6 Important Tips When Buying Disability Insurance

We buy insurance to protect a lot of things: life, liability, health, vehicle, and home are only a few. But, what will you do if you get sick, or can’t work for an extended period?

Disability insurance will replace your lost income from injury or an illness that lasts longer than 90-days, so it should be part of every one’s financial plan.

Although most people don’t think bad things will happen to them, they do. So a good rule of thumb is to plan for the worst and hope for the best. This way you will be prepared and won’t suffer financial ruin in the event something does happen.

The following 6 tips when buying disability insurance will make sure you cover all aspects.

1. Learn and Understand Disability Insurance Terminology

Disability insurance is different than other insurances such as life insurance; because what qualifies as a claim is more complicated. Basically, there are three different definitions used in disability contracts that directly impacts your ability to collect your benefits.

Any Occupation: This means that you’re not able to work at any type of occupation. So if you’re an electrician and you can’t work doing that anymore because of your disability but you can still work as a construction worker; you won’t qualify.

Regular Occupation: This kind of total disability means that you can’t work at your current occupation because of injury or illness.

Own Occupation: This kind of disability is the gold standard and has the highest premium, but is worth it; because total disability is defined as not being able to work at your “own occupation” and it doesn’t matter if you can work at any other job.

2. Know the Benefit Limits on the Monthly Income You Will be Covered for

Every benefit is topped out a specific amount, and your benefit amount is a percentage of your earnings before your disability. As well, the benefits covered for long term disability (LTD) have the following components:

  • They’re payable after the qualifying period (a waiting or elimination period) is over. During the time in between you usually get benefits under short term disability (STD), employment insurance, or a salary continuance plan.
  • Disability is directly associated with your ability to perform your own job, or any other job.
  • Depending on the type of insurance, benefits will end in two years, five years, or when you turn 65.

The short-term disability qualifying period is usually seven days for illness and the first day following hospitalization or after an accident.

Earnings Definition

For the purposes of disability insurance, your monthly benefits are tied to how much you made before your disability. As well, the benefits have a different tax status – gross (pre-tax amount) or net (after tax amount).

Taxability: The taxability depends on who pays the premium. If your employer pays the benefit it is taxable, but if you pay the premium the tax is free.

Gross Earnings: Regular earnings – and depending on your type of benefit plan, includes overtime, bonuses, and commissions. If they are included in your benefit, your insurance carrier usually takes an average of your earnings over two-years to decide your benefit amount.

Maximum Benefit Amount: There are two types of maximums – non-evidence and overall.  Non-evidence is the amount of benefits an insurance company will pay without having medical information about good health when you enrolled. The overall maximum is the amount of money the insurance carrier is willing to insure you for.

3. Choose a Waiting Period That Works With What you Need

Depending on the type of insurance you buy, your waiting period is different. The most common is a 90-day waiting period. So you won’t receive benefits until after you are disabled for 90 days. There are also longer periods than 90 days as well as shorter. But, the shorter the waiting period, is the more expensive the policy is.

4. Know the Difference Between Partial Disability and Residual Disability

Partial Disability Benefits: Are paid to the person who is insured, and according to their policy, is considered partially disable. For example if you’re injury is only to one part of your body. You are eligible for a flat percentage – usually up to a maximum of 50%.

Residual Disability Insurance Benefits: Is less common, and covers you if you experience a minimum of a 20 per cent loss of earnings. The monthly amount is based on a percentage of your lost income.

5. Know the Difference Between Injury-Only and Injury and Illness Disability

Injury only disability insurance only covers disability from injuries, and the premiums are usually on the less expensive side. On the other hand, Injury and Illness disability is a more comprehensive policy and usually costs more – because it covers an injury and a disability related to an illness.    The best policy for your situation depends a lot on your occupation.

6. Consider Adding a Cost-of-Living Adjustment Rider to Your Disability

As a rule, disability insurance does not take into consideration the cost of living. A Cost of Living Adjustment (COLA) rider helps to ensure that your benefits keep up with inflation while you’re disabled. The amount of the adjustment depends on which rider you choose.

About the Author:  Chantal Marr is President of LSM Insurance, a leading Canadian life and health insurance brokerage, where she is in charge of product development. She has a B.A. from Laval University and Bachelor of Education from the University of Western Ontario. Chantal is a member of the Independent Financial Brokers of Canada, which gives her the flexibility to deal with all major insurance companies.

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6 years ago

Great info :)
I work in insurance and it baffles me how little people know about their own coverage. If you make the conscious decision to buy disability insurance, or if you have an employer-sponsored plan and then need to claim, then make sure to dig out your contract (or ask for a new copy!) and read it. If you don’t understand it, call the 1800 number for the insurer and make sure you ask all the questions you need to ask so that you understand it inside out. It’s your disability, your money, your financial situation that is at stake.
Also, I noticed some people hating on self-insured employer plans. Those are actually a lot cheaper than insured plans. It makes sense for employers to use an insurer for administrative/adjudication services only and pay the benefits out of pocket. Of course there are rare cases of employers going bankrupt, but those are so rare that honestly, what’s the cost:benefit of a second policy?

Brian Poncelet,CFP
6 years ago

Another thing to consider for people who have weak disability plans, or self-employed is critical illness insurance.

See blog on this.
There is a video of a client of mine who bought Critical illness insurance.
In his case disability would not have paid out since he was back to work in three weeks!




Chantal Marr
6 years ago

Those are some very good points Brian. Consumers and many agents really undervalue the importance of Disability Insurance.

Brian Poncelet,CFP
6 years ago

The question one needs to ask is can I take two years off or more without withdrawing on my RRSPs/TFSAs?

Most people who are self-employed can’t. Most share holder agreements do not cover this in a proper way.

For people who have company benefits the key is to review the disability plan.
I had a case where I suggested a client of mine review/bring me a copy of her benefits. She suggested her plan was great and did not need to be reviewed.

Years later she came down with brain cancer. She went on disability but after 30 months she was cut off! She told me that was the long term coverage was “30 months”.

Had she told me originally the next question is she comfortable with that. In the end she is draining her RRSPs to make ends meet.

Lewis Morris
6 years ago

The policies can turn out to be more expensive than clients may expect, that’s why it’s important to educate them on the importance of having a policy before looking at numbers. For most people, there is far more need for disability protection than life insurance, but it’s more difficult to quantify the risk of becoming disabled, hence the education.
Also, I tell my clients at the beginning that a comprehensive plan costs around somewhere between 2 and 6% of their income.

Brian Poncelet,CFP
6 years ago

Good article. Some other points as a example is future increase option.


6 years ago

I don’t understand the difference between “regular occupation” and “own occupation”. Obviously the second one is self-explanatory, but what is “regular occupation”? You define it by saying “you can’t work at your current occupation” which seems to be the same as “own occupation”.

Chantal Marr
6 years ago
Reply to  DavidV

Hi DavidV,

That’s a great question, we get it a lot. Own occ vs Reg occ can be confusing.

The only difference between Own occupation and Regular occupation is how income earned in another occupation will affect your benefit payable by the insurance company.

The “regular occupation” definition will factor in your income earned from another occupation once you are not able to perform the duties of your own occupation, potentially reducing your benefit. However the “own occupation” definition will not prorate your benefit, regardless of the income you are earning in another occupation.

Hope that helps,

Alan Whitton (BCM)
6 years ago

An esoteric (maybe) issue is also finding out whether your company is self-insuring. This is the “perfect storm” that ruined many lives with Nortel, because the folks on long-term disability were actually being paid by Nortel directly (even though it looked to be a SUN-Life policy), and when Nortel went bankrupt, the folks on disability were creditors and effectively lost their disability payments.

Chantal Marr
6 years ago

That’s a good point Alan.

Zee Hamdani
6 years ago

Neither my husband nor I ever really thought along the lines of disability insurance. This article has helped me realise that it can actually be quite helpful incase something were to happen. But having said that, at times with so many other bills pouring in, things like these tend to take a back seat. How important do you think it is to get a disability insurance especially if your financial situation is not top notch at the moment?

6 years ago
Reply to  Zee Hamdani

It’s protecting your paycheque – it’s probably the first insurance you should get. In many cases it’s as or more important than life insurance and definitely more important than critical illness insurance.

Treat it as protection and risk management, not an expense.

Or I guess to be blunt, it’s *VERY* important. Morbidity (disability) rates for those under age 65 are multiples higher than mortality rates.

If cost is an issue, there’s a few things you can do to reduce premiums on long term disability insurance (as opposed to short term disability insurance); noting that all of these things involve cutting potential benefits.
1) increase the waiting period/elimination period. Of course that means there’s no benefits being paid upfront for a longer period of time if you do become disabled.
2) forget the ‘own/any/regular occ’ and drop down to regular occ. That will reduce premiums a tiny bit. It also means that if you’re disabled from doing what you do right now, but can actually work at something else, then you have to go back to work doing that something else. Frankly, from an insurance perspective I think that’s the way it should work anyway (to date, 100% of consumers disagree with me on this :) ).
3) reduce the benefit amount. i.e. drop the percentage of your income that would be replaced if you’re disabled. This falls into the ‘something is better than nothing’ category, even though ‘something’ may not be very good.
4) seek out coverage via an association or work. Those plans aren’t normally as good as what you can get through an independent broker, but they are normally priced lower.
5) reduce duration of benefits from age 65, down to 5 years or 2 years. Doing so begs the rhetorical question ‘what are you doing for money at the end of 2/5 years?’ so this option is a bit disturbing to me.

Again, all of those options leave you exposed to risk. I don’t recommend or advise any of them. But they do reduce premiums.

Chantal Marr
6 years ago
Reply to  Zee Hamdani

Putting everything in your budget is not easy easy. But all your other bills being paid are dependent on your ability to work.

6 years ago

Good stuff!

I have one comment regarding point 6. When most of the people, myself including, hear about COLA they think they are protected against inflation when the policy is activated. But it’s not true. It’s important to understand that COLA activates only when the disability starts.

Thus, if you file a claim 30 years after your policy was created – the amount you will receive will already be ‘rotten’ by inflation and COLA won’t help you much.

Chantal, my subsequent question for you is: are there any riders that keep your potential payout in pace with inflation from the start?

Chantal Marr
6 years ago
Reply to  AlexOntario

Good point on COLA kicking in when a claim starts. A Future Income Option allows you to increase the coverage without evidence of insurability but is still subject to Financial Underwriting.