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Did you know that 1-in-4 Canadian adults will become disabled before the age of 65?
For disabilities that last longer than 90 days, the average length is almost six years. Most people disabled that long will have their plans for the future derailed.
That’s where a disability insurance policy can be a lifesaver. By providing a monthly benefit if you can’t work due to an injury or illness, you protect your ability to make a living. Disability insurance is essential for working-class Canadians who want a secure financial future in case of a long-term disability.
But, how much disability insurance should you have? And how much does it cost? Find out the answer to these and more in this post.
- Key takeaways:
- You need to make sure your disability policy pays enough to cover your living expenses, replace your income, and save for retirement.
- Your income, age, and occupation affect how much disability coverage you can buy.
- The price of disability insurance depends on many factors like your age, gender, smoking status, and policy design.
How Much Long-Term Disability Insurance Should You Get?
When it comes to disability insurance benefits, the more coverage, the better. That said, you can’t go out and buy as much as you want (more on that later). Instead, you need a reasonable amount that is enough now and in the future. A critical factor to keep in mind is inflation, which could erode your purchasing power years down the road.
Here are some questions you need to ask yourself when deciding to buy disability insurance.
How much disability coverage do you need to maintain your lifestyle?
The thought of someday not being able to work can be scary. After all, how can you maintain your lifestyle without any earnings?
Therefore, lifestyle should be the first thing you consider when determining how much of a monthly benefit to buy. However, maintaining your current lifestyle is only the starting point. A disability can have a permanent effect on your lifestyle, so there might be other costs you need to consider.
The three things to keep in mind when it comes to your lifestyle are:
- Having enough monthly benefits to cover your cost of living
- Replacing a portion of your income
- Putting away extra money into your retirement savings account
A disability insurance calculator can help you determine how much you need. But first, let’s into more detail for each point.
Cover your living expenses
Even when you are disabled, you still need to pay your bills. Recurring monthly expenses continue for things like mortgage payments, groceries, and utilities. Not to mention extra costs that you might incur, such as medical bills and travel costs to see a specialist.
Fortunately, you’re more likely to see your monthly expenses decrease. That’s because you:
- No longer have travel expenses for work
- Don’t have to eat out for lunch as often
- Can save on recreational activities that you can’t do anymore
- Can move further away from the city where your workplace is
Whether your cost of living increases or decreases, your disability insurance benefits can get you through tough times.
Replace your income
Disability insurance replaces your income. How much it can replace depends on your earnings. Typically, the insurance company will let you buy 50-80% of your monthly net income before tax as income replacement.
Why such a wide range? Because you receive the disability payout tax-free. That means those in a higher tax bracket can replace closer to 50% of their net income, while those in a lower tax bracket can buy closer to 80%.
For example, if you made $120,000, you can buy $6,000 of monthly benefits, replacing 60% of your net income. However, if you made $50,000, you can buy $3,000 of monthly benefits, replacing 72% of your net income.
That being said, you don’t have to buy the maximum amount that you qualify for based on your income. If you make a good living but don’t have too many expenses, you can opt for a smaller amount.
For the most part, most people should buy the maximum amount they can based on their income. After all, that’s the only way to protect your income fully.
Here are some other income levels and the amount of disability insurance you can buy:
$30,000 income: $1,900/month benefit
$75,000 income: $4,200/month benefit
$100,000 income: $5,200/month benefit
$150,000 income: $7,000/month benefit
$200,000 income: $8,000/month benefit
Put into savings
Are you saving money for retirement? How will a long-term disability affect how much you can save? Even a short-term disability can push your retirement date back by several years.
With a disability policy, you don’t have to worry about an unexpected injury or illness derailing your retirement plans. After covering your living costs, you can save the rest in a retirement savings account.
Although the disability income won’t give you RRSP contribution room, you can still save money tax-sheltered inside a tax-free savings account (TFSA). Although the name implies you can only put it in savings, you can use the TFSA for many investments. For example, you can buy stocks, GICs, mutual funds, and more.
What if you have group LTD?
Are you one of the Canadians fortunate enough to have disability insurance coverage through your workplace? If so, you might be wondering if you need individual disability insurance. To answer that question, you need to read your benefits booklet to see if you have enough coverage.
You should also consider if you can rely on your group plan. Your employer can lower or cut your benefits at any time without warning. You might also leave your job for another one that doesn’t provide disability insurance.
Either way, you’re left without disability coverage at a critical time. So it’s worth considering buying disability insurance now even though you’re covered through work.
What about government disability benefits?
For the most part, disability benefits from the government aren’t going to help you much. The three key players here are EI sickness benefits, CPP disability benefits, and workers’ compensation.
EI only provides short-term disability coverage, so it can’t help you with a long-term disability. CPP only provides a small benefit, leaving you with a significant shortfall. Finally, workers’ compensation only provides coverage for workplace accidents, which only account for a small proportion of all disabilities.
How Much Disability Insurance Can You Get?
The amount of disability insurance you can get depends on three factors, your income, age, and occupation class.
Income: The absolute most you can buy is $25,000/month, and that’s if you make close to $1,000,000 per year. For regular folks, they’re looking at closer to $3,000/month in disability income if they make $50,000 and $8,000/month if they make $180,000.
Age: Since the risk of disability insurances as you get older, insurance companies limit their exposure by reducing the amount older workers can buy. So those limits above only apply for people 55 and under. If you’re 56 and above, you can’t buy as much disability insurance coverage.
Occupation class: Lastly, your occupation also plays a significant role in the amount of disability coverage you can buy. Insurance companies separate occupations by class, with low-risk occupations being able to buy a larger amount.
What if you want to increase your disability insurance benefits in the future?
Let’s face it; your income won’t stay the same throughout your career. You’re likely to receive promotions, get pay raises and bonuses, and change jobs before all is said and done.
Does it make sense that your disability benefit stays the same until you retire? If you answered no, you’ll be happy to know you can do something about it.
The first is with a rider called future income option. By adding this rider for a small cost, you can increase your disability benefit in the future without providing any medical evidence. All you need to do is provide proof that your income increased. This is important because a medical condition later in life could make it hard to qualify for coverage.
If you don’t need that guarantee, you can simply top-up your coverage as your income increases. The easiest way to do this is to increase the coverage on your current policy. However, you can also buy another policy. Keep in mind that either way, you will have to go through the underwriting process again to qualify for the coverage.
Can you have too much disability insurance?
The short answer—no. Insurance providers would never let you have unlimited disability insurance benefits. Their philosophy is that you shouldn’t make more during a claim than employed. After all, you need some financial incentive to return to work. The gap between your monthly income and the disability coverage acts as this incentive.
So, disability insurance is there to help you in your time of need, not to give you a lavish lifestyle for the future.
How Much Does Long-Term Disability Insurance Cost?
The cost of long-term disability insurance varies depending on several factors. To give you a better understanding of how much disability insurance costs, here is a brief explanation of the main factors.
Age: The younger you are when you get disability insurance, the less expensive it is. That’s why you should get a policy as soon as you can.
Gender: Because women make more claims than men, disability insurance costs more for women than men.
Smoking status: Smokers are more likely to develop debilitating diseases, making them more prone to disabilities than non-smokers. As a result, expect to pay more for disability insurance if you are a smoker.
Occupation: In general, people working in highly specialized fields represent a lower risk for disabilities. Therefore, accountants and physicians pay less for disability insurance than truck drivers and postal workers.
Definition of disability: You can either get an any occupation or own occupation policy.
Any occupation means if you are disabled in your job but can perform any other occupation that you qualify for based on your training, education, and experience, you would not receive benefits. The insurance company can withdraw its coverage when it believes that you are fit enough to do another job.
However, own occupation coverage means you can continue to claim benefits if you can’t work your job, even if you started another elsewhere. As a result, own occupation coverage costs more.
Regular occupation lies in between the other two. With this definition, benefits stop once you work in another job. However, you don’t need to start another career just because you qualify for it.
Benefit amount: The higher your monthly benefits, the higher your premiums.
Waiting period: Also called the elimination period, this is the amount of time you have to wait before the insurance company starts to pay you the benefit. If you have short-term disability insurance, you can choose a longer waiting period for some savings.
Benefit period: This refers to how long the insurance company will pay your benefits while you’re disabled. The most affordable is two years, while the most expensive is payable to age 65.
Graded premiums: If you’re a recent graduate or starting a new career, your income might not be very high yet. Graded premiums let you pay a lower premium for the first five years, with a higher premium starting in the sixth year.
Sample disability insurance rates
Here’s a sample quote to put the above factors into action. Take Joe, a 35-year-old male non-smoker working as an optometrist. He makes $120,000 per year, which lets him buy $6,000 of monthly benefits.
To round out his policy, he chooses an elimination period of 120 days, age 65 benefit period, regular occupation coverage, without graded premiums. Joe’s premium? $104/month.
How about Emily, a 40-year-old female non-smoker working as a self-employed studio photographer? She earns $40,000 per year, allowing her to buy $2,500 of monthly benefits.
She also chooses the same type of policy as Joe. Emily’s premium? $89/month.
While Emily receives a much lower monthly benefit, her premium isn’t much lower than Joe’s. Unfortunately, her age, gender, and occupation make her rate much higher than Joe’s.
Is disability insurance worth getting?
Is disability insurance worth it? In one word—yes.
Did you know that your greatest asset isn’t your home or your investments? It’s your ability to earn an income. That’s why you need to protect this asset with insurance.
While life insurance protects your family in case of death, it doesn’t help if you become disabled, which has a much higher chance of happening before age 65. Therefore, you need to protect your greatest asset. The best way to do it is with a disability policy.
And as you can tell from the sample quotes above, disability insurance doesn’t have to be expensive. As a rule of thumb, it should only cost you between 1-3% of your income. For the benefit that you get, that’s not much at all.
So, what are you waiting for? A small investment can help you get rid of stress in the future.
Need A Long-Term Disability Insurance Quote?
Are you interested in getting an individual disability insurance policy but don’t know where to start? Determining how much coverage you need is only the first step. You also need to design other parts of the disability plan and ensure it protects your earning potential.
We can provide you with the best guidelines when choosing a disability policy and help you get one that will not only help you today but for years to come.
Contact us today at info@briansoinsurance.com or (604) 928-1628 for a free consultation on finding you the best disability plan.
Get Your Disability Insurance Quote Now
While we make every effort to keep our site updated, please be aware that timely information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Brian So Insurance and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser. This post is a brief summary for indicative purposes only. It does not include all terms, conditions, limitations, exclusions, and other provisions of the policies described, some of which may be material to the policy selection. Please refer to the actual policy documents for complete details which can be provided upon request. In case of any discrepancy, the language in the actual policy documents will prevail. A.M. Best financial strength ratings displayed are not a warranty of a company’s financial strength and ability to meet its obligations to policyholders.
