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Insights & advice

What is disability insurance and how does it work?

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What would you say if someone asked you, “What’s your most valuable asset?”

You might say your home, or maybe your car. But, have you considered that it’s your ability to earn a living? Over your lifetime, that’s worth far more than your home or car. While you likely have insurance to protect both your home and car, do you have insurance to replace your income if the unexpected strikes?

What is disability insurance?

Disability insurance works when you can’t. If an illness or accident keeps you from working, disability insurance can give you a tax-free Footnote 1 monthly benefit to help you pay your expenses by replacing some of your earnings.

You can customize disability insurance coverage with additional benefits at an extra cost. An example is a return-of-premium Footnote 2 rider. With this feature, you may get back up to 50% of yearly premiums you’ve paid. A cost of living benefit helps reduce the impact of inflation by providing yearly adjustments to the monthly disability benefit during disability. Other additional benefits are available - your advisor can help you select what works best for you.

How does disability insurance work?

If you become disabled, you file a claim. After your claim is approved, there is a waiting period. The waiting period is the number of days from the date you’re disabled until the benefit start date. This waiting period, chosen at the time you apply, can be anywhere from 30 days to a year. After this period is fulfilled, your monthly benefit would begin.

The monthly benefit replaces a percentage of your paycheque when an illness or accident stops you from working. Your payments stop when your benefit period ends, or you return to work. Your payments depend on how much coverage you choose to purchase and is approved by us at the time you apply. You will work closely with your advisor to help determine this amount.

What types of disability insurance are there?

There are two types – short-term and long-term disability insurance. They work best together because there’s often a waiting period before your benefits start being paid. Long-term disability policies also have a typical benefit period. Canada Life offers 24, 60, and 120 months and to age 65.

Short term

Short-term disability insurance is usually accessed through a plan provided by your employer. It often provides coverage for up to 6 months if you have an illness or are injured. The waiting period for short term disability is typically shorter than long-term disability.

Long term

While long-term disability insurance can be offered by an employer, the coverage may not be enough. It’s important to review that coverage closely with your employer’s HR representative to ensure you have enough. Individual disability insurance ensures you’re fully covered if you become disabled for a longer period of time.

Government benefits

Some individuals think they don’t need individual disability insurance coverage because they’re protected by government disability programs like Canada/Quebec Pension Plan (CPP/QPP), Workers’ Compensation and employment insurance. Coverage provided by these programs may not be comprehensive enough for your needs. You can find more about these benefits on the Government of Canada’s and Ceridan’s websites.

To learn more about which disability insurance option protects you best, contact a Canada Life™ advisor today.

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Footnote 1
1 The information provided above is for general information only.  It is not to be relied upon as providing legal or tax advice.  You are encouraged to consult with your professional tax and/or legal advisor about your particular circumstances.
Footnote 2
2 The Canada Revenue Agency (CRA) and Revenue Quebec have not provided a formal ruling regarding the tax treatment of return-of-premium benefits that are included in a disability policy. The tax treatment of an optional return-of-premium benefit is, therefore, subject to interpretation.