided disability insurance may not provide adequate coverage for you and your family. For example, if your disability insurance group plan only replaces 60 percent of your gross income due to your inability to work for medical reasons, this amount may not be sufficient to cover your financial responsibilities. In this case, you can purchase additional disability insurance coverage to replace as much as 90 to 100 percent of your income. 

Do you have other types of coverage?

Before you buy disability insurance, evaluate other types of insurance plans you have. If you have critical illness insurance, you may or may not need a disability insurance plan. Of course, this depends on the terms and conditions of the plans and what illnesses the insurer covers.

Some terminal illnesses such as cancer, brain injury, kidney failure, stroke, and heart diseases may be covered under critical illness and disability insurance. 

Your age, medical history, and the number of dependents you have can also play an important part in determining how much disability insurance coverage you need.

Factors to consider when buying disability insurance

When you want to purchase a disability insurance plan, ask your provider important questions to help you buy the right plan. Ask questions on the following:

• How much the premium costs
• How long you will get disability insurance coverage for
• The types of physical and mental disabilities/illnesses covered
• The percentage of income replacement
• If the policy provides ‘own occupation’ or ‘any occupation’ coverage
• How long is the waiting period before disability payments start
• Definition of disability and any limitation clauses
• Tax implications on disability insurance benefits

FAQs on Disability Insurance