How Disability Insurance works in Canada

What would happen if you suddenly couldn't work due to an accident or serious illness? Well, if you're self-employed or you're incorporated or you rely on your income to support your household, like basically everybody, that scenario could really derail everything that you've built. Hi, my name is Laurent Meunier and I'm a partner and advisor here at SafePacific. We help professionals and business owners to protect and to grow their wealth, starting with the foundation, which is income protection. So in today's video, we're breaking down how disability insurance works in Canada, who it's for, how much do you need, and how to integrate it into a smart financial plan. So what is disability insurance in Canada? Well, disability is one of the most important tools to protect your income and to protect your lifestyle if you become sick or injured and can't work for whatever reason. In simple terms, disability insurance replaces a portion of your income, which is usually around 66%, when physical or mental health conditions leave you unable to perform your job. The benefit pays out monthly, tax-free, and can continue for a short period, like two years, or if you set it up correctly, all the way till you're age 65, depending on how you set up the contract in the first place. So disability is not like critical illness insurance, and critical illness pays a lump sum after you get a diagnosis of a covered illness, and also it's not like life insurance, which pays out your family after you pass away. Disability insurance provides a steady income while you're alive, but temporarily or permanently unable to work. This type of protection is especially critical if you're self-employed, if you're incorporated, and you don't have a benefits plan. If you are the primary income earner in your household, you better have disability insurance. If you've got big debts, like a mortgage, like rent that you need to pay all the time, you've got car loans, business loans, overhead expenses that you need to pay, and if your income stops, those things get messed up. Also, you should definitely have disability insurance if your family depends on your ability to continue to earn an income. Really, if you get sick or injured, you want to avoid dipping into your savings or dipping into your retirement funds during recovery. So even a healthy high-income earner can become vulnerable overnight. According to insurance company statistics, one in three Canadians is going to experience a disability that lasts more than 90 days before they hit the age 65. So here at SafePacific, we help Canadian business owners, we help incorporated professionals, we help high-income earners to choose the right kind of disability policy to match their occupation, to match their income, and to match their long-term goals. And this is actually where SafePacific is very different than a lot of the insurance advisors that are out there. Disability is one of the most important parts of your insurance plan. Disability insurance is the most claimed. So statistically, if you're going to buy insurance and you think that you're going to ever need it, disability, you probably will claim before any other types. And what's crazy is it's the least sold. So most advisors don't offer disability insurance. I don't know why. It's crazy. You really should have it as part of a financial plan. And I really think that the reason why is because it's more work for us. So disability insurance is more complicated to set up. And like I said, if one in three people is going to claim on it, that means that one day we're going to have to process those claims. So that's again, more work for the advisor. So a lot of advisors just don't even talk about it and don't offer it, which is a huge hole in the financial plan. Again, this is why SafePacific is different than a lot of advisors in Canada, because anybody who comes to us, they're getting an offer for disability insurance, critical illness insurance, and life insurance, which are the three that you need to have to have a proper insurance coverage for the physical things that can happen to you. Either you get sick, you get injured, or you pass away. Those are like the three physical things that can happen to you. And that's how you cover the whole thing. So now let's talk about what types of disability insurance that you can get. So when it comes to protecting your income, not all disability insurance is created equal. So in Canada, there's two main types of disability insurance, and understanding these differences is key to building your safety net, basically. Number one, you have what's called short-term disability. So short-term disability insurance is really there to bridge the gap between your last paycheck and a longer recovery timeline. So it provides income replacement for a temporary illness or injuries that prevent you from working for a few weeks or for a few months. So typically, short-term disability is anywhere from a few weeks to up to two years, right? And then really common uses is recovery from surgery, from broken bones, medical leaves. We've had a bunch from like concussions. So we have, you know, we're in Vancouver, people here are generally active. So we've had some people have some, you know, mountain biking crashes or snowboarding crashes. And all of a sudden, they need to go on disability because they can't look at a computer screen without getting massive headaches. Also, short-term disability is usually the one that shows up on your group benefits or your employer plan. So often employer plans will have short-term disability and they won't, which will end after about two years. Again, check your policy, but the majority of them end after two years. So this is why it's important to have your own. And short-term disability is really good for, I guess, employees that have workplace coverage or professionals that need that immediate coverage before like a long-term plan kicks in. The other type is called long-term disability. You've got short-term, you've got long-term. So long-term disability kicks in once the short-term coverage ends or after some sort of what they call a period or an elimination period, which is usually like 90 days or 120 days. So it's designed to protect your income for the long-term. So this covers you through an extended recovery or a permanent disability. So long-term disability, the way that we set it up, usually we will set it up to pay out until age 65, which is usually, it's like your Canadian standard retirement age when then other types of benefits kick in. But you can have it for five years, you can have it for 10 years, different companies will have different timelines. The coverage scope is basically if you're sick or injured and can't work. So this includes chronic illnesses, actually most claims right now actually is a huge spike in mental health conditions, musculoskeletal injuries, nervous system disorders, basically any sort of injury or illness that prevents you from working. And then the payout, it replaces your income. So because the disability pays out tax-free, if you set it up correctly and you're not deducting it, it usually pays out around 66% of your previous income. And the reason it's that is that's usually what your after-tax income is. Your disability insurance will never pay you 100% of your income and it'll for sure never pay you more than what you earn because then that eliminates any sort of incentive to go back to work. The insurance company does want you to go back to work there, that's what they're trying to get you to do. And there's a bunch of support that comes with disability insurance to try to get you going back to work. So they're never going to pay you more on disability than you were earning before because then why would you go back to work? You could just sit on disability for the rest of your life. So long-term disability is ideal for self-employed, incorporated, business owners, anybody that doesn't have like a big group coverage or people that do have a group coverage, but their group coverage ends usually after two years. So then you could get your own long-term disability that will kick in after two years in a day. So then you have long-term coverage if you get in a serious situation and you can't go back to work after two years. One of the most important features that we work with a lot because of our type of clientele, it's called own-occupation coverage. So whether it's short-term or long-term, you want to make sure that you have the best type of coverage and the coverage is tied to your type of occupation. So there's three types, you have your own occupation, you have regular occupation, and you have any occupation. So own-occupation is the best version of it and it basically says that if you can't go back and do the exact job that you were doing before, this will continue to pay. And the way that they do that is specifically it's if you can't perform the specific duties of your current profession. So that's like the contract language. So if you're say a surgeon and you break your hand, an own-occupation policy would continue to pay benefits even if you could technically do another job. Because you can't do surgery, because your hands are broken, even if you could go teach at the university and get paid the same amount to stand at the front and lecture, if you can't go back and specifically be that type of surgeon, this disability policy would continue to pay out. You can reduce the cost on your disability policies by having regular occupation or any occupation and like a cheaper policy would have what's called any occupation. And there that means if you could do any job, so maybe you're a surgeon but you have an any occupation definition on your disability policy, even if you could go sweep floors at a gas station, any occupation would say you should go do that and the disability is going to stop, you should go sweep floors at the gas station. Generally at Safe Pacific, we work with companies and we work with people with strong what they call own-oc or own-occupation definitions that are really tailored to your profession. So again the insurance company that we place the business with is going to your occupation is going to depend on that. So if you're a dentist, we're going to place you with this company. Or if you're a consultant, we're going to place you with this company. Or a lawyer, we're going to place you with this company. Because the different insurance companies have their policies set up to be to work for those types of occupations. Now how much disability insurance do you need generally? And this is one of the biggest questions that we get all the time is like how much do I actually need? So the short answer and my personal answer is get as much as you can. So say your job is making you $5,000 a month, you can't get $6,000 a month of disability coverage. So what you do is we tell you generally apply for as much as you can get but for sure on the minimum you want to have enough to maintain your lifestyle and to maintain your financial obligations if all of a sudden you lost your income. So say you got hit by a bus and tomorrow you're in the hospital for the next eight months, you want to have that income come in to cover your expenses. So disability insurance in Canada is really designed to replace your after-tax income. So again like I was saying that's around 66% different companies somewhere between 60 to 80% depends on the policy but it's not just about the percent. It's also making sure that you can keep paying your bills, not go into debt and to protect your long-term financial plan. So I talked earlier about statistically if you've got a disability policy one in three people is going to claim on that before they hit retirement age of 65. So if we write a financial plan and a retirement plan for 100 people and we don't put disability insurance in place there's a guarantee basically according to statistics that 30% of those plans are not going to work because something is going to happen and you're going to be off work for injury or illness and you're not going to have your retirement savings because you're going to have to dip into those to cover yourself. So having the disability insurance in place protects your income, it also protects your future savings, it protects your retirement plan, it protects whatever you're saving for so you don't have to dip into that while you're off work. We typically will recommend that your coverage is for sure enough to cover at least your mortgage and your rent. You know the home is your foundation so your benefits should be enough to keep a roof over your head without stress. So your monthly expenses should get covered by disability so this is utilities, groceries, transportation, insurance, daycare, any recurring bills that you need to pay to to keep your household running. For business owners you also can get what's called overhead expense insurance which is which covers your business related costs so all of the stuff that you need to keep the lights on. You may need to cover say your office rent or your lease or your payroll or software subscriptions or a loan repayment and you want to keep your operations afloat while you're off. Another thing you want to cover too is your ongoing contributions to savings and retirement. So just because you're off work it doesn't mean that your long-term goals disappear. We recommend structuring the coverage so that you can continue to fund your retirement plan so your RSPs, your TFSAs, your emergency savings so that this minimizes the long-term financial hit, your long-term financial setbacks. And what's a typical coverage amount? So I don't think there's really a typical coverage amount. This really can be customized to whatever is your income level but the common benefit amounts range anywhere from like if you're a middle income earners anywhere from $2,000 to $5,000 a month. If you're a high income professionals it's $6,000 to say like $15,000 a month or if you're incorporated. Now keep in mind these benefits are tax-free when you pay the premiums personally so this means a $6,000 monthly benefit could be equivalent to around $9,000 gross because the $6,000 is after tax. So one of the things that we do is we help you to calculate that right number. So we do more than just plug these numbers into a calculator. We work with you to figure out what are your income sources, what are your expenses, what are your debt obligations, what are your business costs. We want to make sure that whatever is being paid it takes into consideration tax and we want to make sure that the contract that you're signing the disability contract is strong and we want to ensure that your benefits align with your lifestyle and if you do have an employer plan we want to make sure that this integrates with that plan. So say if your employer plan pays for the first two years but we're not going to also set your disability up to pay at the same time because you're double paying for for the coverage so we would set up your policy to start when your employer plan ends. So whatever kind of profession you have whether you say you're a dentist and you have clinic overhead or you're self-employed you're a consultant and you have variable income or you're professional earning you know a six-figure salary we will help you to design that plan that protects whatever matters most to you and that gets you the right amount of coverage and that gets you right contract terms so that you get what you need. How much does it cost? The pricing on disability really depends on a bunch of things like with all insurance age and health is the number one. Do you smoke? It has a huge effect on the price of disability. Your gender another big thing that has a big a big impact is your occupation and like so what type of occupation do you have and your risk class right so a bricklayer is going to have a different occupation class than a lawyer right depending on also the monthly benefit amount if you want to have a $2,000 monthly benefit that cost is going to be way lower than if you have an $8,000 monthly benefit. Another thing that you can adjust to make the pricing of the disability go up and down is what's called a waiting period so this is how long do you have to wait before the benefits start so say if I get hit in the head today how many days do I have to wait before the first disability check starts so generally these will be 30 days 60 days 90 days 120 days and then sometimes when you're integrating with an employer benefits plan we would set it up to start when those ones stop or if you have EI you know EI could pay for the first period of weeks and then then your disability plan would kick in after that. And then another big thing that has an effect on the pricing is how long is your benefit period so if you get sick or injured does this disability policy pay for two years does it pay out for five years or does it pay out till age 65 obviously the longer the payout the higher the cost so just for like a simple example call you a 35 year old non-smoking professional you know between $100 to $200 a month is going to get you around a $3,000 a month coverage so if you get sick or injured you could expect $3,000 a month so we shop all the carriers so not every insurance company offers disability insurance it's actually kind of limited but Manulife, Canada Life, RBC, Industrial Alliance, Sun Life all offer disability insurance so we would then depending on your occupation depending on the amount of insurance that you need depending on your budget we would look at all of those different companies to find out like which one suits you the best. So then once we've decided that you need to apply right you can't just get insurance because you want it so how does this application process work and it's pretty straightforward we take care of most of the work so number one is we will assess your financial needs and your goals we'll complete a health questionnaire so we're going to ask you some health questions and then depending on what are you looking for like it could be a high amount there may be an additional what's called a paramedical exam so this could be dependent on your age or dependent on how you answer other health questions or depending on like you need a lot of insurance so once that gets approved and covered we handle all that paperwork there are also a ton of optional features or riders that you can add to your policy so you can do one one that's actually really important is called a future income option so this allows you to increase your coverage later without new medical underwriting so we often do this for people who are starting in a new career so say you actually we do this a lot for university students who are graduating so we do this a lot for dentists and medical students so they're graduating into the field and this is the the least they're ever going to get paid they're only going to get paid more in the future so what we do is we set up the maximum amount of disability that you can get now because their income is at a certain level but we know they're going to make more later so we set up this future option so that they can increase their coverage later as they make more money another option that you can get and this is not available with all companies but you can get it with some companies is called return of premium so if you don't claim on the insurance policy you could get some or all of your premiums back if you don't claim manulife actually has a cool one where they do this every four years there's also a partial or residual disability rider so this is if you go on disability and then when you go back to work maybe you can't go back full time maybe you can only return part-time so this would then top up your pay to your previous levels or maybe you go back you know say we had this happen literally had a concussion thought he could go back to work so then said okay i don't need the disability anymore went back to work for like a week and then it was like yeah no i can't work this is a terrible idea need to go back on so these features add flexibility and they add to the long-term value of the policy especially if your income is expected to grow in the future so really disability insurance is the foundation of a financial plan not enough people talk about it not enough people know how it works but the way that we build these financial plans is in layers so number one the first thing you want to do on a financial plan is protection so you know making grand plans is awesome but what if something goes wrong you need to have this income replacement if you can't earn income if you can't work number two is your savings so this would be things like your emergency fund and anything that's going to help with your short-term stability number three is you want your growth right so this is your investing and scaling your wealth and then number four is your tax planning and your legacy so once all of these pieces are in place and the foundation is is secure that's when you can start talking about more complex things like tax planning and legacy so really in canada most people's greatest asset is their ability to go out and earn an income most people will insure their car most people will insure their home most people will insure their iphone but really your ability to earn the income is what pays for everything so you want to make sure that you have insurance for that a really cool thing that i actually heard another advisor say so if you're making a hundred thousand dollars a year would you like to pay a little bit for the disability insurance so that if you can't work that you continue to earn so would you like to earn ninety seven thousand dollars a year but guarantee that you will continue to make money even if you're sick or injured or would you like to just earn a hundred thousand but if you're sick or injured you earn zero right and then that actually puts it in perspective for people they're like oh yeah i would pay a couple percent of my income to guarantee that i'm going to have an income no matter what versus make a hundred percent or zero right so if you're a professional if you're a business owner you're an entrepreneur you're high income disability insurance is one of the smartest decisions you can make and it should be the foundation of a financial plan because it protects your lifestyle it protects your business it protects your family helps you to pay your debts helps your income to keep going and again like i said at the beginning it's crazy that more people don't talk about this and that more advisors don't set up disability insurance it's one of the least sold types of insurance but it's one of the most claimed insurance so like if you're going to walk into a casino you want the one that's going to pay out the most and it's usually disability insurance how do you take next steps next steps is if you want to work with us or if you want to work somebody else that's fine but just go and do it but if you want to work with us go to the website it's safepacific.com you can fill out the contact form it's on tons of pages there's buttons everywhere that'll get in contact with us you can actually even schedule directly into our calendar through there or you can send us a message if you send us a message somebody's going to get back to you within a business day to book a free consultation with no pressure no rush and then we can take next steps for us this is pretty simple stuff to do because we do it all day every day we do we've been doing this now for 14 years and we've set up hundreds and hundreds of disability policies for people and we've paid out actually quite a lot of claims for disability insurance we've delivered those checks so i know that everything that i said in this video like we've done it so if this is something that you need and something that you that you want more information on go to the website safepacific.com you can get in contact with us from there now if you learned anything from this video or if this gave you any sort of value please do all the things the robots like the algorithm loves it when you push the like button when you push the subscribe button if you leave a comment if you have any sort of questions please leave them in the comments below i'm the one who actually responds to those myself that's it for me today i'll see you next time