Does life insurance cover a disability?

Protect your family's finances from the devastation of an unexpected impairment.

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Disabled woman hugging a little girl

Unfortunately, your life insurance policy doesn’t cover mental or physical disabilities. That’s where disability insurance comes in. Available in short and long terms, this coverage protects your income and can pay for your living expenses if you become disabled.

Does life insurance cover disabilities?

In a nutshell, no. Most life insurance policies don’t build in clauses for disability, meaning your provider won’t pay you if you face a sudden impairment to your mental or physical health. However, you can add disability riders to your policy that kick in to help if you fall seriously ill or face a disability.

Getting disability coverage through life insurance

Disability insurance offers the most comprehensive coverage. But if you don’t want to — or can’t afford to — purchase a separate policy, you may be able to add a disability rider to your life insurance policy.

Life insurance riders allow you to customize your coverage, often at a cost. Providers typically offer 2 riders:

  • Disability income. If you’re unable to work due to a disability, your provider pays you a monthly stipend. The fine print of your policy specifies the benefit, which is set at a percentage of the face amount of your policy. For example, if you have a $100,000 policy and the disability income benefit is 1%, the rider pays you $1,000 a month. It replaces your income much like long-term disability insurance, but it’s more limited.
  • Waiver of premium. This rider doesn’t pay out money. Rather, it allows you to stop paying your premiums until you’re able to return to work full time. With this rider, your policy remains in effect, the term and death benefit unchanged. You’ll have to prove you’re disabled as defined by your policy rider. Life insurance companies have different ideas about what constitutes a disability, so compare policies before you commit.

Do I need disability coverage?

According to MoneySense, 1 in 6 Canadians will be disabled for 3 months or more before reaching 50. If you don’t have enough savings or funds to cover your daily living expenses for a few months, you might need disability insurance. But there may be circumstances where disability insurance isn’t a necessary safety net in case you become disabled.

Consider disability coverage if:

  • You’re the breadwinner of your family
  • You don’t have any coverage through your job
  • You’re self-employed
  • You’re paying off debt
  • You’re a caregiver
  • You’re in an injury prone profession
You might not get disability coverage if:
  • Your Canada Pension Plan (CPP) disability benefits are enough.
  • You have outside support, perhaps in the form of a trust fund or a spouse who makes enough money to support the family if you can’t work.
  • You have enough money of your own and can self-insure the risk of not being able to work.
  • You’re in the military and have disability coverage provided through your military benefits.
Although it can potentially be expensive, disability insurance is widely offered for a simple reason: Your chance of an unexpected disability at some point in your career is higher than you might think. And disability doesn’t just refer to workplace accidents or incidents that put you in a wheelchair — many disabilities include diseases like cancer, or chronic conditions like multiple sclerosis or slipped discs.

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Alternatives to life insurance with disability coverage

If you want financial protection for a disability outside of your life insurance policy you have other options:

  • Short-term disability. If you aren’t able to work due to an injury or illness this coverage can pay a percentage of your income for less than a year – usually around 6 months.
  • Long-term disability. Depending on which plan you choose, this benefit can pay a percentage of your income up to retirement age so long as you can’t work.
  • Workers’ compensation. Depending on provincial or territorial rules, your employer may have to continue paying you a portion of your wages if you’re injured on the job. Workers’ compensation for federal employees is handled under the federal Labour Program.
  • CPP Disability Benefits. If you meet government requirements, this program will pay you a monthly benefit. To qualify for coverage, you have to have made a minimum amount of CPP contributions while working. Visit the Government of Canada website to learn more about this benefit.

What is disability insurance?

Disability insurance pays a part of your salary — usually 60% to 85% — during the times that you’re too ill or injured to work. It protects your income, so you can continue to pay for your living expenses or any other costs that pop up as a result of your disability. For example, your doctors might prescribe expensive medications or advise hiring a nurse for at-home care. If you’re injured or lost a limb, you may need to renovate your home to accommodate a wheelchair or order a custom-built van with hand controls.

The 2 main types of disability policies are short term and long term.

Long-term disability insurance (LTD)

Long-term disability insurance usually lasts 2, 5 or 10 years — or until you reach retirement age. It pays monthly after you’ve used your sick leave and short-term disability benefits. Typically, there’s a 90- to 120-day waiting period, which can be covered by short-term disability coverage.

LTD can cover:

  • Cancer.
  • Accidental injuries (i.e. brain trauma from a car accident)
  • Musculoskeletal and connective tissue disorders (i.e. osteoarthritis or chronic back pain)
  • Cardiovascular disorders — like heart attacks.
  • Circulatory disorders — like coronary artery disease.
  • Mental illness — like PTSD or a major depressive disorder.

Short-term disability insurance (STD)

Short-term disability insurance pays a percentage of your income for 3-6 months after you’ve used your sick leave. Typically, STD pays you weekly after a waiting or elimination period of 1-10 days from the date of disability. While STD is cheaper, it’s often used to supplement long-term disability insurance.

STD can cover:

Amount of coverage

Unfortunately, it won’t ever match 100% of your salary. Short-term disability insurance typically pays 50% to 60% of your salary, and long-term disability insurance replaces around 60% to 70% of your income.

Are disability insurance benefits taxable?

It depends. CPP disability payouts are taxable, but payouts from other sources may not be. Your insurer will notify you whether payments count as part of your taxable income and will withhold tax for you if it is. Check with your insurance provider to find out whether your benefits are taxable.

What to watch out for

When purchasing your policy, you’ll want to make sure you fully understand your benefit options and exclusions before committing to a policy. Here are some things to keep an eye out for:

  • Waiting period. Sometimes referred to as an elimination period, this is the amount of time you’ll have to be out of work before receiving your first disability check. Make sure you know how long you’d be able to go without your income before choosing a waiting period.
  • Exclusions. Make sure you’re fully aware of any specific conditions or situations that won’t be covered. Pre-existing medical conditions won’t likely be eligible for coverage, but your insurers may allow you to get coverage if a certain amount of time has passed after a condition has ceased to exist. A second medical exam may be required to demonstrate your level of health.
  • How to file your claim. Check with your potential insurance provider to see how exactly you would file a claim and what information you will have to keep to prove your disability.
  • Denials and appeals. Talk with your disability provider to find out what happens if a claim is denied and what the appeal process involves.

Can’t I just rely on workers’ compensation or Canada Pension Plan (CPP) Disability Benefits?

It can be risky to rely solely on workers’ compensation or government benefits programs. Workers’ comp is limited to work-related injuries and illnesses, while CPP disability benefits (CCPDB) has strict eligibility requirements.

And if you qualify, the payments are low: The maximum CPPDB payout in 2020 is $1,387.66. That comes to $16,651.92 annually, which is below the poverty line for a one-person household.

Life insurance vs. disability insurance

Life insurance and disability insurance both provide income protection but are triggered by different circumstances. With life insurance, your policy is paid out to your beneficiaries when you die. In some cases, policyholders can access their life insurance benefits early. Known as living benefits or accelerated death benefits, these are often restricted to those with terminal illnesses.

On the other hand, disability insurance protects your income while you’re alive. So if your new disability prevents you from working and earning money, your disability insurance policy pays the benefits directly to you. Unlike life insurance, which pays out a lump sum known as a death benefit, disability insurance pays out a percentage of your former salary weekly or monthly, depending on your policy.

Benefits breakdown

In the simplest of terms, your life insurance pays out to your beneficiaries when you die. Disability insurance protects your income and offers financial benefits while you’re alive.

Life insurance
Disability insurance
Pays a death benefit
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Pays out for full disability
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Pays for partial disability
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Offers living benefits
Green check mark outlined by a circle
Green check mark outlined by a circle
Ability to borrow against your policy
Green check mark outlined by a circle
Lump sum payment
Green check mark outlined by a circle
Monthly payments
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Should I apply for life and disability insurance at the same time?

If you’re interested in both types of coverage, it’s worth applying at the same time. Here are the benefits:

  • Your rates won’t be as low as they are today. The longer you wait, the more you’ll pay for a policy. This is because your age and health are the 2 major factors that underwriters take into account when determining your rates.
  • You may only need to take 1 medical exam. If you’re applying for coverage with the same carrier, you’ll likely be able to use the results from the same medical exam — which is much more convenient.
  • Your policies could go into effect at similar times. Depending on your provider, the underwriting process can take anywhere from 3-8 weeks. While the application process for life and disability insurance is slightly different, you’ll only need to spend time gathering the paperwork and records once.
  • You’re covered during your working years. You’ll be financially prepared for disability, illness or death during the years you may depend on your working income.

Bottom line

If you rely solely on your income to cover your living expenses, it’s worth looking into short- or long-term disability insurance. These policies protect your income if you become disabled and can no longer work.

Before committing to a policy, compare disability insurance providers. And if you want to add disability benefits to your life insurance, compare life insurance companies that offer that rider.

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