See the most disability income you can insure, and why who pays the premium decides whether the cheque is tax-free or taxable.
Gross employment or self-employment income before tax.
Insurers rarely cover more than ~60% of pre-tax income, so a claimant is never better off not working.
Applied only to an employer-paid benefit, which is taxable in the employee's hands.
Max monthly benefit
—
before tax
Personally paid
—
tax-free in pocket
Employer paid
—
after tax in pocket
Tax cost / month
—
taxable vs tax-free gap
How this works. Insurers cap disability coverage near 60% of pre-tax income
(the manual's Heinrich earns $70,000 and is offered ~$42,000, or $3,500/month) so a claimant is never
financially better off staying on claim. The twist is tax: when the insured pays the
premiums personally, the benefit is received tax-free; when an employer pays the premiums,
the same benefit becomes taxable income in the employee's hands. That is why a tax-free
benefit stretches further: it represents a much higher share of the take-home pay it replaces.
Educational illustration of standard Canadian insurance concepts. Figures are illustrative, not an insurer’s rates.
Illustration only, not a quote or advice. Figures are simplified for education and do not
reflect any specific insurer's rates. Consult a licensed advisor.