I'll start this article with a description of how an individual long term disability policy works in Canada, benefits, considerations, and companies. Then I'll separately cover your workplace disability insurance and how the two interact. Spoiler alert — if you have long term disability insurance at work, you should absolutely have an individual disability policy in addition. Too many Canadians are complacent about the coverage they have at work. I'll cover why that is below.
Individual long term disability insurance
(Read this even if you have workplace coverage, because it'll allow you to evaluate your workplace benefits).
Definition: Long term disability insurance provides a monthly benefit amount to you starting after the waiting period (normally 90 days) to the shorter of either age 65, or when you are no longer disabled.
That's probably pretty much as you expected — if you're disabled, you get a monthly cheque from the life insurance company as long as you're disabled. There's a 90 day upfront waiting period where you're on your own and no benefits are paid — be prepared for this, ideally through an emergency savings fund. Then they pay you out to a maximum age 65. No real surprises there. Like many things, the real concern is going to be in the details.
Partial and Residual — what if you're not completely disabled?
Disabilities are often not just moving from working 100% to being 100% disabled. Frequently there's a long drawdown period where you are able to work less and less. And coming back to work, the same — often people come back to work either a limited number of days per week, or part time. These shoulder periods can last longer than the period of full disability so it's vital that your policy include coverage for those periods. In the industry, these benefits are called Partial and Residual. The exact definitions are beyond the scope of this article, just make sure that you have that coverage.
Waiting period — when does disability insurance start paying?
You can often choose how long before benefits start. Most commonly we would expect 90 days. Going much shorter than this increases the premiums dramatically (because you're really starting to cover short term disability). Going longer than 90 days doesn't generally save a lot. So 90 days is sort of the sweet spot. Note that in the section below on workplace benefits, we're going to look at a waiting period of 2 years, but that's a special case when integrating with workplace benefits. I would not expect a 2 year waiting period on an individual standalone policy.
Duration of benefits — how long does disability insurance pay for?
That's how long they pay. A typical individual policy will pay as long as you're disabled, to a maximum age of 65. You can choose a shorter duration, but I advise against that. If you're permanently disabled, and benefits cease after say 5 years, where's your income coming from then? Without a good answer to that question, keep your duration at age 65. Worth noting that in some cases the company may limit benefits to 5 years, but that would be for occupation or insurability concerns and then we don't have a choice in the matter.
What is the definition of disability? When do you qualify for disability payments?
IMPORTANT. If you have workplace benefits, you need to take the time to read this section. It will become important when we look at how your workplace coverage is designed.
Sometimes when people ask me what I do for a living I joke that I'm unemployed. Then my spouse corrects me to say I'm self-employed. Then I quip, well, some days it's hard to tell the difference. Same thing here — how do we know if you're just not working, or actually disabled? We need a definition of disability. This definition is important so make sure you understand what you have. If you don't meet the definition, you'll not receive any benefits.
In the life insurance industry in Canada, there are three general definitions of disability. There's some mild variations on these, and sometimes the terms get intermingled, but these are the common ones. Understand the definition and don't get too focused on the titles.
- Own Occupation — You are disabled if you can't do your current job, but you can do another job. If you do get paid for doing another job, that pay is not deducted from your benefits; i.e. you have two income sources, disability and earned. So if a surgeon can't be a surgeon anymore because they've lost use of their hands, but they can be a family doctor, then if their policy has this definition of disability they will get paid disability benefits — while at the same time as they're working as a family doctor. This benefit is normally only available in very specific high income earning situations such as doctors and high earning engineers.
- Regular Occupation — You are disabled if you can't do your current job. Assumes you are not doing another job. Also assumes the life insurance company can't kick you off benefits because you could go get a job in a different industry. This is the baseline definition and I think the one that most people would reasonably expect if they think about it.
- Any Occupation — You are disabled if you can't do your current job, AND also are unable to do any other occupation for which you're reasonably suited by education training and income. So if you can't do your own job AND can't do another job, then you're disabled. If however you can't do your own job but can do another one, then you're not disabled — you're expected to go earn a living at that other job. e.g. you work in manufacturing but have a bad back. So, you can't work on the shop floor all day and are thus disabled. But it turns out that you could earn a similar income as a real estate agent, and we assume that you can work as a real estate agent with a bad back. If your policy has an Any Occupation definition of disability then in this case you would not be considered disabled — go get some training on real estate and welcome to your new career. Because the company won't pay benefits. This definition is objectionable to many people so avoid it.
The summary here is that there are three definitions — we are unlikely to qualify for Own Occupation definition, we don't want Any Occupation definition, and Regular Occupation is the one we would expect, and what most of us likely want to apply for.
Future Insurability Option — rider
Many plans offer the option to purchase additional insurance in the future without any medical requirements. You pay a premium for this rider, in order to be able to purchase more disability insurance in the future. This is very useful if you expect your income to increase substantially in the future. For example, if you've just started your career, or if you're working at a startup and expect substantial income increases in the near term. This rider lets you simply complete a form and purchase predefined amounts of additional insurance at predefined times in the future (normally the amounts and dates are selectable, within limits).
For example, my son was in school and working as a teaching assistant and making about $40k/year. We expected that upon graduation he would earn substantially more, so we purchased the Future Insurability Option on his disability policy. When he finished his degree and started earning multiples more than that, we simply signed a form and had his coverage increased to match his new, higher income.
Cost of Living (COLA) — rider
The COLA rider increases your benefit payments roughly with inflation. If you're disabled for a short period of time, the impact of this rider is minimal. If you're permanently disabled over decades, this rider is a lifesaver. I thus recommend this rider on all disability polices.
It's hard to see the impact of this looking forward, but it's easy to see if you look at the past. Would you be able to live on what your income for your job would've been 30 years ago? Likely not. If you don't have the COLA rider and become disabled, 30 years from now you'll be living on a 30 year old income. COLA rider prevents that and keeps your benefits during disability roughly inline with inflation.
How much disability insurance do I need? Coverage amount
The maximum benefit for most people is 2/3'rds of your gross annual income. That sounds low, but remember that disability benefits are not taxed, so the 2/3'rds is after tax. For example, if you make $100,000 per year, your actual after tax take home is likely what, about low $70's? If you purchase $66,000 in benefit, and become disabled, your actual take home doesn't drop from $100K to $66k, it's dropping from about $72k to $66K. The drop is minimal, and designed to make sure that you don't make more money on disability than you do working.
Long term disability costs
Cost of the coverage, the premiums, is based on your insurability, your age, the amount of coverage, and of course your occupation. If you'd like a quote, please contact us.
Premiums for individual policies are guaranteed level to age 65 — you lock them in at issue and they never change.
Summary, and long term disability companies
The above outlines the important attributes of a long term disability policy. A comprehensive policy will address all of the above.
If you do a review of available disability policies in Canada looking for the ones that are comprehensive and address all of the above points, you'll likely end up at two companies — Canada Life and RBC Insurance. If your coverage is not with one of those two companies, you should be aware that your coverage may be deficient.
Between those two companies, policy features are almost identical. Pretty much any time I've compared premiums, the difference is less than 1%. So I, and most brokers, assume that the two company's policies are indistinguishable and simply choose the company that they prefer.
In my case, I have a mild preference to RBC Insurance simply for ease of application. However as a broker I do have Canada Life available if you prefer — either are correct choices.
Disability insurance coverage at work
Do you have disability insurance at work, as a benefit? You should be aware that it is almost certainly deficient, and full of gaping holes that can leave you disabled but without coverage. I recommend you obtain a policy booklet from work and go through all of the following to determine exactly what coverage you have.
You can only purchase disability insurance when you don't need it. Buy the time you do need it, it's too late to make changes. So take the time now to review your coverage and make sure that it'll be sufficient in the event you do become disabled.
The solution? Is to obtain an individual disability policy that acts as a top-up to your benefits, paying above and beyond when your workplace coverage leaves you without benefit. It's also portable so if you move jobs to a company that doesn't have benefits in the future. Basically if you choose a benefit of say $7K/month, then it will pay $7k less what your workplace coverage pays. So if your workplace pays $5K, it'll pay $2K — giving you a total of $7k. If your workplace doesn't pay anything (and we are going to see examples of this right now), it pays $7k. If you move jobs and don't have coverage, i.e. it pays $0, then again, the individual policy pays $7k.
How much coverage do I have at work?
Coverage amounts with workplace benefits are generally maxed out at 66% of your gross income, or 75%. Beware — in some cases workplace benefits are taxable income (you pay taxes on benefits when you receive them, unlike an individual policy where benefits are not taxed). If your maximum is 75%, then your benefits are likely taxable.
Workplace coverage amounts are also often tiered. Something like 66% of the first 5K, then 50% of the next $2500, then $0 above that — it's capped. The more you make, the less of a percentage of your income is insured. Yes, workplace benefits often leave you underinsured.
Lastly, workplace coverage percentages are often not based on income, they're often based on salary. So if your income consists of salary plus dividends or salary plus bonus, or salary plus anything else, then your coverage is only going to be 2/3rds of the salary portion of your income. In contrast an individual disability policy can provide a benefit of 2/3's of your entire income, not tiered, not capped, and in addition to just the salary portion of your income.
To determine the actual benefit amount, you should obtain a policy booklet from work. That'll let you determine the actual amount of benefit you'll receive. People are often shocked when they see the real numbers — it can leave you uncomfortable financially, whereas an individual topup policy can make sure that you're total coverage is still the 66% after tax.
In short, workplace benefits often provide insufficient coverage. You think you'll be covered, but in practice you might find yourself substantially compromised financially if you end up on disability. Just having coverage isn't enough, you need 'enough' coverage and your work policy may not provide that.
Duration of benefits — how long does workplace disability insurance pay for?
These days, duration of benefits is generally to age 65 like an individual policy. But in years past, a duration of benefits of 5 years was not unheard of. When you check your policy booklet, make sure to confirm that the duration is to age 65. If your duration of benefits is only for 5 years, then an individual topup policy would start paying the full 66% from years 5 on (because it pays the 66% less workplace coverage and at that point workplace coverage is 0 so the individual policy will kick in and pay the full 66%).
Definition of disability
Red alert — this is the biggest, hidden problem with workplace disability plans and can leave you without any coverage at all even though you are disabled. This is not hypothetical. It happens. And it happens because of the way they use the definitions if disability.
Workplace definition of disability is generally twofold. In the first two years the definition will be Regular Occupation — you're disabled if you can't do what you're doing today. But after two years, the definition changes to Any Occupation — which means you're only disabled if you can't do anything else reasonably.
Here's what that means. You can't do your job, you're disabled. So you receive benefits for 2 years. Then in year 3 the company changes the definition of disability and you no longer meet the new definition. Result? You're cut off benefits after 2 years. You haven't changed, you're still disabled. But now you're disabled, thought you had coverage, but turns out you're off benefits — no more benefit payments.
Again, the solution is an individual topup policy. Individual policies do not change the definition of disability after two years. And since they topup the benefits of your workplace coverage, if your workplace policy stops paying after 2 years your individual policy will take up the slack and again provide full benefit payments of 2/3'rds of your income.
Partial and Residual
Most workplace disability plans just do not provide any coverage for the shoulder periods of partial disability. It's either full, or nothing. You'll need to check your policy booklet to make sure, but in any event, the coverage from an individual policy is always better for any plan that I've seen.
Workplace disability insurance premiums and guarantees
Premiums for your workplace coverage are not guaranteed past this year. They can, and do, increase based on the company's experience. And premiums are 'banded by age' which means that premiums are priced to increase every quinquennial age. That's a word I get to use so rarely, what it means is that your costs will go up at age 30, 35, 40, 45, etc, every 5 years of age. Unlike individual policies where premiums are fully guaranteed and can never increase.
Summary
If you have workplace coverage, you should get a policy booklet and review the above points to ensure you know what your actual coverage is. Then you should purchase an individual top up plan, to cover all the gaps in coverage that we've just gone through. Doing so ensures that you have proper coverage at all times. An individual top up policy will provide level benefit coverage even if your workplace policy:
- has insufficient benefit amount or doesn't cover non-salary income
- stops paying after 2 years because they changed the definition of disability
- doesn't pay during the shoulder periods of disability
- your future employer doesn't have benefits
Here's an example. You need $7k in coverage. Workplace provides $5K in benefits. You become disabled.
- In the first two years, workplace pays $5K, your individual policy pays $2k — your total is now $7k.
- After two years your workplace plan changes the definition of disability and now pays you $0. At that time, your individual policy will now pay $7k. Your total again, $7k.
- You move employers to a company that doesn't have benefits. Your individual policy once again will pay the full $7k.
One of the biggest risks here is the two year change in the definition of disability. You can mitigate this by creating an individual policy that has a two year waiting period instead of 90 days. You would then be covered by your workplace coverage for the first two years of benefits. After that if your workplace plan stops because of the change in the definition of disability, your individual policy will take over and start paying benefits to age 65. This does somewhat reduce the premiums, though it does also mean there's no individual coverage at all for the first two years of disability.
Please reach out if you'd like to discuss this further or would like a quote.