Disability insurance is essential if illness or injury prevents you from working. It provides tax-free monthly income, helping you cover your regular expenses and avoid financial difficulties during recovery. Whether you’re an individual or a business owner, this protection is crucial to safeguard your financial future and maintain your quality of life.
What Is disability insurance?
Disability insurance replaces a portion of your paycheck if you cannot work temporarily or long-term. Whether the disability is visible (e.g., a fracture) or invisible (e.g., chronic pain, mental illness), this coverage offers financial support. It can be tailored to fit individual and business needs, ensuring your income or business operations are well-protected.
Why get disability insurance? It’s More common than you think
Approximately 45% of Canadians experience a disability lasting at least three months before their retirement. Disability insurance helps you navigate these periods without draining your savings.
An unexpected illness or injury can disrupt your ability to work, putting your income and plans at risk. Disability insurance provides financial security by replacing a significant portion of your income and safeguarding your retirement savings. Here’s how:
Without disability insurance, you may need to withdraw funds from your RRSP, TFSA, or other retirement accounts to cover day-to-day costs. Early withdrawals reduce your savings and may trigger tax liabilities and penalties. Disability insurance preserves your long-term financial goals by covering your expenses, ensuring your retirement savings remain intact and grow as planned.
This dual benefit of income replacement and savings protection offers peace of mind, allowing you to focus on recovery without jeopardizing your financial future.
Disability insurance for business owners: protect your business
Business owners can benefit from disability insurance specifically designed to support their operations. This coverage ensures your business can manage overhead expenses, continue functioning, and finance a buy-sell agreement if a partner becomes disabled.
Overhead expenses covered: Reimburses your fixed business costs during your disability.
Key personnel protection: Helps maintain operations while finding and training a replacement.
Buy-sell agreements: Provides funds to buy out a disabled partner’s shares.
The cost of disability insurance
Several factors affect the cost of your policy:
Coverage amount: Higher coverage means higher premiums.
Benefit period: Longer benefits result in increased premiums.
Waiting period: A more extended waiting period lowers premium costs.
Age and health: Younger, healthier individuals benefit from lower rates.
Occupation: High-risk jobs come with higher premiums.
Group Insurance vs. individual insurance: Finding the right fit for your needs
When choosing disability insurance, it’s essential to understand the differences between group insurance and individual insurance. Each offers unique advantages, but your situation and long-term needs will determine which option suits you best. Below is a breakdown of their key distinctions.
Limited Coverage: Group plans usually offer basic coverage that may not be sufficient to meet your financial needs. These policies may cover only a portion of your salary, often capped at a specific amount, leaving a gap if your income exceeds the policy’s limit.
Restricted Changes: Group insurance offers limited flexibility—changes to the policy can usually only be made during specific enrollment periods. Moreover, your employer decides the coverage parameters, leaving little room to tailor the plan according to your situation.
Ends with Employment: One of the most significant drawbacks of group insurance is that it typically ends when you leave the company. Whether you change jobs, retire, or are laid off, your coverage ends unless your plan allows for conversion to an individual policy (which often comes at a higher cost).
Customized Protection: With individual insurance, you can choose the amount of coverage, additional riders, and the duration of the protection. This flexibility ensures the policy aligns with your financial obligations, such as mortgage payments, children’s education, and future retirement plans.
Flexible Adjustments:
Life is constantly changing, and individual insurance allows you to adjust your coverage as needed. Whether your income increases, you start a family, or your financial priorities shift, you can modify the policy anytime to stay aligned with your goals.Independent Protection: Unlike group insurance, individual coverage is not tied to your job. It follows you throughout your career and retirement, ensuring continuous protection regardless of your employment status.
Government Benefits: CPP and QPP
The Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) offer disability benefits, but they are limited. Eligibility criteria are strict; the average monthly CPP benefit is approximately $966.43. Private disability insurance fills these gaps with more comprehensive coverage.
Do you need critical illness insurance or disability insurance?
Both types of insurance often complement each other in providing comprehensive financial protection.
Critical Illness Insurance offers a lump-sum, tax-free payment upon diagnosis of a covered condition. It typically has no waiting period in some cases and provides lifetime coverage.
Disability Insurance, however, replaces monthly income if you cannot work due to illness or injury. It usually requires a waiting period before benefits begin and ends at age 65.
Take Control of Your Financial Future!
Investing in disability insurance is essential for ensuring your peace of mind and financial stability. Here’s how you can get started:
Assess Your Needs: Determine the coverage amount based on your financial obligations.
Consult an Expert: Collaborate with a financial advisor to customize your policy.
Get Insured: Safeguard against unexpected events that could impact your future.
Together, they create a robust safety net for managing health-related financial challenges. Take control today