Does term life insurance cover disability?

by Mark Cluett
6 min read

Many procrastinate and put off talking about obtaining an individual disability insurance policy, but it’s something one should always keep in mind. If you are reading this, you are likely worried about the insurance policies you currently have in place and whether you’re in the best position possible for coverage. Your ability to earn an income isn’t a guarantee, as one accident could prevent you from paying your mortgage or other expenses.

With that in mind, it’s important to realize that just because you have term life insurance, it doesn’t mean that your life insurance coverage is going to cover everything. This rings especially true if you and your dependents rely on your ability to earn a paycheque. When you’re put in a position that prevents you from earning your regular income due to disability, tough times are likely to ensue.

KEY TAKEAWAYS

  • Neither term life nor whole life insurance policies cover disability by default
  • You can add disability riders to many insurance polices to cover circumstances where you are injured or ill and no longer able to earn an income
  • An individually owned disability insurance policy can be tailored to your needs and income levels for a more robust level of coverage
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What is life insurance?

Life insurance is an agreement between you and a life insurance provider, where if you die, they will pay a lump sum, tax-free benefit to someone you choose – also known as your beneficiary. In exchange, you agree to pay your insurance provider a monthly or annual premium: a small amount of money over the length of your policy

This doesn’t cover you if you’re dealing with long-term disability, as the policyholder has to be deceased before the death benefit can be paid (hence the name). With that said, some life insurance companies offer optional riders. These riders can be added to your regular life insurance coverage at the time of application and provide options and coverage for the future, should you find yourself dealing with disability or serious illness.

What is disability insurance?

Individually owned disability insurance is specifically designed to provide income protection to those who have lost income due to an injury or illness. This is different from a life insurance policy, as life insurance policies are focused on helping the estate or beneficiaries after the policyholder is deceased. There are certain disability riders you can add to term or whole life insurance at the time of application to give you more protection should you become disabled. But, they do not offer the breadth and customization of individually owned disability insurance.

The insured must be deceased for a life insurance policy to pay out; disability insurance policies only make payments if the if the insured remains alive, but has lost their income due to a disability.

To find out more about the different kinds of disability coverage, how your occupation relates to the kinds of coverage you can get, long-term disability insurance, Canada Pension Plan (CPP), and income replacement, read our guide to disability insurance.

Does term life insurance cover disabilities?

No, a life insurance policy does not cover disabilities. This is true whether it is a term life insurance policy or a whole life insurance policy. But, as mentioned, there are different ways your life insurance policy can protect you through optional riders.

Total Disability Waiver of Premium Rider

Under this rider, life insurance premiums are waived if the life insured suffers a permanent total disability. Total Disability Waiver of premium covers disabilities due to accidents as also those suffered due to illnesses. To claim under this rider, the life insured must:

  • not be able to perform essential duties of their occupation,
  • not be engaged in any other occupation, and
  • be receiving medical care for the condition that has caused total disability.

Generally, disability waiver riders only pay out after the individual has been totally disabled for at least 4 or 6 consecutive months. The premiums can be waived retroactively, including for the initial 4 or 6-month waiting period. The rider is valid until a certain age of the person to be insured, most often up to the age of 60 or 65.

Disability Income Rider

A Disability Income rider provides monthly payments to the life insured in the event they become disabled and unable to work. The policyholder will need to choose the time period for which the payments are to be made and the monthly payment (which is usually capped). This rider typically has a 30 or 90 day waiting period, with retrospective payments that start after the waiting period is over.

Mortgage Disability or Credit Disability Insurance Rider

A Mortgage Disability rider covers all or part of the life insured’s line of credit or monthly mortgage payments in the event of their temporary or permanent disability. The payments are made for a specified period of time such as 2 years from disability, 5 years from disability, or up to the age of 65. Credit riders typically have a waiting period of 90 days, although can be retroactive to 31 days in the event of disability from an accident. A proof of the outstanding loan is usually required at the time of the claim.

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Keep yourself covered with disability insurance

Disability insurance should be considered by anyone in their prime income earning years. As you make financial decisions based on the assumption that you’ll be receiving a regular paycheque, it’s important to contemplate what might happen if an injury or illness suddenly prevents you from earning your income. The insurance experts at PolicyAdvisor have experience helping Canadians understand their current disability benefits; and – if there are gaps in coverage, they can assist in obtaining additional disability insurances and coverage. Reach out below if you have any questions.

The information provided herein is for general informational purposes only. It is not intended and should not be construed to constitute legal or financial advice.

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