Disability Insurance 101: What Actually Happens If You Can't Work
Most people insure their car, their house, and their life. Far fewer insure their income, even though it's the asset funding everything else. If you're working and depending on a paycheque, disability insurance (sometimes called accident and sickness coverage) is protecting the thing that makes all your other financial plans possible.
What it actually covers
Disability insurance replaces a portion of your income, typically 60% to 70%, if you become unable to work due to illness or injury. It's not just for catastrophic accidents. The majority of disability claims come from things like back injuries, mental health conditions, cancer, and other illnesses that keep someone off work for months or years, not a single dramatic event.
Group coverage vs. individual coverage
If you get disability coverage through work, that's a good starting point, but it usually has real gaps:
It often ends if you leave your job. Group coverage isn't portable, so a career change can leave you with nothing.
Benefits are frequently taxable. If your employer pays the premiums, the benefit you receive is taxed as income, which can shrink that 60% replacement rate more than people expect.
Coverage caps out. Group plans often cap monthly benefits at a level that works for an average salary, not necessarily yours.
Definitions can be weaker. Group plans more often use "any occupation" definitions after an initial period, which we cover in a separate article, but it means the bar for staying on claim gets harder to meet over time.
Individual disability insurance, which you own personally and pay for yourself, fixes these gaps. It stays with you regardless of employer, the benefit is typically tax-free if you paid the premiums with after-tax dollars, and you can tailor the definition of disability, the benefit amount, and the length of coverage to your actual situation.
The waiting period
Every policy has an elimination period, the gap between when you become disabled and when benefits start (commonly 30, 60, 90, or 120 days). A shorter waiting period costs more. Most people size this around their emergency fund: if you have six months of expenses saved, a 90 or 120-day elimination period can lower your premium without leaving you exposed.
How long benefits last
Benefit periods range from a couple of years up to age 65. Short benefit periods are cheaper but leave you exposed if a condition is long-term. For most people in their prime working years, coverage to age 65 is the more defensible choice, since it protects against the scenario that actually causes financial damage: a long-term or permanent disability, not a short one.
Who needs this most
Self-employed professionals, business owners, and anyone without strong employer group coverage are the highest priority. If you don't have a paycheque showing up regardless of whether you're at your desk, this is arguably more urgent than life insurance, because statistically, you're far more likely to become disabled for a period during your working years than you are to die during that same period.
The bottom line
If you asked yourself right now, "what happens to my mortgage, my savings rate, and my family's lifestyle if I couldn't work for a year," and the answer isn't a confident one, that's the gap disability insurance is built to close.
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This publication is for informational purposes only and has been prepared from public sources which are meant to be reliable. None of the information in this should be construed as investment advice. Speak to your Investment Advisor to learn if this product is right for you. Designed Securities Ltd. (DSL) is regulated by the Canadian Investment Regulatory Organization (CIRO), and a Member of the Canadian Investor Protection Fund (www.cipf.ca). Christopher Burke is registered to advise in securities to clients residing in Ontario. The views expressed are those of the author and not necessarily those of DSL. This report does not constitute an offer or solicitation in any jurisdiction in which such offer or solicitation is not authorized or to any reliable person to whom it is unlawful to make such offer or solicitation. Content is accurate as of the date of publication, and subject to change without notice.
