Disability Insurance For Employees in Canada - What You Need To Know (2024)

Understanding your current disability insurance coverage and assessing additional needs is a valuable exercise for helping you to make informed decisions about your financial security.

Your paycheck not only covers your bills but also supports your lifestyle, from extracurricular activities to daily necessities. So, what happens if an illness or injury suddenly impedes your ability to work?

For full-time employees, your benefits package likely includes some form of disability insurance, essentially acting as "income replacement insurance" by replacing a portion of your income during periods of illness or injury when you’re unable to work.

Evaluating Your Workplace Disability Insurance Coverage

Disability insurance through your employer is a significant benefit, given the higher-than-expected occurrence of disabilities among Canadians.

According to Stats Canada; in 2017, 22% of Canadians aged 15 and over (approximately 6.2 million people) reported having experienced at least one disability, highlighting the importance of this coverage.

Your disability ‘benefit’ is the payment received from your disability policy.

Employee group plans may include short-term disability (STD) and long-term disability (LTD) insurance coverage. Short-term disability typically offers immediate benefits lasting for up to three to six months. Long-term disability often requires a waiting period to be satisfied before providing benefits, which may continue for a specified period of time (e.g. 2-years), or until reaching a certain age (e.g. age 65). These short-term and long-term coverages are designed to work together to ensure continuous coverage without gaps.

Whether it is short-term, or long-term, disability insurance replaces your lost income, providing financial stability if a disability prevents you from working.

Key Considerations for Your Disability Insurance Coverage Through Work (Employee Group Benefits):

Protection of Monthly Income

Your policy details, including benefit amount, definition of disability, benefit duration, waiting periods, and any limitations or exclusions, are essential to understand.

When reviewing your policy documents, find out:

• Benefit Amount: How much benefit you would receive if you became disabled (typically ranges between 60 to 85 percent of your monthly after-tax income).
• Definition of Disability: Which definition of “disability” is used to qualify you for benefits and does this definition change after a period of time (typically the definition changes after the initial 2-years of being on claim).
• Benefit Duration: How long (i.e. the benefit duration) you will receive benefits for if you become disabled (typically 5-years, or to age 65).
• Waiting Period: What is the waiting period (if any) that needs to first be satisfied before you begin to receive disability benefits.
• Limitations or Exclusions: What limitations or exclusions exist that may preclude you from being eligible to receiving benefits – e.g. pre-existing medical conditions that you may have.
• Optional Coverage: What optional coverage (if any) does your employee group plan offer, and have you accepted/opted in. This additional coverage would serve as a ‘top-up’ to your base coverage amount.

Monthly Income Benefits

The amount you receive from your disability insurance is based on your salary and the percentage of income replaced by the benefit.

For example, an employee group plan policy document may specify that it replaces 60% of salary (before-tax), to a maximum of $5,000 per month in the event of a disability.

Using this formula for an employee earning $55,000 annually (gross income, before-tax), a policy replacing 60% of their salary would provide $2,750 monthly. Because $2,750 is less than the $5,000 maximum, the employee would receive the full $2,750 benefit.

It is worthwhile to have a conversation with your employer’s HR department to confirm exactly what benefit amount you would receive in the event of a disability.

Funding of Disability Insurance

Whether you or your employer pays the monthly premium for your disability insurance affects the taxability of benefits. If you pay the premiums, your benefits are typically tax-free, mirroring your take-home pay more closely.

Employers will often structure their employee group benefits plan such that the employee pays the full monthly premium for the disability insurance, and if so, it will be mandatory for all employees covered by the plan (i.e. you cannot opt-out). This is because if you (the employee) pays 100% of the premium, then the disability benefit is tax-free should you become disabled and claim.

Conversely, if your employer pays some or all of the premium for your disability insurance, then the disability benefit is taxable as income should you become disabled and claim.

Again, it is worthwhile to confirm with your employer’s HR department whether your disability benefit is taxable or tax-free.

Adequacy of Disability Insurance Benefits

Assessing whether your disability benefit meets your needs involves understanding your reliance on after-tax income for monthly expenses.

Higher earners may find their benefits capped at a maximum amount, and thus their coverage represents a smaller percentage of their income. This is known as ‘reverse discrimination’ in disability insurance.

To illustrate, let’s continue to use the previous example of an employee group plan that it replaces 60% of salary (before-tax), to a maximum of $5,000 per month in the event of a disability.

• An employee earning $55,000 annually would receive $2,750 monthly. This represents 60% of their income.
• An employee earning $150,000 annually would receive $5,000 monthly. This represents 40% of their income.

Because of the disparity, higher earners may wish to ‘top-up’ with additional disability coverage to match their income more closely.

Supplementing Your Employer's Disability Insurance

Beyond employer-provided benefits, personal disability insurance policies offer customizable coverage tailored to your specific needs, including benefits based on your inability to perform your job. Remember, employer-linked coverage ends if you leave your job, or you’re let go.

A personal disability policy can be obtained from an insurance broker, who can assist you in evaluating your coverage needs and provide potential customized solutions.

Making Informed Decisions About Disability Insurance

Gaining clarity on your existing coverage and determining your income replacement needs are important steps toward ensuring your financial well-being. Discussing your coverage with your employer or HR department can provide insights into whether your current plan suffices or if additional coverage is warranted.

Exploring Personal Disability Insurance Options

Personal disability insurance policies, available through brokers, allow for a more tailored approach to income protection. These policies can offer specific benefits and levels of coverage, ensuring that your financial security is maintained according to your unique circumstances and career trajectory.

Conclusion

In summary, understanding and evaluating your disability insurance coverage is a foundational aspect of financial planning for employees. By assessing your current coverage and considering additional insurance options, you can ensure a comprehensive safety net that supports you and your family during periods of unforeseen health challenges.