Short vs. Long Term Disability Insurance: All You Need to Know

Disability insurance in Canada replaces your income when you are unable to work due to an accident or illness. Let’s take a closer look at the differences between short and long term disability insurance, and why these differences matter.

How does short-term disability insurance work?

Short-term disability insurance is also referred to as STD or a “weekly indemnity.” As the name suggests, it covers you for a short period of time, typically around six months and usually less than a year. This coverage has two functions: first, it replaces income when you have a shorter recovery period, such as a broken bone. Second, it provides income during the elimination period of long-term disability insurance, should you need to switch to long-term later on.

Is short-term disability insurance taxable?

If your short-term disability is a benefit paid by your employer, the premium is not taxable, but the money you receive from the insurance payout will be taxed. On the other hand, if you pay for a short-term disability insurance policy, the benefit is received tax free.

Occupation class for short-term disability

As benefits are paid for a limited duration, most STD coverage is generally classed as own occupation. This means, you are disabled if you are unable to do your regular job. This differs from the more varied occupation classes for long-term disability insurance, which we will address in more detail below.

Does short-term disability insurance cover my entire salary?

No. Any type of disability benefit will not cover 100% of your usual wages. This is to limit insurance fraud and to incentivize people to go back to work as soon as possible.

How does long-term disability work?

Long-term disability, also known as LTD, starts after your short-term coverage ends if you are still disabled and in need of continuing benefits. Ideally you want to have your LTD coverage start right after your STD coverage to ensure there are no gaps in payments. Long-term disability coverage has a waiting, also known as an elimination, period – this can be covered by the STD benefit cycle. 

It is important to note that long-term disability insurance payments are often lower than short term. Depending on your occupation class and terms of your policy, you can be looking at between 30%- 85%. Typically, the range is 50%-60% of your income, but some policies are lower, and some are higher. 

The length of time you are covered under long-term disability depends on a number of factors, including if you recover and your occupation class.

Is long-term disability insurance taxable?

Just as with short-term, if your LTD coverage is a benefit paid by your employer, the premium is not taxable, but the money you receive from the insurance payout will be taxed. If you pay the premium through your workplace or if you have an individual policy, the benefit is tax-free.

Occupation classes for long-term disability insurance

Long-term disability is classed as own occupation, regular occupation, or any occupation. There is a total disability class too, but that is generally used for government CPP benefits. 

Own occupation means you can not do the duties for the job you specifically trained for, and even if you switch careers, you will receive benefits as though you are totally disabled for life. Needless to say, an own occupation policy class has a high premium, and not everyone can even qualify for this. It is reserved for those that dedicated years of study for one profession, such as doctors.

Regular occupation means you cannot perform the duties of the job you specifically trained for, and benefits cease if you switch careers. This is another desirable, but expensive class and again, only available under certain circumstances. 

Any occupation is the broad category that means you can return to work in some capacity after a set amount of time. It may not be in the career you trained for or even close to your previous salary. Regardless, after a set amount of time (which is listed in the policy) it is expected that you will return to work, if you can work in any capacity.

Does long-term disability insurance cover my entire salary?

Long-term disability insurance does not cover your entire salary. It covers a percentage determined by your occupation class and the limits in the policy as per each insurer. It is also important to note that you cannot stack policies. This means, you could have multiple individual policies plus coverage through work, but when you make a claim, cross checks are done to ensure you are not receiving more than your maximum allowance, and some benefits may be reduced to compensate for the other claims.

Does disability insurance differ among provinces?

A disability insurance Ontario provider is governed by a different set of regulations than an insurer in, for example, Alberta or Saskatchewan. Each province has their own levels of provincial regulation. The Financial Services Commission of Ontario licenses and regulates insurance professionals in Ontario. In Alberta this is handled by the Alberta Insurance Council. While there may be some nuances in how the regulations and oversight is handled provincially, the basics of disability insurance in Canada are largely the same. The province will not have a major impact on the occupation class or other such terms, as most policies are sold across Canada by national insurers such as Manulife. The greater differences will be seen among insurers, not provinces.

Where to get a disability insurance quote

Disability insurance is part of most employer benefit plans, but the coverage is usually lower than your allowable maximum. To top up coverage or to get an individual policy, speak with a broker. While agents sell the policies of one company, a broker can access, compare, and sell the products of several. The brokers at Insureye Inc. have access to 25+ Canadian insurers, so this means they can always find the best disability insurance quote for your needs and your budget. Contact an Insureye Inc. broker today to learn more.

Author: Oliver Curtis

Hi there. I’m Oliver. I’m just a young boy from the outskirts of… Okay, that’s a lie, I’m not a young boy anymore, although I certainly feel that way at heart.