What is long-term disability insurance?

Disability insurance is essential to protecting you and your family. It can replace a major loss of income if you are injured or ill and can’t work. However, as important as this protection is, nearly half of Canadians still don’t have any disability insurance. 

Some employers provide short- and long-term disability insurance as a workplace benefit. However, the number of Canadians with disability coverage from their workplace declined from 57% in 2015 to 48% in 2018, as employers tighten their belts (source: RBC study). Without this employer coverage, Canadians can be left struggling to pay their bills and survive off savings — but this is where private disability insurance comes in. 

If employers do offer coverage, they likely offer short-term coverage, so most already know the basics of this short-term disability. This article discusses long-term disability insurance in-depth—a coverage that most often benefits from buying independently owned policies. Read on to learn about what long-term disability is, how it works, the difference between employer individual plans, and what disabilities commonly qualify for coverage.

What is long-term disability insurance?

Long-term disability insurance protects against major losses of income from persistent, ongoing health issues by providing a partial income replacement—typically, this benefit replaces 50 to 70% of your regular income. Coverage for long-term disability benefits usually begins right after a short-term disability period is over and can last for two to five years. However, some policies cover individuals until they’re 65. 

Long-term disability insurance provides peace of mind. You know if an accident or circumstance could leave you unable to earn an income, the policy can replace most of your earnings. This way, you can recover or manage your situation without worrying about your and your family’s financial needs. Common disabilities that trigger the need for a disability payout include cancer, mental health issues, musculoskeletal problems, and other physical disabilities resulting from accidents. 

So, suppose you get into a car accident, and you’re permanently unable to return to your full-time job. The benefits of a long-term disability insurance plan could provide a percentage of your income for a pre-determined number of years, usually two to five years or possibly up to age 65. 

Individuals typically use a private long-term disability policy to supplement employer-provided disability insurance. However, in most cases it’s usually more beneficial to take a stand-alone individual plan as the coordination of benefits may cause you to pay double the premium for minimal coverage. 

For example, your employer policy may cover 50% of your income for two years and your individual plan may cover 60% for up to 5 years. This doesn’t mean you’ll get 110% income coverage in the first two years. The employer plan will take precedence covering 50% of your income, then when the two years are up, the individual plan will cover the final three (making sure you get coverage for 50% of your income for a total of five years. In other words, you can’t stack your coverage, you can only coordinate.

There are also options outside of private long-term disability insurance. Federal and provincial governments provide programs like Employment Insurance (EI) and Canada Pension Plan (CPP). Workers Safety Insurance Board (WSIB) also provides supplemental income if you suffer a long-term disability due to a workplace incident. Lastly, your workplace may have group benefits that offer long-term disability insurance. 

These other options aren’t perfect, however, and many use individual long-term disability insurance to make up for the shortfalls. For example, EI can provide some income relief, but applicants must fall into specific criteria to receive payments. WSIB, on the other hand, only provides a benefit if you’re injured in the workplace on the job. This is why individual long-term disability insurance is vital. Individual policies let you customize your coverage, so you can choose how much income you want to cover, the length of coverage, the waiting period before coverage starts, and the company you want to pay premiums to.

How does long-term disability insurance work?

You get long-term income coverage in exchange for the premiums you paid while you could work. This usually costs between one to three percent of your annual income. You are no longer required to make premium payments once your benefit period starts.

Learn more about the cost of disability insurance.

It’s important to note that long-term disability policies have a waiting period, also known as an elimination period. This is the time between the start of your disability and the beginning of your payment period. Waiting periods can be 4, 8, 12, 16, 20, or 52 weeks — the longer the waiting period, the lower your premiums. This is because your disability might recover before the end of the waiting period. If so, you can return to work, and there’s no longer a need for long-term disability payouts.

During the waiting period before your long-term coverage begins, you may have short-term disability benefits kick in. The significant distinction between short- and long-term disability insurance is that short-term disability insurance considers a benefit payout period in weeks. In contrast, long-term disability insurance considers the benefit period in years. 

It’s important to remember that, due to the customizability of long-term disability policies, each plan differs in scope. For example, some policies may not cover mental health problems, despite it being a common long-term disability. Every policy will include its defined category of what a “disability” is. 

Any occupation vs regular/own occupation plans

Long-term disability insurance is categorized into “any occupation” and “regular or own occupation” plans. Any occupation plans only allow you to receive disability benefits if you’re entirely unable to work — i.e., your illness or injury means you can’t perform the duties of any job you’re reasonably suited for. 

For example, suppose you work as a cashier at a grocery store. You suddenly can’t perform cashier tasks, which require long periods of standing, due to an injury. In this case, you might still qualify to work as a store greeter, which can be done sitting down. You then wouldn’t be eligible for your policy’s disability benefits because you’re able to work another reasonably suited job despite your injury. 

A regular or own occupation plan means that an inability to perform the primary duties of your role qualifies you for disability benefits. So even if you could still work another job, you would receive benefits if you’re unable to perform the role you had before the injury or illness. 

Some insurers will end or reduce benefits, however, if they discover you begin working another role. We recommend own occupation plans for individuals with specialized professions that would require a significant pay cut if they chose to work in another field.

How long can you get long-term disability benefits from work?

Long-term disability insurance administered through your employer functions similarly to individual long-term disability insurance. A plan might provide two to five years of payouts or provide the benefit until your retirement age. 

However, you might not have the option to choose the benefit period for an employer-sponsored plan. An employer is typically selecting the benefit period instead. If the selected period doesn’t work for your circumstance, it might be beneficial to look into private insurance.

Employers may also give employees the option to upgrade their work policy. But doing so can come at an additional cost. For example, suppose your employer-sponsored long-term disability plan pays 50% of your income for five years after a 120-day waiting period. The plan might have an upgrade option, where, in exchange for a $50 bi-weekly paycheque deduction, your employer’s long-term disability insurance now offers a benefit of 65% of your income until you’re 65 after a 120-day waiting period. 

Again, each long-term disability insurance plan is unique. It’s critical to comb through the terms of your workplace insurance policy to understand how long benefits would remain if you could no longer work. You should also consider whether the benefit is enough to pay your usual expenses. At PolicyAdvisor, we’re happy to look at your existing policy to ensure you’re adequately covered. 

If you need additional coverage, we can help you look into an individual long-term disability policy. Having an individual plan lets you go outside of your workplace plan’s limitations. You can choose your own waiting period, coverage period, and benefit amount with an individual plan. 

Group plans vs individual plans

Below are some high-level differences between group and individual long-term disability plans:

It’s critical to highlight that the application process for the two plans can be substantially different. The application process for individual plans is similar to life insurance. There’s an underwriting process where the insurer evaluates your risks depending on medical history, questionnaires, and medical examinations. They also need to verify your income level and work credentials since your benefit amount is based on these factors. 

In contrast, group plans have a more accessible enrollment. Group plans might forego the whole underwriting process. However, insurers providing group plans are beginning to add employee health questionnaires to exclude risky individuals. Group plan insurers may also include exclusions for pre-existing conditions. 

This emphasizes the importance of understanding what’s included in your workplace insurance policy. You may discover your employer-sponsored long-term disability insurance is inadequate and buy an individual plan to supplement it.

Is life insurance the same as long-term disability insurance?

Long-term disability insurance and life insurance are quite different. Life insurance is a legal agreement with your life insurance company to pay a designated beneficiary a tax-free lump sum amount upon your death. 

Thus, the two main differences are: 

• Life insurance is paid in a lump sum to your designated beneficiary, while long-term disability insurance is a periodic benefit payment to you.
• Life insurance payouts trigger on your death, while long-term disability payouts trigger after the waiting period after you face a disability.

Overall, disability insurance aims to cover your daily expenses when you can no longer earn an income. In contrast, life insurance provides your beneficiary, often your spouse or children, with a lump sum payment to cover funeral costs, debts, and other expenses after your death. 

However, some life insurance policies offer a disability rider. This is essentially an add-on to life insurance coverage to accommodate the possibility of a disability. There are two key types of disability riders:

• Disability Waiver Rider: Eliminates life insurance premium payment requirements if you acquire a permanent disability
• Extreme Disability Rider: Pays out a portion of your life insurance benefit if you face a permanent disability

Although life insurance can accommodate disabilities through riders, it doesn’t replace a long-term disability policy. Riders don’t provide the flexibility and customizability that an individual long-term disability policy has. Riders also offer less protection, as it only pays out a portion of your life insurance benefits and doesn’t provide any ongoing income replacements.

What illnesses qualify for long-term disability?

Long-term disability insurance covers scenarios when you can’t work due to an illness or injury that remains after the policy’s waiting period. At this point, your short-term disability benefits are usually over. Such a disability might result from mental health complications, accidents, or illnesses such as cancer. 

The policy won’t cover work-related or on-the-job injuries. These are managed by WSIB. 

Examples of long-term disabilities that qualify for coverage

Suppose you’re at a dinner party. Your hand feels a sudden paralysis, and you accidentally drop a wine glass. You continue to feel muscular weakness and pains and finally visit the doctor. After numerous tests, you discover you have Multiple Sclerosis (MS). MS eventually leads to an inability to walk and adequately use your legs.

After the diagnosis, you may begin to use sick days from your job at a furniture warehouse where you constantly move heavy items. After a week, you run out of sick days and move to short-term disability benefits. You might also receive EI and CPP disability benefits at this point. After 16 weeks, you transition from short-term disability and EI benefits to long-term disability benefits, which replace most of your prior income. The benefits continue until you reach 65. 

Another example could involve mental health issues. If you suffer from severe depression and cannot work, you may go through similar motions as the previous example. However, suppose in this scenario, you recover and better manage your depression after three years. In this case, your long-term disability benefits would stop once you’re well enough to return to work. 

Other common illnesses and injuries include: 

• cardiovascular disease 
• stroke
• cancer
• major car accidents 
• arthritis 
• mood disorders, including bipolar, anxiety, or depression
• PTSD
• mental health problems
• back injuries
• fractures
• head or brain injuries (concussions)
• brain injuries
• arthritis, rheumatoid arthritis
• diabetes
• nervous system disorders and seizures
• multiple sclerosis
• lupus
• fibromyalgias and chronic fatigue syndrome
• infection
• gastrointestinal illness (Crohn’s, colitis, irritable bowel syndrome, diverticulitis)

Does anxiety or mental health issues qualify for long-term disability?

Anxiety and mental health issues are some of the top reasons that people claim their long-term disability policies. However, each insurer and their plans are unique. Some cover mental health illnesses while others don’t. 

As medical experts diagnose and recognize mental health issues on the same level as physical illnesses and injuries, more insurers are including conditions like anxiety in their disability coverage. There’s no guarantee that a policy covers mental health — some might require additional premiums to cover it or cite someone’s mental health history to exclude mental illnesses from the scope of the policy. 

A policy’s scope can also account for the severity of the mental illness. Severe depression involving a medical diagnosis and drug treatments might justify a long-term disability payout. However, long-term leave from work due to stress may not necessarily trigger a policy’s coverage.

Should you get a long-term disability plan?

You need to think about your unique personal and family situation when deciding whether to buy long-term disability insurance. Consider the following: 

• How much income will you need to replace if you can no longer earn a salary from your job?
• Could programs like EI or CPP or your workplace group disability insurance fully cover your expenses?
• Do you need to purchase additional coverage to make up the difference between what you currently earn and any income you’d receive if you faced an injury, accident, or disability?

These questions are challenging to answer. It might help to work with an insurance advisor to determine what type of long-term disability coverage you need. PolicyAdvisor’s expert advisors can suggest an individual long-term disability policy and match you to an insurer that fits your needs. 

Schedule a call with one of our experts today. We can ensure you and your family are protected if you ever face an illness, accident, or injury that leaves you unable to work.

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