We have likely heard the word “inflation” more in the last two to three years than in the previous 20. It has been front and center for the majority of Canadians on a personal level, but inflation has always been and will continue to be a significant issue for employee benefits plans.
Employee benefits plan inflation has fluctuated from year to year but has generally averaged about 6% per year over the past 25 years. During the COVID-19 pandemic, we saw annual inflation rates higher than that historical average, but thankfully we saw them decline steadily through 2025. However, the bad news now is that employee benefits inflation is starting to increase again and is still well above general market inflation, which has recently come down.
Going forward, we expect the “perfect storm” to continue to drive inflation for group benefits – more employees are using the plans, using them more often, and using them for more expensive items. In spite of this ongoing and persistent inflation for group benefits, businesses are under continuing pressure to not only maintain but also enhance their employee benefits plans. Employees always place a high value on group benefits plans when choosing to join a new company and stay with an employer. As well, employees indicate that they value their benefits plans more today than before the pandemic.
Last year, we projected that the cost of employee benefits for 2025 would increase approximately 6%, as compared to 7% for 2024. We have been pretty accurate with our “crystal ball” at ZLC Employee Benefits Solutions – actual inflation levels each year have generally been very close to our projections. Below is our forecast for key components of your benefits plans:
Life insurance
For the majority of small and mid-sized Canadian companies, annual renewal adjustments for life insurance benefits are driven primarily by changes in the insurers’ broader block of business (aka, manual rates). The Canadian working population continues to age and the recent positive impacts we saw on aging from the strong flow of immigrants to Canada has now disappeared as immigration levels have returned to historical levels. We are expecting life benefit increases to be about 3% to 5%.
Long term disability
In the same way as for the life benefit, the aging population has largely been driving disability rates. While we recently saw the incidence and duration of mental health claims subsiding, that appears to no longer be the case, and Canadians continue to struggle with mental health issues. As well, disability claims continue to be further complicated by a general reduction in the quality of health care across Canada. That said, it is important to note that most plans require employees to pay for the LTD premiums to ensure a non-taxable benefit, so inflationary pressures in this area are more often a burden to employees rather than plan sponsors. We are expecting long term disability benefit increases to be about 6% to 8%.
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Extended health
The “perfect storm” for employee benefits plans is felt the most in the extended health area. In 2025 we saw the introduction of some new generic drugs for a couple of high-cost drugs, which yielded savings, but we are not expecting anything of significance in this area in 2026. We have been speculating for years around the introduction of the National Pharmacare plan, and this is coming to fruition for B.C. in 2026 with the federal government covering the cost of diabetic medications, supplies and devices along with hormone replacement therapy in the coming year. Another major item to watch is the cost of Ozempic, as this drug will be losing patent protection during 2026, but only in Canada, and we expected to see generic/biosimilar versions coming online. We are expecting extended health benefit increases to be about 6% to 10%.
Dental
For the past 10 to 15 years, annual dental inflation has generally ranged from 6% to 8% each year, ignoring the COVID-19 pandemic years, but it returned to historical norms in 2025. In spite of that, we are still seeing insurers using much higher trend factors in their renewal calculations and we are awaiting the fee guide increases early in the new year, but we expect them to be consistent with historical norms. Lastly, we are waiting to see about the impact of corporate dentistry on plan costs as there is ongoing consolidation of dental practices. We are expecting dental benefit increases to be about 5% to 7%.
Projected annual inflation for 2026
Given the above, it is really just simple math: Life insurance accounts for about 5-10% of total benefits plan costs, long term disability for about 15-20%, extended health for about 40-50%, dental for about 20-30%, and other benefits (i.e., employee assistance plan, spending accounts) account for up to another 10% (running more at general inflation levels). When you put it all together, we are looking at approximately 7% projected annual inflation for 2026.
That said, if your plan has additional cost drivers (i.e., older population, higher historical utilization, high employee turnover, etc.), you could be looking at larger increases. We recommend using an inflation assumption within a range of 5% to 10% if you are doing any multi-year business planning.
Dan Eisner is an employee benefits advisor for ZLC Employee Benefits Solutions.
Originally published by ZLC Employee Benefits Solutions.
