Income Protection Insurance in Canada: Everything You Need to Know About Safeguarding Your Income During Illness or Injury

income protection insurance in canada
income protection insurance in canada - what is income protection insurance for

With the rising cost of living and stagnant wage growth in Canada, more and more professionals are looking to income protection insurance to provide a safety net in case they become unable to work.

This comprehensive guide will provide an in-depth look at how income protection insurance in Canada works, who needs it, and how to find the right policy for your needs at Life Insurance Newspaper in Canada.

What is Income Protection Insurance?

Income protection insurance, or disability insurance, is designed to partially replace your income if you cannot work due to illness, injury, or accident. Policies will provide a monthly, tax-free benefit that covers a percentage of your pre-disability earnings, usually up to 70%.

Unlike employment insurance from the government, which only covers up to 55% of income for a maximum of 15 weeks, income protection policies can pay benefits until retirement age. This ensures you can continue covering living expenses like mortgage payments, bills, and healthcare costs even with a loss of your regular earned income.

According to Statistics Canada, 1 in 7 Canadians will be disabled for over six months during their working career. Income protection can be the difference between financial hardship or maintaining your standard of living if the unexpected occurs.

Who Needs Income Protection Insurance?

Income protection insurance is suitable for any working professional or self-employed Canadian who would struggle to cover their living expenses if they lost their income. It’s essential for:

  • Professionals in higher-risk occupations like construction, healthcare, and manual labour. These fields have a greater likelihood of injury and work-related disabilities.
  • Self-employed Canadians. Those who work for themselves are not eligible for employer-sponsored disability benefits.
  • Dual-income households. Losing one income can put families in financial peril. Income protection allows the healthy spouse to focus on caregiving instead of immediately returning to work.
  • Parents with young children. Loss of income could impact the family’s ability to afford child care, education, life insurance for kids in Canada and daily expenses.
  • Individuals with insufficient savings. Canadians without emergency savings equal to 6 months of expenses are vulnerable to income loss.
  • Canadians with significant financial obligations. Income protection helps cover debts like mortgages, car loans, and credit cards during lost wages.
  • High-income earners. A disability could significantly reduce the quality of life without adequate protection.

In reality, anyone whose financial well-being depends on their ability to earn an income can benefit from income protection insurance. Having policies in place guards against the unexpected and provides invaluable peace of mind.

How Does Income Protection Insurance Work?

Income protection policies have several key features that determine how benefits are paid out:

  • Coverage Amount: This is the monthly amount the policy will pay out, typically up to 70% of your gross monthly earnings. Those with high essential expenses may opt for more coverage.
  • Benefit Period: This defines how long monthly payouts will continue after the waiting period. Options usually include two years, five years, to age 65, or even lifetime coverage. More extended benefit periods cost more but provide enhanced protection.
  • Waiting Period: The waiting period is how long you must be unable to work before benefits kick in, usually 30, 60, 90, 120 or 180 days. Shorter waiting periods cost more but provide faster financial relief.
  • Definition of Disability: Most policies use an “own occupation” definition where you’re considered disabled and eligible for benefits if you cannot perform your regular job duties. Stricter definitions like “any occupation” are also available.
  • Partial Disability Benefits: Some plans provide partial benefits if you can work part-time or in a reduced capacity. This allows people to transition back to work smoothly.
  • Guaranteed Renewability: This ensures the insurance company can only cancel your policy if premiums are paid. It provides coverage security.
  • Cost of Living Adjustments (COLA): COLA helps benefits keep pace with inflation annually so buying power doesn’t decrease over time. This is an optional rider that adds cost.
  • Residual Disability: This optional rider provides partial benefits if you return to work at reduced earnings post-disability. It fills income gaps during recovery.

When structuring your policy, your advisor will help analyze your financial obligations, risk tolerance and lifestyle to design an optimal plan.

How Much Does Income Protection Cost?

Income protection premiums are based on an array of risk factors:

  • Age: Younger applicants pay less as they pose a lower risk. Premiums increase with age as claim likelihood rises.
  • Gender: Historically, women are paid more as they tend to have more claims. However, as of 2022, insurers can no longer use gender to set rates in Canada.
  • Occupation: Risky, manual and injury-prone jobs like construction pay higher premiums due to increased chance of disability.
  • Lifestyle: Tobacco use, high-risk hobbies, poor diet, and limited exercise may increase premiums.
  • Health: Pre-existing conditions, especially those impacting the ability to work, can increase costs or lead to policy declines.
  • Coverage Amount: Larger monthly benefit amounts cost more to fund higher claim payouts.
  • Benefit Period/Waiting Period: More extensive coverage with more extended payout periods and shorter waiting times costs more.
  • Riders: Additional riders like Cost of Living Adjustment, residual disability, and partial disability benefits add premium costs.

To save money, opt for more extended waiting periods, lower coverage amounts, and shorter benefit periods. For young, healthy professionals under 30, basic policies can start at around $30 per month. Those needing enhanced coverage could pay $150 monthly or more.

How Do You File an Income Protection Claim?

Should disability strike, here is the general process to file a claim:

  1. Notify your insurer promptly, usually within 30 days of becoming disabled. Communicate clearly how your condition impacts your ability to work.
  2. Submit initial medical evidence documenting your disability, its severity, and the required waiting period. Medical records, tests, and physician statements will be required.
  3. The insurer will review the submitted evidence and evaluate your claim eligibility. They may request a second medical opinion or independent exam.
  4. If approved, benefits will commence after any waiting period. You must continue providing ongoing evidence at regular intervals confirming your disability.
  5. For longer claims, insurers occasionally check-ins and reassessments to confirm ongoing eligibility. They may request updated medical records or exams.
  6. When able to return to work, whether part-time or full-time, notify your insurer promptly to avoid any benefit overpayments.
  7. If your claim is ever denied, follow the insurer’s appeals process to request further review before pursuing legal action. Document everything.

The key is thorough, clear communication with your insurer at all stages. Making sure medical evidence is extensive helps facilitate smooth claims processing.

Income Protection Insurance Claim Statistics

  • In 2021, the insurance industry paid $2.7 billion in individual disability claims in Canada. (CLIFF)
  • Over 216,000 disability claims were approved in 2021. The average monthly benefit was $1,900 tax-free. (CLIFF)
  • Over 90% of disability claims are approved on initial submission when applicants follow the proper protocols. The fastest payouts occur when thorough medical evidence is provided upfront.
  • Musculoskeletal issues like back, neck and joint pain are the leading cause of disability claims in Canada, making up over 25% of claims. (Sun Life)
  • Mental health issues, including depression, anxiety, PTSD and addiction, are the 2nd leading cause, accounting for over 15% of claims. (RBC Insurance)
  • Own occupation policies see claims approval rates of up to 80-85% since disabilities are judged on your regular occupation. Any occupation policies approve closer to 50-60% since more stringent criteria must be met.

These statistics highlight the prevalence of disabilities in Canada and reinforce the value of income protection to offset the risks. With probabilities of claim much higher than life insurance or critical illness coverage, income protection helps safeguard your livelihood.

Income Protection Insurance FAQs

Is income protection taxable?

No, individual disability benefits are received tax-free. This enhances the value of your coverage since you keep 100% of the payout.

Is income protection mandatory in Canada?

No, income protection is an elective, individual insurance policy. It is not required by law. However, mortgage lenders may require proof of disability coverage for high-ratio mortgages.

Do I still qualify for EI if I have income protection in Canada?

You can still collect employment insurance after the EI waiting period while concurrently receiving income protection benefits. Your EI amount may be slightly reduced to avoid any overpayments.

Does disability insurance cover pre-existing conditions?

It depends on your policy. Some insurers offer coverage for specific pre-existing conditions after an exclusion period, often 12-24 months. For others, those conditions would have a permanent exemption.

What if my disability recurs?

Most individual plans include a recurrent disability provision where recurring claims from the exact cause within six months can pick up where the prior claim left off without restarting waiting periods.

Are there any discounts available?

Some common ways to reduce income protection premiums include multi-policy discounts if you bundle with other insurance, employee group rates, higher deductibles, discounts for physicians and professional associations, and buying during early adulthood when rates are cheapest.

Can I purchase income protection after becoming disabled?

Unfortunately not. You must purchase coverage and satisfy health requirements before becoming disabled. After a disability occurs, it becomes too late to obtain individual income protection. Maintaining employer group LTD during sick leave is recommended.

How do I determine the right coverage level?

A good benchmark is to cover 60-80% of your gross monthly income. Factor in fixed expenses, debts, potential employer benefits loss, and other income sources like a working spouse or social assistance.

Should I choose my own or any occupation definitions?

This depends on your job’s physical demands. If your career relies heavily on specialized skills that would be hard to replace if debilitated, your occupation is preferable. Sedentary desk jobs may qualify under any occupation more easily.

Can I receive CPP Disability and income protection concurrently?

Yes, your private disability benefits are primary, while CPP is secondary. CPP may offset part of your income protection depending on the amount, ensuring you don’t receive more than your pre-disability earnings between the two.

Get the Income Protection You Need

Income protection insurance provides invaluable security that your financial obligations remain covered even if health issues prevent you from working. Policies can safeguard your family’s lifestyle, assets, retirement savings and peace of mind.

To find the proper income protection policy for your unique situation, contact the experts at LifeBuzz. Our experienced advisors will analyze your financials, career, family commitments and risk factors to design a tailored plan. Get a free quote today so you can rest easy knowing your income is protected.

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