Long-term disability (LTD) insurance plays a critical role in safeguarding the financial well-being of Canadian workers who become unable to work due to a prolonged illness or injury. It offers a reliable income stream during extended periods away from work, which ultimately helps individuals cover everyday expenses and maintain financial stability in their lives.

But when it comes to the question of cost—who foots the bill for LTD insurance? Is it fully employer-funded, deducted from your salary, or split between the two? Knowing who pays for your LTD coverage is essential, not just for budgeting purposes but also because it influences whether any future benefits you receive will be subject to taxation. The following blog will delve into this complexity and aim to answer the pressing question.

Employer-Paid Long-Term Disability Coverage

Across many Canadian workplaces, long-term disability (LTD) insurance is often included as part of a standard employee benefits package when they commence working at a certain job. In these instances, the employer usually pays the entire premium, and employees are enrolled automatically.

This arrangement is especially common—and beneficial—in unionized environments or the public sector, where comprehensive benefits are standard across the board. However, there’s an important consideration to be made in this context: when the employer covers the full cost of LTD premiums, any benefits paid out to the employee during a claim are treated as taxable income. As a result, individuals receiving LTD benefits in such cases will see a portion deducted for taxes, which can lower their net monthly payout.

Employee-Paid Long-Term Disability Coverage

In some employment situations, employees are solely responsible for covering the cost of their long-term disability (LTD) insurance. These premiums typically are deducted directly from their pay and are paid with after-tax dollars. Although this places the financial responsibility on the employee, it offers a notable benefit to them in the long run.

When LTD premiums are fully paid by the employee with after tax dollars, any benefits received during a period of disability are typically not subject to income tax. This tax-free status can provide a crucial financial cushion when earnings are interrupted, so more money goes into the employees pocket. For this reason, many financial professionals advocate for this structure whenever feasible, as it helps ensure more consistent and predictable income during times of need.

Shared Premiums Between Employer and Employee

A frequently used approach to funding long-term disability (LTD) insurance is splitting the cost between both employers and employees. In this shared model, the employer pays a portion of the premium, and the remaining amount is taken from the employee’s wages. While this setup eases the expense for both sides, it introduces complications when it comes to how benefits are taxed, compared to if one side pays for the entire thing like mentioned above.

If you make a claim under this type of arrangement, the portion of your LTD benefits subject to tax will correspond to the percentage of premiums paid by your employer. For instance, if your employer contributes 60% and you cover 40%, then 60% of the benefits you receive will be taxable, and 40% will be tax-exempt. This division of tax liability can lead to surprises for claimants who may not realize that a portion of their benefits will be taxed. However, for employees who aren’t in a position to cover the full premium themselves, this cost-sharing model offers a practical compromise—allowing at least part of the benefit to remain tax-free.

The Tax Implications You Need to Know

The tax rules surrounding LTD benefits in Canada are closely tied to who pays the premiums. 

It’s important to understand the following general rules:

  • If the employer pays the premiums → benefits are taxable
  • If the employee pays the premiums with after-tax dollars → benefits are tax-free
  • If the premiums are shared → benefits are partially taxable, in proportion to the employer’s contribution

Understanding these rules can help employees make informed decisions when negotiating employment benefits or considering supplementary individual disability insurance.

How Much Does Long-Term Disability Insurance Cost?

The price of long-term disability (LTD) insurance can fluctuate significantly based on the type of coverage and an individual’s unique profile. Key factors that influence the cost include an individual’s age, income level, health status, occupation, and the specific terms of the policy.

Why It’s Important to Understand Your Coverage

Having LTD coverage is just the starting point—it’s equally important to understand the details of how the policy functions.

This includes knowing:

  • Who pays the premiums;
  • Whether benefits are taxable;
  • How much coverage you have (percentage of income replaced);
  • How long benefits last; and
  • The waiting period before benefits begin.

Being proactive about understanding these elements ensures that you won’t be caught off guard in the event of having to make a LTD claim. 

Seek Professional Help

Long-term disability insurance plays a significant role in a well-rounded financial strategy for working Canadians. Whether your premiums are covered by your employer, deducted from your pay, or split between the two, it’s important to recognize how this influences both the cost and the taxation of your benefits. Gaining clarity on who funds your LTD plan helps you make informed financial choices and prepare more effectively for unforeseen setbacks.

It’s far better to understand your coverage before you need it—take the time now to review your plan details and make sure you have the protection you might one day rely on. The team at NOVA Injury Law is ready to support you, whether it is through a LTD claim or if you simply want to review your coverage. For more information or to book a free consultation, reach out to them at info@novainjurylaw.com.