Disability insurance: individual, group or both?

Your income is your main asset

For most people, the greatest wealth is not the house or the savings, it is the ability to earn an income year after year. An illness or accident that interrupts that ability weighs on the budget well before it affects net worth.

Disability insurance answers this reality: it pays part of your income when you can no longer work. The question is therefore not only “am I insured?”, but “who protects my income, for how long and on what terms?”.

Two main forms exist: group insurance, offered by an employer or an association, and individual insurance, bought in your own name. They are not equal in every respect, and they are not mutually exclusive: some people combine the two.

This article contains no amounts and no premiums. It helps you ask the right questions, and an authorized person, registered with the Autorité des marchés financiers (AMF), can then apply them to your situation.

What disability insurance protects

Disability insurance replaces part of your income if illness or injury stops you from working. It does not reimburse medical costs: those fall under other protections, such as supplementary health insurance or public coverage.

It is also distinct from life insurance, which pays on death, and from critical illness insurance, which generally pays a lump sum if a specific diagnosis is made. Disability supports your income during the period you cannot work, according to the contract’s definitions.

Public programs also exist, such as those covering workplace injuries or maternity and parental benefits. They answer specific situations and do not cover everything. To understand what is already provided, consult the public bodies concerned.

Disability insurance therefore targets a particular need: keeping income flowing during a health-related interruption of work. That is the need to assess before comparing formulas.

Group insurance

Group insurance is often offered by the employer as part of a benefits package. It is generally inexpensive for you, sometimes without a medical exam, and simple to get: you enrol, and coverage starts under the plan’s rules.

Its limits are just as important. It generally ends when you leave the employer, and its terms are set by the plan, not by you: definition of disability, benefit period, share of income replaced. The employer or insurer may also change the plan over time.

Group coverage therefore depends on your job. If you change work, become self-employed or cut your hours, what existed may disappear or change.

To know what you really have, ask for the plan booklet or contract, and look for the same elements as in an individual policy: definition, waiting period, benefit period, exclusions. Many people discover at that point that coverage is thinner than they thought.

Individual insurance

Individual insurance is a contract you own. It follows you if you change jobs, become self-employed or your employer changes its benefits. Its terms are chosen up front and, depending on the contract, generally cannot be changed unilaterally by the insurer as long as you pay the premium.

This stability has a price: individual insurance generally requires a health assessment and a description of your occupation, and the premium reflects them. The insurer may refuse the application, limit it or add exclusions.

It also offers more flexibility in choosing terms: waiting period, benefit period, definition of disability, options to adjust the protection over time. Each choice affects both the premium and the protection.

For a self-employed worker, someone whose group coverage is limited or someone who wants stable protection, individual coverage generally deserves a look.

Terms to compare

Whatever the formula, four terms determine the real value of a disability insurance contract.

The definition of disability: being unable to do your own occupation is not the same as being unable to do any occupation you are qualified for. The difference can decide a claim. The waiting period: the number of days before benefits begin, to be weighed against your ability to manage financially during that time. The benefit period: a few years, or up to an age set in the contract. The tax treatment of benefits, which generally depends on who pays the premiums and how.

Also look at the share of income replaced, exclusions, renewal conditions and whether you can return to work part-time while still receiving benefits.

On taxes, draw no conclusion without checking: the rules depend on your situation, and the Canada Revenue Agency and Revenu Québec are the official sources.

Combining both: when it is worth discussing

Some people keep their group coverage and add individual coverage. The idea is simple: the group plan serves as an inexpensive base while you are employed, and the individual policy provides protection that does not vanish with the employer or fills the gap between your income and what the group replaces.

Others prefer a single formula for simplicity. There is no universal answer: it depends on your job, your expenses, your savings, whether the household has another income, your health and your risk tolerance.

Before stacking coverages, check how they fit together. Some contracts cap the total benefits you can receive, or reduce amounts when other sources of income exist. Also consider that you may not be able to buy later: if your health changes, access to individual coverage can become harder.

This is a discussion to have with an authorized person, who knows the products available and can set them against your situation.

A hypothetical scenario

Imagine a person, called Alex, who works as an employee at a company and has group disability insurance. Alex has never read the plan booklet in detail and assumes that “everything is covered”.

A few years later, Alex leaves the company to start out on their own. Overnight, the group coverage ends. Alex then wants individual insurance, but finds that a health assessment is required and that, in the meantime, a health issue has appeared. The application may be refused or come with an exclusion.

In another version of the story, Alex would have read the booklet earlier, understood that the coverage was tied to the job and asked an authorized person to look at individual protection while in good health and employed.

This scenario is fictional and contains no figures. It simply shows that job-based coverage can disappear at the very moment it is needed, and that the time to get informed is before the change.

The waiting period in practice

The waiting period is the stretch between the start of the disability and the first payment. It is counted in days, and it is chosen up front in an individual policy, whereas it is set by the plan in group coverage.

A short waiting period brings benefits closer to the start of the work stoppage, but the premium generally reflects that. A longer one lowers the premium, provided you can manage without income during that time. The right question is therefore not “what is the ideal waiting period?” but “how long can I hold on with my reserves, my paid sick days and the other possible sources of income?”.

To answer, draw up a simple list: your fixed expenses, the money available quickly, the sick leave your employer provides and the public benefits you might be entitled to. That list becomes the basis for the discussion with an authorized person.

Finally, check whether a disability that resumes shortly after a return to work counts as the same period or a new one: that can avoid a second waiting period.

Where to learn more and whom to ask

To go deeper without commitment, several public and independent resources are useful. The AMF offers a register to check that a person is authorized to sell life and health insurance, along with consumer information. The Financial Consumer Agency of Canada publishes neutral explanations of financial products and consumer rights.

For the tax treatment of benefits, the Canada Revenue Agency and Revenu Québec are authoritative. For disputes with a life or health insurer, the OmbudService for Life & Health Insurance offers a free resolution service, after you have gone through the insurer’s internal process. The Canadian Life and Health Insurance Association also publishes general glossaries.

Get into the habit of noting your questions as you read, then putting them to an authorized person. They can place them in the context of your job, your income and your expenses, which no website can do for you.

There is no rush: a disability contract is chosen after understanding what it replaces, for whom and for how long.

Mistakes to avoid

Several mistakes come up often when thinking about disability insurance:

• assuming group coverage is enough without having read the plan booklet;
• ignoring what happens to coverage if you leave the employer;
• comparing only the premium, without looking at the definition of disability and the benefit period;
• underestimating the waiting period, and not planning how to manage financially during it;
• not finding out about the tax treatment of benefits;
• leaving out or downplaying medical information on an application, which can jeopardize a future claim;
• waiting until a health problem appears to look for coverage.

Each of these mistakes is fixed by a document read or a question asked. An authorized person can help you spot what is missing and understand the terms of each contract, so you do not have to decipher everything alone.

Questions to ask

Whether you are looking at a group plan or an individual proposal, here are questions to ask, preferably in writing:

• What is needed to be declared disabled: my own occupation or any occupation?
• After how many days do benefits begin?
• For how long are they paid?
• What share of my income is replaced, and is there a maximum?
• Are benefits taxable, and under what conditions?
• What happens to my coverage if I leave my job or change status?
• Can the contract be cancelled or changed by the insurer, and in which cases?
• What are the exclusions and situations not covered?

CompareTaux shows no rates and makes no decision for you: the service passes your request to an authorized person, registered with the AMF, who can obtain proposals and explain them to you. In case of a dispute with a life or health insurer, the OmbudService for Life & Health Insurance offers a free service.

Frequently asked questions

Sources

• Autorité des marchés financiers (AMF)
• Financial Consumer Agency of Canada
• OmbudService for Life & Health Insurance
• Canada Revenue Agency (CRA)