Disability Insurance vs Disability Riders in Canada

Losing the ability to work due to an accident or illness can devastate a person’s financial situation. But it doesn’t have to: disability insurance and disability riders for life insurance offer protection that can be tailored to your specific needs. Keep reading to find out which coverage type is the best option for you.

What is disability insurance?

Disability insurance protects people from income loss if they no longer have the ability to work due to an accident, degenerative illness, or other disability. Disability insurance provides a monthly tax-free benefit payment (typically between 60-85% of your income) until you become fit to work again or the policy term ends.

What is a disability rider?

Disability riders are actually life insurance riders;  optional add-ons to your coverage. There are two key types of disability rider: a Disability Waiver Rider, which eliminates the need for premium payments should the policyholder acquire a permanent disability from an accident or illness; and an Extreme Disability Rider, which provides access to a portion of one’s life insurance death benefit in cases of total permanent disability.

Disability insurance, the pros and cons

Pros:

• Independent policy: disability insurance is purchased as a standalone policy, meaning it is not dependent on your job’s workplace benefits or your life insurance policy. In other words, you have more freedom to customize coverage and benefit terms and can rest easy knowing your coverage will follow you if you change employers or change your life insurance policy.
• Income replacement: disability insurance effectively replaces the bulk of your income if you lose the ability to work, which is critical to maintaining a stable quality of life in the event of a disabling accident or illness.

Cons:

• Stringent underwriting: similar to life insurance, disability insurance requires a thorough underwriting process to determine whether you are eligible for coverage. This includes medical evaluations to establish any pre-existing conditions that could lead to a disability claim, as well as income assessment for coverage purposes.
• Higher premiums: while premiums do vary depending on the policy holder and their coverage, monthly premiums tend to be higher for disability insurance compared to disability riders. Factors that influence premium rates are age, health, and job, as well as coverage amount and term limits.

Disability riders, the pros and cons

Pros:

• Simple: disability riders can simply be added on to a life insurance policy at time of application, meaning that you will benefit from both types of coverage without having to apply for two policies and undergo multiple underwriting processes.
• Premium protection: disability waiver riders ensure that if you lose the ability to generate income, your life insurance premiums will be covered for the duration of your policy. This is especially important for whole life insurance, as it ensures your policy will remain active as it accrues in value.

Cons

• Less flexibility: a disability rider tied to your life insurance policy will inevitably have fewer options than an individual policy in terms of coverage terms and amounts. Typically, the benefits are capped at a lower threshold than those of individual policies.
• Less protection: a disability rider like waiver of premium only covers your life insurance premiums – and nothing else; there is no income replacement. An extreme disability rider provides early access to your death benefit, but that also means less of cash will eventually go to your beneficiaries.

What to choose?

When it comes to choosing between individual disability insurance or a life insurance rider for disability, there is no universal right answer. For those looking for customizable and robust disability insurance coverage, with an emphasis on income replacement, an individual policy is likely the way to go. 

A waiver of premium rider, by contrast, is a good option for those who may have comprehensive disability coverage through work but want to protect their life insurance policy from lapsing in the event of a disability. Finally, a disability income rider is a good option for those seeking to boost their coverage through a single life insurance policy.

• Learn more about when to buy disability insurance and how long coverage should last.