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When asked what their most valuable asset is, most people would conclude that it’s their home. But did you know that your most valuable asset is your ability to earn a living?
Think about it, from the day you start working to the day you retire, you will end up making millions of dollars. This is likely worth more than any physical asset you possess.
But if you suddenly lose your ability to work due to an injury or illness, how will you cope with the loss of income? How would you maintain your standard of living? How long would your savings last? What would happen to your retirement plans?
That’s where disability insurance can help. It replaces your income when you need it the most, so you can focus on returning to work.
But do you know how to buy disability insurance in Canada? In this post, we guide you through the steps of purchasing disability coverage.
- Key takeaways:
- Start your journey by learning how long-term disability insurance works and the type of policy that offers the best protection against a long-term disability.
- Compare a few quotes from an independent insurance advisor and weigh the benefits of each.
- Applying for coverage, the underwriting process, and issuing a new policy may take a week to over a month.
How To Get Long-Term Disability Insurance
A long-term disability insurance policy offers the best protection for your income-earning ability. It pays out a monthly benefit if an unexpected illness or injury prevents you from working.
With the monthly income, it lets you make mortgage payments and pay other expenses while allowing you to focus on recovery at the same time.
Benefits last until you recover or reach age 65, whichever occurs first.
1) Learn how private disability insurance works
While the basics of disability insurance are simple to understand, many small details are easy to overlook. For example, did you know that some policies have guaranteed premiums, while the insurance company can increase the premium every year with others?
How about the fact that different occupation classes affect your premium?
Or how about the fact that if you’re self-employed, you can gross up your net income by 20% to determine your benefit?
These are just a few things you should know when buying your private disability insurance plan.
2) Decide how much coverage you need
How much disability insurance do you need? Although you’d like your disability coverage to match your income, that’s not possible. The amount of disability benefits you can buy is based on how much you earn, but it will never exceed a percentage of it. This percentage ranges from 50% to 80% of your regular pay.
There are two main reasons for this:
- Because your income is taxable while the benefit is tax-free, buying 100% of your earnings would result in over-insurance.
- You need some financial incentive to return to work. If you get 100% of your earnings while you’re on a claim, it will decrease your motivation to return to work.
For example, if your monthly pre-tax income is $5,000, the most disability benefits you can buy is 70%, or $3,500.
3) Customize your disability policy
Besides the benefit amount, you also need to figure out a few other essential things, like the waiting period (WP) and benefit period (BP).
The WP is the number of days you must wait before benefits begin, while the BP is the length of time you can receive benefits.
The most common waiting period is 90 or 120 days. Shorter waiting periods make the disability insurance premiums too high, while longer ones make the financial burden too high during a claim.
As for the BP, the best one to get is age 65. That’s when you can receive benefits until you’re age 65, assuming you’re still disabled. Some only pay for up to two years, but that doesn’t protect you from a permanent or long-term disability.
4) Add riders
You have your base policy after choosing the benefit amount, WP, and BP. But it doesn’t offer the best coverage. To get that, you have to add riders, which are optional add-ons that enhance your disability benefits.
Here are some common riders you should consider:
Regular occupation extender
The regular occupation definition means that you can receive benefits as long as you’re unable to work in your occupation and not working another job. Most policies have a regular occupation period of two years, which then switches to the any occupation definition.
Any occupation means you can only continue to collect disability benefits if you can’t do a job you qualify for based on education, experience, or training.
The regular occupation extender rider increases the period from two years to the entirety of the disability, giving you greater peace of mind.
Own occupation
Own occupation plans are a step above regular occupation when it comes to the definition of a disability. With the own occupation rider, you can receive benefits if you can’t do your job, even if you’re working a different job.
Own occupation plans are especially vital for highly specialized professions like doctors, dentists, accountants, and lawyers. It lets these high-earning professionals change jobs, perhaps take a pay cut, but still receive disability benefits.
Partial or residual disability
This rider lets you collect partial disability benefits if you don’t have a total disability but can still do some tasks.
Cost of living adjustment
Imagine going on a long-term disability claim that lasts many years. The benefit you get initially isn’t worth the same 5 or 10 years down the road due to inflation. The cost of living adjustment rider alleviates that problem by indexing your benefits by inflation.
For example, if inflation is 3% and your original monthly benefit is $5,000, it will increase to $6,720 after ten years.
Future income option
This rider lets you purchase more insurance coverage later without providing medical evidence of insurability. You only have to show that your income justifies the increase to qualify.
Premium refund rider
Want your money back if you never make a claim? Now you can with the premium refund rider. It’ll cost a pretty penny, but you can recuperate all your disability insurance premiums after a few years.
5) Get a quote
Now that you know what you want in a long-term disability insurance plan, it’s time to get a quote. Most life insurance companies sell disability insurance through a broker, so start by finding a knowledgeable and experienced broker.
You also want to make sure the broker has access to all the leading insurance companies in Canada so that you’re getting the best coverage at the best price.
When comparing quotes, ask to see a sample contract so that you can review the fine print.
6) Apply
The insurance advisor can guide you through the application process. On the application, you’ll need to disclose your personal information, including your:
- Medical history
- Lifestyle habits
- Occupation details
- Financial information
A medical professional may also collect the answers to some of these on a telephone interview.
7) Underwriting
Once the life insurance company receives your application, it gets to work underwriting. Underwriting is the process in which the insurer determines if it’s in its best interest to offer you disability coverage given what it knows about you.
Based on your age and benefit amount, it can ask you to undergo a medical exam. You may have to provide blood and urine samples, blood pressure readings, and more during the exam.
You might also have to provide financial evidence, such as your T1 tax return and corporate financial statements.
The entire underwriting process can happen in as short as a week. It could also take over a month to gather and review all the information.
8) Policy issue
Once underwriting is completed, the insurer will offer you disability coverage. While the best result for you is a standard policy, you might also encounter a policy with exclusions for specific medical conditions. These will apply if you have a pre-existing condition that puts you at a higher risk for a disability.
The last step to place the policy in effect is to pay for it. Although you can pay monthly, the most cost-efficient method is annual payments.
Finally, pat yourself on the back. You just went through an exhaustive process to find the ideal insurance plan you need to protect your income.
How To Buy Other Types Of Disability Insurance
Besides long-term disability insurance, there are also other disability plans for different situations. Below are a few types of policies that also act as income replacements.
How to buy short-term disability insurance
Short-term disability insurance isn’t available for individual purchases. That means you have to get it from other sources. For example, government plans via Employment Insurance (EI) or group insurance via your employer or association.
Self-employed individuals have to register for EI online and pay the premiums to access the sickness benefits.
How to buy mortgage disability insurance
Mortgage disability insurance is tied to your mortgage or another loan. If you can’t work due to an accident or sickness, the insurer will make mortgage payments to your lender.
Although you can package this with the mortgage, this product has severe limitations such as a low benefit amount and period.
On the other hand, mortgage disability insurance can be purchased individually through a broker much like how you buy long-term disability insurance. It’s a more comprehensive product that gives you much better benefits.
How to get disability insurance through your employer
With some group disability plans, the employer pays for the entire cost of disability insurance. To get this type of group disability coverage, all you have to do is enroll in the plan after joining the employer.
With other group policies, you have to bear the cost of insurance. The enrollment process is the same, although your employer will deduct the premiums from your paycheck.
Frequently Asked Questions About Buying Disability Insurance
How much does disability insurance cost per month?
Expect to pay between 2-3% of your annual income for long-term disability insurance. The price depends a lot on #2 to #4 in the section about buying disability insurance.
What qualifies you to receive payments?
To qualify for benefits, you have to satisfy a few conditions:
- You are unable to perform the important duties of your occupation
- You are not working in any gainful occupation
- You are under appropriate physician’s care
Is it hard to make a claim for disability insurance?
As long as you can satisfy the conditions above, it is not hard to claim benefits.
Is it hard to get disability insurance?
Although underwriting is more challenging than life insurance, it’s not hard to get disability insurance.
Is critical illness insurance the same as disability insurance?
No, they are not the same. Critical illness insurance pays you a lump sum benefit if you are diagnosed with a significant illness like a heart attack or cancer. Disability insurance pays you a monthly benefit if you are unable to work due to an injury or illness.
Does the Canada Pension Plan (CPP) provide enough coverage?
The CPP disability benefit only pays a maximum amount of $1,457.45/month (in 2022) if you are unable to work. Due to this low figure, it’s not a good source if you need disability insurance.
Thinking Of Buying Disability Insurance Coverage?
Long and short-term disability insurance are a crucial part of your insurance plans. Critical illness or injury can strike at any time, leaving you unable to work. Having private disability insurance provide a tax-free monthly income to pay for expenses helps when you need it most.
There are many disability insurance plans, from own occupation plans to guaranteed renewable ones. A knowledgeable insurance advisor can guide you from #1 to #8 to get you the perfect coverage.
Contact us today at info@briansoinsurance.com or 604-928-1628 for a free consultation and no-obligation quote!
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.
