Long-term disability insurance in Canada: A complete guide

Long-term disability (LTD) insurance provides income protection if an illness or injury prevents you from working for an extended period. This coverage can be important for Canadians because nearly 8 million people aged 15 and older, 27% of the population, were living with a disability, according to the latest comprehensive Statistics Canada data. Long-term disability benefits typically replace part of your income after an elimination period and can continue for several years or until age 65.

What is long-term disability insurance?

Long-term disability insurance provides income protection if you become unable to work due to a serious illness or injury. It typically replaces 50% to 70% (sometimes up to 85%) of your income and kicks in after short-term disability benefits end. 

Coverage can last 2, 5, or 10 years, or even until age 65, depending on the policy. Common conditions that qualify for benefits include cancer, mental health disorders, and musculoskeletal injuries, helping individuals manage financial needs while recovering.

While employer-provided disability plans and government programs like EI, CPP, and WSIB offer some coverage, they often have limitations on benefit amounts, eligibility, and coverage duration.  An individual policy can help fill gaps in employer-sponsored coverage. Private long-term disability insurance allows you to customize coverage, choosing benefit amounts, coverage length, and waiting periods. However, the benefits are often coordinated with other income (CPP‑D, WSIB, EI, employer DI), and tax treatment depends on who pays the premium.

What are the types of long-term disability insurance?

There are three types of long-term disability insurance. It is available through workplace plans, government plans, and as individual policies. The main differences are who qualifies, how much control you have, and whether the coverage stays with you if you change jobs.

• Group long-term disability insurance: This coverage is provided through an employer or a professional association. It provides coverage for a portion of your salary if you become disabled. The plan offers pre-set benefits and policy terms, which may include limitations on benefit amounts, waiting periods, and coverage duration. Association plans can be particularly relevant for professionals who do not have employer-sponsored coverage
• Individual long-term disability insurance: Individual or private LTD insurance is purchased privately from an insurer. This provides greater control over the benefit amount, waiting period, benefit period, and definition of disability. It can supplement existing group coverage and help fill gaps in workplace or association plans
• Government disability benefits: Government programs can provide financial support to Canadians who cannot work because of a disability. Depending on the situation, this may include EI sickness benefits, CPP disability benefits, or workers’ compensation benefits such as WSIB

Differences between group and individual long term disability plans

Group and individual long-term disability (LTD) insurance differ in cost, underwriting, taxation, coverage flexibility, control over the policy, and portability. In the table below, we have listed the differences between group and individual long-term disability plans. 

Group vs individual long-term disability plans:

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 circumstances, 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. 

What is partial or residual disability insurance?

Partial or residual disability insurance provides benefits when an illness or injury limits your ability to work or reduces your income, but does not prevent you from working entirely. For example, if you return to work part-time or in a reduced-capacity role and earn less than before your disability, the policy may pay a proportion of your long term disability benefit to help replace the lost income.

How does long term disability insurance work?

To get the benefits of long-term disability insurance, you pay premiums while working, and if you become disabled, you submit a claim and complete the policy’s waiting period before receiving monthly benefits.

Here’s how a long-term disability policy works:

• You pay premiums while you are working: You get long-term coverage in exchange for the premiums you paid while you could work. This usually costs between one and three percent of your annual income. You are no longer required to make premium payments once your benefit period starts
• You become disabled: If an illness or injury prevents you from working and meets the policy’s definition of disability, you can submit a claim to your insurer
• You complete the waiting period: Also called the elimination period, this is the time between the onset of your disability and when benefits become payable. Common waiting periods include 4, 8, 12, 16, 20, or 52 weeks or even 2 years. Generally, a longer waiting period means lower 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.
• You can get short-term disability benefits: During the waiting period before your long-term coverage begins, you may have short-term disability insurance
• You receive long term disability benefits: Once your claim is approved and the waiting period ends, the insurer pays the long term monthly disability benefit outlined in your policy. Your long-term disability benefits may continue for a specified number of years or until a certain age, provided you continue to meet the policy’s definition of disability

Core definitions of disability

Not every illness or injury automatically qualifies for LTD benefits. Your policy will define what constitutes a disability and the conditions you must meet to receive benefits. For example, some policies use an “own occupation” definition, while others may require that you be unable to perform any occupation for which you are reasonably suited by education, training, or experience.

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 are 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 are able to work another reasonably suited job despite your injury. 

An 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 are 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.

What illnesses qualify for long-term disability?

A LTD can be caused by illness, injury, or chronic conditions and must meet the definition of disability in your insurance policy. Some of the most common long-term disabilities include:

• Serious illnesses (e.g., cancer, heart disease)
• Mental health disorders (e.g., severe depression, anxiety)
• Chronic conditions (e.g., multiple sclerosis, arthritis)
• Injuries (e.g., spinal cord damage, paralysis)

Other common illnesses and injuries include: 

• PTSD
• Back injuries
• Factures
• Head or brain injuries (concussions)
• Diabetes
• Nervous system disorders and seizures
• Lupus
• Fibromyalgias and chronic fatigue syndrome
• Gastrointestinal illness (Crohn’s, colitis, irritable bowel syndrome, diverticulitis)

To qualify for benefits, your condition must significantly impact your ability to work and may require medical proof.

How can long-term disability insurance help in real-life situations?

One of our advisors recently helped a client who worked in a physically demanding warehouse job. The advisor reviewed his income, occupation, and financial obligations and helped him choose a long-term disability policy that would provide monthly income if an illness or injury prevented him from working.

Later, the client was diagnosed with multiple sclerosis (MS), which made it difficult for him to continue performing his regular duties. After using his sick days and available short-term disability benefits, he completed the waiting period under his long-term disability policy and began receiving monthly benefits that replaced a portion of his lost income. This helped him continue covering his living expenses while he was unable to work.

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

Yes, anxiety and other mental health conditions can qualify for long-term disability benefits if the condition prevents you from working and meets your policy’s definition of disability. However, some LTD policies place specific limits on mental health claims, such as a maximum benefit period of 24 months. Short-term disability (STD) coverage may also apply first, but it typically provides benefits for a much shorter period, often several weeks or months, before LTD begins.

Your insurer will assess medical evidence and your ability to work when reviewing the claim. For instance, 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.

Benefits of long-term disability insurance in Canada

Disability insurance benefits anyone in their prime working age in the following ways:

• Income protection: Disability insurance ensures a steady income if you are unable to work due to illness or injury. Many people think that they won’t suffer from a disability, but statistics show that disabilities are more common than you might expect
• Peace of mind: Knowing you have financial support in case of disability relieves stress. Some might say they have savings, but savings can deplete quickly without a regular income
• Covers expenses: It helps cover daily living expenses, medical bills, and rehabilitation costs. You might think you can rely on your spouse’s income, but a single income may not be sufficient, especially with additional medical expenses
• Maintains standard of living: Helps you maintain your lifestyle and support your family financially. Your employer may provide workplace benefits, but employer-provided plans may not offer adequate protection or may end with your job
• Customizable coverage: Policies can be tailored to your specific needs, ensuring optimal coverage. Some might find disability insurance expensive, but the cost of not having coverage can be far greater in the long run

How long do most long-term disability benefits last?

The duration of long-term disability benefits can vary based on the kind of disability that you have or the specific plan that you have purchased. Some companies offer disability benefits for a specific period such as 2, 5 or 10 years, whereas other companies can extend their disability benefits until an individual reaches 65 years of age. 

Many individuals choose coverage that lasts until they reach retirement age or can access other financial support, ensuring long-term financial security in case they are unable to return to work.

How much long term disability coverage do you need?

The long-term disability coverage you need depends on the amount of income you would want to replace and how much is actually covered through your employer or government plans. You should choose coverage that can replace 50% to 70% of your income. 

Some of the factors that you should take into consideration to determine the coverage are as follows:

• Calculate your monthly take-home income. This gives you a starting point for the amount you may need to replace
• Review your existing disability benefits. Check your employer’s group plan, CPP/QPP disability benefits, and other sources of income you may qualify for
• Calculate your essential monthly expenses and include housing, food, utilities, debt payments, insurance, and other ongoing financial commitments
• Cover the remaining income gap through an individual long-term disability insurance policy. Subtract the employer benefits from your estimated monthly expenses to check how much individual coverage will be enough

How is long-term disability insurance taxed in Canada?

The tax treatment of long-term disability (LTD) benefits depends primarily on who pays the premiums:

• Employer-paid premiums: If your employer pays all or part of the long-term disability premiums, the benefits you receive are generally taxable as income
• Employee-paid premiums: If you pay the entire premium yourself with after-tax income, your disability benefits are generally tax-free
• Shared premiums: If you and your employer both contribute to the premiums, the tax treatment will be dependent on the benefits received from your employer

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 once 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
• Disability income rider: Provides a monthly income benefit if you become totally and permanently disabled and meet the policy’s eligibility requirements

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 they only pay out a portion of your life insurance benefit and do not provide any ongoing income replacement.

Do I qualify for CPP as well as LTD coverage?

Yes, you can qualify for both Canada Pension Plan Disability (CPP-D) and long-term disability coverage at the same time. The eligibility rules, however, vary for the two plans. To qualify for CPP-D, you must be under 65 years of age, while for other long-term disability plans, the eligibility will depend on the disability plan type you choose. Moreover, your long-term disability insurer will also require you to apply for CPP and may reduce your long-term disability benefit by the amount of CPP you receive. This is known as an offset, so receiving both does not necessarily mean you will receive the full amount of both benefits.

Things to consider when buying long-term disability insurance

When buying long-term disability insurance, a few things you need to consider include the definition of disability, waiting period, monthly benefits, and a few more.

• Definition of disability: Check whether benefits are based on your ability to perform your own occupation or any occupation you are reasonably suited for
• Monthly benefit: Choose an amount that can cover your essential expenses and supplement any existing disability benefits
• Plan type: While individual plans are more customizable, group plans are more affordable. Pick a plan that best suits your needs and budget
• Waiting period: A longer waiting period generally means lower premiums, but you will need enough savings or other coverage to support yourself during that time
• Benefit period: Policies may pay benefits for a set period, such as 2 or 5 years, or until a specified age, such as 65
• Exclusions and limitations: Review conditions or circumstances the policy does not cover before purchasing

Should you get a long-term disability plan?

Yes, long-term disability insurance may be worth considering if losing your income because of an illness or injury would make it difficult to cover your regular expenses. Whether you need additional coverage depends on your income, savings, employer-sponsored benefits, and eligibility for government disability programs.

Before purchasing an LTD plan, consider these questions:

• 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 can sometimes become 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 now to get started!