Toronto freelance writer, Caroline Cakebread was in her early 30s when someone she knew had a terrible accident while hiking. A rock fell on his head and he lost the ability to walk and talk. "He was in the hospital for months," says Cakebread. "And he became permanently disabled and unable to work."

It made Cakebread wonder what would happen to her if she faced such a life-changing accident. "I began to wonder how would I survive? How would I pay my bills?” Cakebread recalled that it was a wakeup call that inspired her to take out disability insurance.

What is disability insurance?

Financial expert, Jim Yih of the Retire Happy blog says, "Disability insurance protects your greatest asset – your earning power." It helps cover your loss of income by providing you with a monthly benefit if you're unable to work for a certain period of time due to an accident or illness.

There are two types of disability insurance, short-term and long-term:

  1. Some employers offer short-term disability coverage as a group benefit, meaning it's part of your employee benefits. Short-term disability insurance generally only covers you for the first 120 days of a disability.
  2. Long-term disability coverage is available both individually and through some employers' group plans. Long-term disability insurance generally covers you from the 120th day (or other specified waiting period) to traditional retirement at age 65.

Do you need disability insurance?

Disability insurance isn't just for the self-employed like Cakebread. You may have group disability insurance coverage at work (often called long-term disability or LTD). But you need to be aware of what your group plan offers. This means you'll have to find out:

  • how your group plan defines a disability,
  • what conditions the plan covers and
  • how much and how long you can expect to receive income.

Is the amount of money you expect to get from your group long-term disability insurance enough to cover you in case you get sick or injured? If it's not enough, then you may want to consider getting your own disability insurance.

Also, Worker's Compensation only covers certain types of workers and work-related accidents. As an example, let's say you fall off your bike on the weekend and can't work for a long time. Since it wasn't a work-related injury, it's not covered under Worker's Compensation.

Plus, unemployment insurance sickness benefits only cover up to a maximum of 15 weeks. What happens if you can't work after it runs out? This is where disability insurance (along with other potential sources of income) can help to make ends meet if the need arises.

How does disability insurance differ from other insurance?

Disability insurance is often confused with two other types of insurance: long-term care insurance and critical illness insurance. The difference is that disability insurance helps cover loss of income for those under age 65, whereas long-term care insurance and critical illness insurance are designed to help cover health-related costs. Here's a breakdown of what each one has to offer:

  • Disability insurance pays a monthly benefit to help cover loss of income for those under age 65 who can't work because of an injury or illness.
  • Long-term care insurance can either reimburse your expenses or pay you a regular recurring benefit to help cover the cost of care you may need if you become significantly physically dependent or cognitively impaired. In such cases, you may require care such as nursing care at home or a stay in a chronic care facility.
  • Critical illness insurance pays out a lump-sum to help cover costs if you're diagnosed with a serious illness or condition. You'll receive this benefit if your policy covers the condition or illness you have.  And, if you survive for the required period of time.

Which type of insurance is right for you?

The right type of insurance for you depends on your specific needs and life stage. Perhaps your needs are simple and you only need one type of insurance. Or maybe you have a large family or multiple people who rely on you financially. In some cases, you may need more than one type of insurance to help protect yourself and your loved ones.

Cakebread says she felt a lot better about riding her bike around the city once she had her disability insurance policy in place. And now that she's a mother of two, she's considering increasing her coverage.

"My policy gives me peace of mind," says Cakebread. But she also notes that she made sure to save a little extra money in an emergency fund to cover expenses over the first few months before her policy kicks in. "I definitely hope I never have to use the insurance. But I'm glad I have it just in case I need it."

Need help figuring out what type of insurance is right for you? You may want to consider speaking with an advisor for help. An advisor can:

  • discuss all your insurance options,
  • answer questions you have to help you understand your options and
  • help you figure out what type of coverage makes the most sense for you.

What's more, an advisor can also help you build life insurance into your overall financial plan. This can be especially helpful if your financial picture is complicated. For example, maybe you own a business or you're self-employed. Or, you may have a blended family. Or, if you want to use life insurance to leave money for your children.