What Is Disability Insurance and How Does It Work?
Learn how this coverage replaces your income if injury or illness prevents you from working
For most people, the ability to earn a living is their single most valuable asset. If an injury or illness stopped your income tomorrow, how long could you manage your expenses? Disability insurance exists to answer that question — by replacing a portion of your income during a health crisis that affects your ability to work.
Unlike critical illness insurance, which pays a lump sum based on a diagnosis, disability insurance pays an ongoing benefit to help you meet your regular financial obligations. This protection can be essential whether you are employed, self-employed, or running a household that depends on your earnings.
How It Works in Practice
When you purchase disability insurance, you are insuring your ability to earn. If you experience a medical condition that prevents you from performing your job duties, the policy pays you a monthly benefit. The definition of “disability” can vary depending on the policy, but generally falls into one of two categories:
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Own occupation — You are considered disabled if you cannot perform your specific job, even if you could do a different one.
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Any occupation — You are considered disabled only if you cannot work in any job you are reasonably qualified for based on your education and experience.
Most policies have a waiting period (also called the elimination period) before benefits begin, commonly 30, 60, or 90 days after you stop working. Benefits continue for a set time, such as 2 or 5 years, or until age 65, depending on your selection.
Typical Policy Features
| Feature | Details |
|---|---|
| Benefit amount | Often 60 to 85 percent of your gross monthly income |
| Waiting period | Time between the disability and when benefits begin (e.g., 90 days) |
| Benefit period | Duration of payments (e.g., 2 years, 5 years, or until age 65) |
| Definition of disability | Varies by policy — own occupation vs. any occupation |
| Optional riders | Cost-of-living adjustments, future income increases, partial disability |
Why This Coverage Matters at Every Life Stage
Disability insurance is not just for people with high-risk jobs. Health issues can impact anyone, regardless of their industry or role. Whether you are a surgeon, an IT consultant, a tradesperson, or a teacher, your income is what funds your mortgage, food, savings, and future goals.
It is especially relevant if:
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You have dependents or family who rely on your income
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You are self-employed and not covered by group benefits
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Your emergency fund would not last more than a few months
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You want to protect long-term financial goals like retirement or education
When Employer Coverage May Not Be Enough
Many people assume their workplace benefits are sufficient, but group disability policies often come with limitations. Coverage may be capped at a lower percentage of income, may not continue if you leave your job, or could be taxed if premiums are employer-paid.
Caution: Always review your group policy carefully. If it uses an “any occupation” definition or limits benefits to a short timeframe, consider supplementing it with personal coverage.
Disability Insurance vs. Other Income Protection
It is helpful to understand how disability insurance compares to other common forms of protection:
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Critical illness insurance pays a lump sum upon diagnosis of a covered condition, regardless of whether you continue working.
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Employment Insurance (EI) provides short-term support in Canada, but usually only up to 15 weeks and at limited amounts.
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Workers’ compensation covers job-related injuries, but not conditions that arise outside of work.
Disability insurance offers broader and longer-lasting income protection than these other forms.