What is Disability Insurance?
Disability insurance protects you in the unlikelihood you can no longer work and earn an income due to an injury, a serious illness or a mental health issue by replacing a portion of your income with monthly payments after a waiting period has passed. You can use the funds to cover ongoing living expenses, your mortgage, and even saving for retirement. Think of it as insurance for your pay cheque.
Disability insurance should not be mistaken with critical illness insurance that pays you a tax-free, lump sum payment following a specified survival period, commonly 30 days, after diagnosis of a life-threatening illnesses or critical condition as defined by your insurance plan.
How Disability Insurance Works
Group disability insurance plans are usually offered through your employer, union or association as part of an employee benefits package of which they pay, or you may contribute to through payroll deductions. Often it is a taxable benefit to the employee. Most group insurance plans are designed to provide both short-term disability and long-term disability coverage.
Short-term disability will cover you for a specified time if you’re unable to work. If you remain disabled pass that time, coverage extends to long-term disability which covers you for up to two years if you’re unable to return to your job. Coverage may be ongoing and extended beyond two years if you’re unable work in any occupation. Length of coverage can vary depending on the type of disability insurance plan you have.
Individual disability insurance plans are purchased outside your work through a licensed life insurance broker and can be customized to meet your specific “income replacement” needs. These plans include flexible options depending on whether you’re employed, self-employed or a business owner that are best explained by a licensed life insurance broker.
Benefits of Individual Disability Insurance
Disability insurance is highly recommended for business owners or anyone who is self-employed with no means to replace their income if they become disabled. However, even if you are an employee with a group disability insurance plan, you can also benefit from purchasing individual disability insurance.
While group disability plans provide you some protection, coverage is not transferable. If you leave your place of employment, you lose your coverage. If your employer stops offering the plan, you lose your coverage. You might also find you aren’t fully covered for certain disabilities or circumstances in which you become disabled due to a broader range of exclusions and limitations.
Individual disability insurance provides you with stronger long-term protection because coverage isn’t tied to your workplace and it will remain intact no matter where you go or who you work for. An individual disability insurance plan can also be customized to meet your specific needs and retain more of your earnings—whether you are an employee or self-employed. And since you pay for premiums on an individual plan, your benefits are considered tax-free income.
Disability insurance is a solution if you’re…
- Self-employed, a small business owner, or an employee without a group insurance plan and need to protect your income or business assets.
- Have a government plan that covers basic costs and not extended healthcare needs.
- A single-parent with dependent children living off one income.
- Want to safeguard your retirement with continued savings when you are no longer working.
- Paying a mortgage and don’t want to invest in mortgage insurance.