As the cost of living in Canada continues to rise, many individuals who rely on long-term disability benefits are feeling the financial squeeze. With rent, groceries, and everyday expenses increasing, it’s harder than ever to make ends meet, especially when you’re depending on a fixed income from Long-Term Disability benefits.

At Mulqueen Disability Law, we understand that Long-Term Disability benefits are supposed to help replace lost income due to an illness or injury. However, these benefits don’t cover 100% of your lost earnings. The amount you receive is based on a formula set out in your insurance policy—typically your Long-Term Disability benefit is only a percentage of your pre-disability income (usually between 50% and 75%). For many, this can leave a significant gap in their income. For some, this gap may mean the choice between food and much-needed medical treatment.

In the past several months we have had many clients come to us asking if their monthly Long-Term Disability benefit increases to account for the rapid increase in the cost of living. Unfortunately, in many cases, the monthly Long-Term Disability amount will remain unchanged, meaning that it will forever be based on the individual’s income as of the last day they worked.If someone has been receiving Long-Term Disability benefits for many years and there’s been no increase the their monthly income, you can imagine how difficult it would be to make ends meet, particularly now with our current high cost of living. 

In this article we are going to look at a very important Long-Term Disability insurance rider or policy provision that is meant to help bridge the gap between lost income and the ever-rising cost of living.

What Is a Cost of Living Adjustment (COLA)?

Some disability insurance policies include a Cost of Living Adjustment (COLA). This is an annual increase meant to help your benefit keep pace with inflation, ensuring it doesn’t lose value over time. However, not all policies offer a COLA, and those that do vary in how they’re applied.

In general, a COLA may:

• Be a fixed percentage increase each year, such as 1% or 2%; or
• Be tied to the Consumer Price Index (CPI), with increases matching the inflation rate up to a certain cap; and
• Be applied on a specific date, like January 1st, or based on the anniversary of your benefit’s start date

However, it’s important to note that the COLA increase is calculated based on the Long-Term disability benefit amount which was calculated based on your salary as of the date you stopped working. It does not take into account any increases to your salary that you would have been entitled to if you had not become disabled and continued to work, which means the increase might not be as significant as it first appears.

A Real-World Example: How a COLA Works

Let’s walk through a couple of examples:

Imagine you were approved for long-term disability benefits in June 2023, with a monthly benefit of $2,000. Your policy includes a 2% COLA, which takes effect every January 1st after the first full year of benefits.

This means that on January 1, 2025 (19 months after your benefit started), your benefit will increase by $40 per month (2% of $2,000). 

In some cases, the same increase will apply each year, based on the original amount, so your monthly benefit will continue to grow by $40 annually. While this helps, it’s important to keep in mind that a 2% increase may not fully offset the rising costs of living, in this case.

In other cases, the COLA will be applied to the adjusted benefit, every year. For our example, that would mean that in January 2025, the 2% COLA would be applied to $2,040 and bring the monthly benefit up to $2,080.80. In 2026, the 2% COLA would be applied to the $2,080.80 and the benefit would be increased to $2,122.42. As you can see this second example will be more helpful in keeping up with increases in the cost of living.

It is also important to remember that the cost of living adjustment might not take effect for many months or even years after you become disabled. For example, under the current Ontario Teachers Long-Term Disability Plan (OTIP LTD), the cost of living increase does not happen until the first January, following two years of benefits. For some teachers, that means their LTD benefit may not increase for as long as nearly three years.

COLA: A Benefit, But Not Always Guaranteed

Including a COLA in a Long-Term Disability insurance policy can be costly for insurance companies and the purchaser of these policies as well,, which is why not all policies include this provision. 

In Group Long-Term Disability insurance policies, which are the types of policies that employers typically purchase for their employees, COLA might be an option that the employer or employee must elect and then pay extra for. They might also offer it to only certain classes of employees (such as executives or business owners). For employers, even a small annual increase across many employees can significantly raise the cost of providing group insurance benefits. Offering employees the option to upgrade their Long-Term Disability coverage to include COLA is one way that employers can offset the cost and still provide this important benefit to their employees.

In Individual or Private Long-Term Disability insurance policies, the type that is purchased by an individual through an insurance broker, COLA is often an option, albeit an expensive one. However, most insurance brokers will be able to advise an individual whether the added expense will be necessary and worthwhile should they become disabled. Many people who purchase individual/private Long-Term Disability policies are higher income earners (business owners and professionals) and the added expense is not prohibitive.

Retroactive Salary Increases and COLA

Another key point to understand is how retroactive salary increases could impact your benefit and also the COLA adjustments. This is something that has become a major issue for many of our Teacher and Government Employee clients, with the demise of Bill 124, allowing for retroactive pay increases to these employees, going back many years.

The way it works is if your salary is subject to a retroactive increase that goes back to the period of time before you stopped working and became disabled, then your salary as of your last day working would be higher than what was reported to the insurance company back when you became disabled. Remember that your Long-Term Disability benefit is a percentage of your salary as of your last day working. Therefore, the insurance company must then recalculate your monthly Long-Term Disability Benefit, as well as any COLA increases going all the way back to when they first started paying you. 

That means that you would be entitled to a lump sum retroactive payment as well as an increase in your current monthly Long-Term Disability benefit. Even if you are no longer on Long-Term Disability, you could still be entitled to a lump sum retroactive payment if your salary increased before your period of disability and your monthly benefit was calculated based on a lower salary.

What About Canada Pension Plan Disability Benefits (CPPD)?

When you’re receiving long-term disability benefits, most insurance policies will require you to apply for Canada Pension Plan Disability (CPPD) benefits, typically around the two-year mark. While CPPD benefits often reduce your disability payments (called an “offset”), it’s worth noting that CPPD benefits are also indexed to inflation. This means your CPPD payments will increase each year, on January 1st, to match inflation.

The good news is that the annual increases to your CPPD benefit will not reduce your Long-Term Disability benefit further. You will be able to keep the extra. For example, If your Long-Term Disability benefit is $3,000 and your initial CPPD monthly benefit was $1,000, the insurance company can only ever reduce your Long-Term Disability benefit by $1,000. That means that when your CPPD benefit goes up to $1,100, that extra $100 is money in your pocket and not in the deep pockets of your insurance company.

One thing that you should check and double check is that your Long-Term Disability Insurance Company is reducing your Long-Term Disability Benefit by the correct amount. Recently, CPPD approval letters will set out the current monthly CPPD benefit. The problem is that if you are approved retroactively, then your current monthly CPPD benefit may have already been increased for COLA once or even twice. Remember, the insurance company may only reduce by the initial CPPD amount, before any annual increases are applied. 

We strongly recommend contacting CPPD to find out what your initial CPPD benefit amount was (the monthly amount for the first year they approved you for) and then confirm that your insurance company is reducing your Long-Term Disability benefit by only that amount, every month.

Contact Mulqueen Disability Law in Markham for Trusted Guidance on Appealing a Long-Term Disability Claim Denial

If you’re facing a Long Term Disability claim denial and are concerned about its impact on your pension, reach out for professional assistance. Our team at Mulqueen Disability Law is here to help you navigate this challenging situation and fight for your rights.  With nearly 25 years experience dedicated to disability insurance litigation Courtney Mulqueen and her specialized legal team are focused on providing highly skilled, trauma-Informed legal representation to clients whose Long Term Disability claims have been denied or terminated.

Mulqueen Disability Law specializes in hard-to-prove long-term disability claims for “Invisible Conditions” such as mental illness (depression, anxiety, PTSD) and chronic conditions (pain, neurological, immunological, concussion, post-COVID)  Contact us for a free confidential consultation.

The preceding is not intended to be legal advice. This blog is made available for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By using this blog, you understand that there is no solicitor client relationship between you and the blog publisher. The blog should not be used as a substitute for competent legal advice from a licensed lawyer in your jurisdiction. If your disability claim has been denied and you require legal advice, contact a lawyer specializing in disability law.