Income Protection Insurance in Canada: The Ultimate Guide (2023)

Whether an employee or self-employed, you don’t want to get caught off-guard if an accident or illness prevents you from working. Investing in income protection insurance is the best way to ensure this doesn’t happen to you.

Income protection insurance replaces a portion of your income should you be unable to work due to illness, injury, or disability. Of course, life is full of surprises, but your income protection insurance serves as your safety net for unexpected events.

However, there are many things you need to know before buying income protection insurance in Canada. Based on my experience, here I discuss what this type of insurance entails and how to buy the one that suits your situation.

What is Income Protection Insurance?

Income protection insurance, otherwise known as disability insurance, replaces part of your income if you cannot work due to an injury, sickness, or disability.

That said, this type of insurance is designed to help ensure that you maintain your current standard of living in the event you’re unable to work.

Like other types of insurance, you’re expected to apply for income protection insurance and commit to paying a monthly premium.

Accordingly, you will receive monthly tax-free payouts from your insurer to help cover a portion of your income when you cannot work.

Depending on your policy, the amount of your income protection may range from 75% to 90% of your net income.

However, the coverage ends once you return to work or the benefits period ends.

What Does Income Protection Cover?

As mentioned previously, income protection insurance covers your income portfolio if you can’t work due to sickness, injury, or disability.

However, different income protection policies have different income coverage. But most insurance companies cover 75% to 90% of your net income.

Thus, you must check with your policy insurer about the coverage available for you.

What Does Income Protection Not Cover?

Each income protection insurance has different coverage. Generally, income insurance doesn’t cover the cost of medical treatment or other expenses.

So if you’re looking for an insurance policy that covers the cost of medical treatment, you should consider critical illness insurance. Critical illness insurance is a cover against critical illnesses such as cancer, heart attack, stroke, kidney failure, liver failure, etc.

That said, you will receive a one-lump-sum tax-free payment from your critical illness insurer if you’re diagnosed with any eligible critical illness. Thus, the difference between insurance protection and critical illness insurance is clear.

On the one hand, income protection insurance pays monthly benefits throughout the duration of your inability to work. On the other hand, critical illness insurance pays a one-lump sum for treating your critical illness.

As a result, you can buy the two insurance policies for maximum coverage against unforeseen events.

Who Should Buy Income Protection Insurance?

Is income protection insurance right for me? That’s the primary question you should ask yourself before purchasing this type of insurance.

Frankly speaking, any income earner concerned about their long-term financial security and family needs income protection insurance.

However, this type of insurance is most suitable for individuals who:

• Have no savings or any investment.
• Have no emergency fund to rely on when they can’t work.
• Live paycheque-to-paycheque.
• Are not qualified for government benefits.
• Are self-employed.
• Have dependents that rely on their income.
• Can’t claim worker’s compensation or sick leave.
• Have a lot of mortgage and other financial obligations.

But even if you’re not one of the above, you need income protection coverage for maximum financial security.

Why Should I Insure My income?

From the above discussion, it’s obvious the importance of income protection to every income earner. But specifically, here are the three major reasons why you need income insurance:

1. Income Replacement

No one can predict precisely when an issue will surface that may prevent you from working. However, you can be prepared to deal with those situations.

Since income protection insurance replaces a portion of your income, you can maintain your current living standard if you cannot work because of injury, sickness, or disability.

This allows you to focus on getting better and not on how to make ends meet.

2. Quick Recovery

The insufficient fund is one of the major reasons why some illnesses extend for a long, leading to an untimely date.

But having income coverage can help you maintain your current standard of living while you’re unwell, allowing you to focus on getting well sooner, not worrying about money.

3. Risk Avoidance

Life is full of risks, but you can avoid risk with the right income protection coverage. Income protection is a risk avoidance tool that can help you avoid costly mistakes in your life.

One of the major mistakes you’re likely to make when you’re unable to work is accumulating large debts that may be difficult to pay back.

But with an income protection policy, you don’t have to worry about money due to your inability to work.

How Much is Income Protection Insurance?

Most income protection policies cost between 1–3% of your income. However, the cost of your income protection insurance depends on your provider and other factors, such as your:

• Health Status: The better your health status, the less risk you have for your insurer and the lower the cost. However, the reverse is the case if you have poor health status.
• Smoking Habit: If you smoke, you pose a high risk to your insurer, making your insurance cost higher. Some insurance companies may even decline your coverage. But if you don’t smoke, your insurance cost may be low.
• Job Type: The riskier your job, the more risk you pose to your insurer and the higher the insurance cost. However, the reverse is the case if your job is less risky.
• Age: Older people tend to have more health issues, making income protection insurance more expensive.
• Coverage Amount: The amount of your coverage determines your overall insurance cost. The more your coverage, the higher the cost.
• Benefit Period: A benefit period refers to receiving a monthly payment. The longer the benefit period, the longer your insurance costs.
• Waiting Period: A waiting period is a time you have to wait before your coverage begins. The longer the waiting period, the lower your insurance cost.

5 Factors to Consider Before Choosing an Income Protection Insurance

Choosing the best income protection policy can be tricky considering the multiple policies out there.

But when it comes to choosing the best income protection insurance in Canada, consider the following factors:

1. Policies

There are several insurance providers in Canada, each with its different underwriting.

As a result, each insurance provider has different requirements, leading to different terms and conditions.

Thus, ensure that you compare different policies to choose the one that suits your situation and budget.

2. Potential Exclusions

Different policies may provide different exclusions. Exclusion prevents you from making a claim even if you can’t work.

However, exclusions vary based on your policy, but you will be informed about them before accepting the terms and conditions.

So before buying the insurance, you should talk to your provider about the exclusions since you may not want a policy with specific exclusions.

But it’s essential to remember that the fewer the exclusions, the higher your insurance cost.

3. Coverage Rate

As mentioned, different insurance companies provide different levels of coverage, but most insurers offer between 75% to 90% of your net income.

If the maximum coverage rate of your potential insurer is high for you, you can negotiate to reduce your premiums.

So depending on your need, you can apply for a coverage rate below your net income.

4. Claim Conditions

To be eligible to claim income protection, either temporarily or permanently, you must be unable to work due to illness or injury.

Thus, even if you’re sick but able to work, your insurance will not come into effect.

However, different insurance companies have different claim conditions. You want to choose an insurance company with favorable conditions that apply to your situation.

5. Waiting and Benefit Periods

As mentioned previously, a waiting period is when you must wait for your coverage to be effective after lodging a claim.

Usually, the waiting period ranges from 30 to 60 to 90 days. But the longer the period, the lower the cost of your policy.

On the other hand, the benefit period is the duration of the monthly payments you will receive after making a claim. Also, the benefit period varies from one insurer to another.

That said, a short benefit period amounts to low premiums. However, you will no longer receive a monthly payment once your period ends, even when you still can’t work.

On the other hand, a long benefit period amounts to high premiums. However, you will receive monthly payments for a long time, so far you can’t work.

Where to Get Income Protection Insurance in Canada?

An online insurance broker is an ideal person to consult when looking for income protection insurance in Canada.

But I usually recommend online insurance brokers over other means because they’re low-cost and fast.

However, there are many online insurance brokers in Canada, and each operates differently.

Thus, it’s essential to choose the best online insurance brokers, such as Bounc3.

Bounc3 is one of Canada’s best online insurance brokers, offering Canadians access to customized and affordable insurance. Using advanced technology, Bounc3 simplifies online insurance purchases from its partner insurance carriers.

Final Thoughts on Income Protection Insurance

It’s worth emphasizing that income protection insurance is your and your family’s safety net ahead of rainy days when you cannot work.

From the above discussion, you can see several other income protection advantages that make it worth buying.

However, don’t rush to buy an income protection policy without evaluating your situation to know how much coverage you need and your benefit period.

Most importantly, you should consider the potential exclusions, claim conditions, coverage rate, and the policy’s waiting and benefit period before buying.

Finally, don’t hesitate to reach out in the comment section or contact me for additional help in buying the perfect income protection policy that suits your situation and budget.

FAQs on Income Protection Insurance in Canada

Is it Worth Getting Income Protection Insurance?

It’s worth getting this type of insurance if you’re concerned about your and your family’s financial security when you cannot work.

With income protection, you don’t have to run into debt or sacrifice your current standard of living because of an illness, injury, or disability that stopped you from working.

What is the Average Cost of Income Protection Insurance?

The average cost of income protection varies from one insurer to another. However, your monthly premium should be anything from $45 and above.

How is Income Protection Cover Calculated?

Each insurance company uses different factors to determine your coverage. However, most insurers determine your coverage using your average pre-disability income (often 12 months).

Furthermore, your income protection cover can be determined by the risk you pose to your insurer. The higher the risk, the lower your coverage.

Some insurance companies will decline your offer if you pose a high risk to them. Factors determining high risk include smoking, poor health, and job type.

Is Income Protection Better than Critical Illness Cover?

Both critical illness and income protection coverage is essential, and you should buy the two. But if you want to narrow your selection, it’s essential to consider your situation, especially your job type and health status.

If you have a riskier job and poor health status, buying critical illness insurance is essential first. But if the reverse is the case, I recommend buying income protection cover first.

The reason is that critical illness insurance only pays one lump sum when you encounter a severe medical condition.

But depending on your benefit period,  your incomplete protection policy pays you monthly once you cannot work due to illness, injury, or disability.

Is Income Protection Insurance Payout Taxable?

Once you pay the monthly premiums yourself, your income protection payout will not be taxed. But if your employer or partnership pays the monthly premium, the payout is taxable.

Have more questions? Kindly drop them in the comment section.

Also Read:

• Why You Need a Personal Insurance as a Self-Employed Canadian