Disability Insurance: Are You Covered?

Many Canadians are good at insuring the obvious stuff: their life, their home, their car, maybe even their phone (if it’s fancy enough). But what often gets overlooked is insuring the one thing that pays for all of it — your income. This is where disability insurance comes into the picture.

Here’s an uncomfortable truth: if something serious affected your health, your finances could unravel faster than you might expect. While many people focus on solely protecting themselves with life insurance, the odds tell a different story — you’re far more likely to be sidelined by illness or injury than to die during your working years. In fact, about one in three working-age Canadians will become disabled and unable to work before age 65.

One big reason why many people aren’t prepared? Some Canadians assume their employer’s disability insurance has them covered. But group health plans usually only replace a portion of your income, may cover you for as long as you’d need, and don’t follow you if you leave your job. And the risks are real: nearly 30 per cent of Canadians say their savings would run out within six months after a major health setback, yet only about 10 per cent have disability insurance.

This article breaks down how disability insurance works in Canada, what workplace disability coverage does (and doesn’t) provide, and how to make sure your most valuable asset — your ability to earn a living — is properly protected. Because hoping your benefits are enough isn’t much of a plan.

Key takeaways

• One in three Canadians will be unable to work at some point before age 65. Illness or injury is far more likely during working years than death, yet these risks are too often underinsured.

• Your ability to earn an income is your biggest financial asset. It pays for everything else, but it’s easy to overlook when thinking about protection with disability insurance.

• Disability insurance provide income support if illness or injury prevents you from working.

• Workplace disability coverage can often be overestimated. Employer group plans usually replace only part of your income, may be taxable, may not last long enough, and typically end when you change jobs.

• Disability coverage is often more affordable than you’d expect. Depending on the type and amount of coverage, disability insurance may cost roughly 1 per cent to 3 per cent of your annual income.

Understanding disability insurance

Disability insurance is a type of insurance product that helps replace a portion of your income if an injury, illness or mental health event stops you from working – regardless of whether the injury or illness occurred in the workplace or elsewhere. In other words, it helps protect your financial security while you focus on getting better.

In general, disability insurance replaces part of your income — not all of it — up to a maximum amount and for a set period of time. How much you receive, when payments begin, and how long benefits last all depend on your policy.

Some Canadians have disability insurance through an employer, as part of their group health benefits. Others choose to buy coverage through a licensed insurance advisor, especially if they’re self-employed or want to top up the coverage they already have.

Types of disability insurance

There are two main types of disability insurance available in Canada:

• Short-term disability insurance covers temporary time away from work, like recovering from a hospital stay, with benefits that typically last up to six months while you recover from an illness or injury.

• Long-term disability insurance is designed for more serious or long-lasting conditions, such as cancer. Some plans may provide coverage if you can’t return to your job for up to two years. After that, benefits may continue if you’re unable to work in any job.

In other words, these two types of disability insurance are designed for different “what if” scenarios, and they’re not the only types of disability insurance available.

What does a disability insurance policy cover?

At this point, you might be wondering, Okay, but what actually counts as a disability? What qualifies as a disability will largely depends on the policy you choose, and the details in the plan.

Some policies are narrower than others. For example, an accident-only policy covers disabilities caused by injury, but not illness. More comprehensive disability insurance policies can cover both illness and injury, though exclusions and limitations may still apply.

Depending on your coverage, disability insurance may provide income support if:

• You’re injured in a car accident and need months of rehabilitation.

• You fall while skiing, break an arm, and your job requires full use of both hands.

• You experience mental health challenges that make it impossible to work.

The key thing to remember? Disability insurance policies aren’t one-size-fits-all.

What are the benefits of disability insurance?

The benefits of disability insurance go beyond replacing a paycheque. For Canadians and their families, disability insurance can provide financial stability and flexibility during an otherwise stressful time. Here’s what it can help with:

Income replacement

Disability insurance benefits are usually paid directly to you, which means you decide how to use the money — rent, groceries, medical costs, car payments, whatever’s most pressing. With private disability insurance, if you pay your premiums yourself using after-tax income, the benefits you receive are generally tax-free.

Peace of mind

The length someone is unable to work due to disability can last years — on average between 2.1 and 3.2 years. That’s a long time to rely on savings alone. Having income protection from disability insurance can ease financial stress so you can focus on recovery, not constant money worries.

Support while returning to work

Getting back to work after an illness or injury isn’t always a straight line. Some disability insurance policies may include return to work benefits, such as rehabilitation services, retraining, or workplace accommodations, to help make that transition smoother when you’re ready.

A top-up to government benefits

Government programs like Employment Insurance (EI), the Canada Pension Plan (CPP), or Quebec Pension Plan (QPP) can provide support, but eligibility rules are strict and coverage is limited. Private disability insurance can help fill the gap when government benefits don’t go far enough.

Coverage that stays with you

Disability insurance through an employer usually ends when your job does. Whereas private disability insurance isn’t tied to your employer, so it can stay with you if you change jobs, become self-employed, or retire.

More flexibility than workplace coverage

Group insurance plans don’t always go as far as expected. Many replace only about half of your net income, and benefits are often taxable if your employer pays the premiums – leaving you with less money to cover expenses.

On the other hand, individual disability insurance plans usually offer more flexibility, a broader definition of what is included as a disability, and optional features tied to how you actually work. If you pay the premiums yourself, benefits are generally tax-free.

More affordable than expected

With individual disability insurance, you can often adjust coverage to fit your needs and budget. Depending on the type of disability insurance and amount of coverage, it may cost roughly 1 per cent to 3 per cent of your annual income.

How much disability insurance do you need?

The short answer is: it depends. Disability insurance is generally designed to replace between 60 per cent and 85 per cent of your income. Many Canadians rely on workplace group coverage, but employer plans typically replace only part of your income, limit how long you’ll receive disability benefits, or place restrictions on what is covered as a disability. That’s why some people choose to supplement workplace coverage with a private disability insurance plan.

When calculating how much disability insurance you need, it’s more helpful to think about what your income supports — and which expenses are will still need to be covered if your paycheque stopped. A few key considerations include:

• Current coverage. Group benefits can help, but many replace only about half of your net income. That may work for a while, but what happens if you need long-term disability coverage?

• Your everyday lifestyle. How much does it actually cost to run your life right now? If you had to cut back, what’s realistic? And for how long?

• Your fixed expenses and savings. Bills don’t stop because you’re sick or injured, and savings can be wiped out faster than expected.

• The people who depend on you. If others depend on your income, going from two paycheques to one (or none!) can be a big adjustment. Add caregiving into the mix, and it can get even harder.

• Your work flexibility. If you couldn’t do your current job, could you reasonably pivot? Or does your income hinge on specific skills, physical demands, or credentials?

• Your longer-term plans. Time away from work can impact things like retirement, education savings, or buying a home.

Not sure where to start? You can plug your numbers into the disability insurance calculator from RBC Insurance and see how your income, expenses, and existing coverage stack up.

Key factors to consider when applying for disability insurance

Beyond the monthly benefit amount, a few details can make a big difference when applying for disability insurance:

• Your existing coverage. Take stock of what policies you already have in place and pinpoint any gaps in coverage.

• How is disability defined? This could a big consideration, as definitions vary by insurer. Some policies may focus on whether you can do your job, while others look at whether you can do any job. Also, carefully review the exclusions or limitations, including pre-existing conditions.

• The waiting period. This is how long you need to be off work before disability benefits kick in (e.g., 30, 60, 90, or 120 days).

• How long do disability benefits last? Some policies pay benefits for a set period, while others continue until a certain age, such as 65. Make sure that timeline aligns with how long you would want support to span.

• Cost, taxes, and flexibility. Premiums depend on factors like age, health, occupation, and coverage choices. It’s also worth checking out how benefits are taxed, whether coverage can be increased later, and whether partial work is allowed while receiving benefits.

• Support and claims. Ask how disability insurance claims are handled and whether the policy includes additional support, like return to work services.

Cover yourself and your income with disability insurance

The odds of winning the lottery are about one in 14 million, and people still buy tickets. But the chances of becoming disabled and unable to work at some point during your career? Closer to one in three.

Disability insurance can help safeguard the life you’ve built if illness or injury prevents you from working. Group disability coverage through an employer can help protect you, but it may not be enough to sufficiently cover your expenses.

If you’re unsure how much protection you need,  RBC Insurance’s disability calculator can help you estimate how your income, expenses, and existing coverage line up. Still have questions? One of our licensed insurance advisors can help you make sense of the options. Because your financial security isn’t something to leave to luck.

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