Disability Insurance – Disability Income Protection

Disability insurance, often called disability income insurance, is a form of insurance that insures the beneficiary’s earned income against the risk that disability will make working (and therefore earning) impossible. In other words, it answers the question, “How would I pay for my living expenses if I became unable to work?”

What is Disability Insurance?

Disability insurance replaces earned income for you if you become unable to work because of an accident or a medical emergency. While few of us expect to get sick or become injured, disability insurance can provide a significant financial safety net for you and your family if this does happen. And disabilities are more common than you may expect. A 30 year-old has a 75% chance of becoming disabled (for more than 30 days) before reaching the age of 65.

Disability insurance may take the form of group coverage, private insurance, or public insurance. Group coverage and private insurance typically provide more comprehensive benefits and greater options than most types of public disability insurance.

Find out more about Disability Insurance and get free help with making a plan for yourself.

Employer Sponsored Disability Plans.

These policies offer payments to employees who are (usually temporarily, rarely permanently) unable to work because of any injury or illness, even if it is not job-related. Unlike workers’ compensation, this coverage may not involve any aspect of health insurance, life insurance, or payments for pain and suffering. Similarly to most employer-supplied health insurance, these plans are essentially just open-market plans with the advantage of a negotiated group rate. That is, they are similar to what an individual would buy, but they are purchased with a volume discount. Another general fact about them is that they tend to offer rather basic, low-end coverage, essentially because most people balk at paying for anything more. Sometimes each employee has the option to buy upgraded coverage if they are willing to pay for it.

Individual disability insurance policies

Individuals can purchase their own disability insurance policies on the open insurance market. This is useful for self-employed people, because, obviously, they have no employer under which to get coverage. The higher the premium that a customer is willing to pay, the greater the coverage he or she can purchase, from bare-bones coverage up to very thorough coverage.

It’s great to be self employed, right? There are plenty of “upsides” to being your own boss. But there is a downside. If you are sick or disabled, you can’t rely on employee health benefits to carry you through the rough times. How long could you manage without an income if you were unable to work due to sickness or injury? If more than ninety days would be a problem, you have probably already considered purchasing disability insurance.

It’s a smart move. Statistics compiled indicate that at age 30, 5 out of 9 people will be disabled for more than 90 days. At age 50, it’s 1 out of 3.

When you’re shopping for a good policy, take your time and read the fine print. There are a lot of differences between policies and some key issues you should know about before you sign on the dotted line. The following questions to ask are provided by a Licensed Disability Consultant.

1. What is the length of the term? If you have a stroke, for example, are you covered for 36 months or until age 65? For some conditions, 36 months won’t be enough.

2. How is disability defined? If you can’t work at your stated occupation, are you considered disabled, or will you be expected to get a job serving hamburgers if you are capable?

3. Is there a Partial Disability Option? Diseases like MS or diabetes, for example, often make it possible for you to work sporadically or part time. You don’t want to discover that you are disqualified if you are able to work sporadically.

4. Are the premiums guaranteed? If you start smoking or become high risk for disability in some way, can your premiums be raised?

5. Is there a Return of Premium option or some other option that will allow you to recover your payments in 20 years time if you have not used the insurance? Some policies allow premiums to be rolled into an RRSP or something similar.

6. Is there a Cost of Living Rider? A monthly income that seems adequate today may be way too little twenty years from now.

7. If you miss a payment, how much time before your policy is canceled? You don’t want to discover that your policy is canceled because your check was tied up in the mail and you are three days late with a payment. Cancellation after thirty days is reasonable.

8. Is your company the First Payer or is there an Integration Clause? That is, if you are unable to work but have some other income, will your insurance policy deduct your other income from the payments (Integration) or will they pay you the full amount (First Payer)? It will make a difference if you believe your disability insurance will augment some other type of income, then discover too late that this will not be how it works.

9. Is your policy portable? If you relocate to another area or country, can your policy go with you?

10. Is there some way you can check to ensure that the company has been solvent for several years? If you purchase insurance with an unstable company, you will lose your premiums and your coverage if they go broke.

11. Are there tax benefits? Your accountant should be able to provide this information.

One last thing. Be sure to reveal all pertinent information regarding previous health conditions. If you ever file a claim, the insurance company will look into your past medical records. If they find a pre-existing health condition that you did not report, this could mean you get nothing plus you will lose all of your premiums paid to that point.

Here’s what you need to know about the various kinds of disability insurance:

Qualifications vary. Some policies consider you disabled and qualified for benefits if you cannot continue to work in your own chosen field. Other policies provide benefits only if you are unable to work in any occupation at all. In any event, you will need to provide some kind of proof from a doctor that you have a disabling health condition.

Short-term disability insurance pays a percentage of your income if you are unable to work for a short period of time due to illness or injury. A standard short-term disability policy offers you a weekly percentage of your salary for several weeks or months. Benefits will be paid immediately if you suffer from an injury. If you get sick, benefits are delayed, largely because it takes some time to show that the illness is grave enough to be disabling.

Long-term disability insurance takes over when short-term disability insurance ends. Long-term disability policies typically pay you a percentage of your salary until you reach retirement age.

Partial disability insurance covers lost income and other expenses during your recovery period if you are able to return to work part-time. Some policies also cover costs related to recovery in order to help you successfully rehabilitate.

Workers’ compensation insurance may pay for medical care, lost earnings, and other benefits to you if you are hurt on the job or in a job-related activity. Workers’ compensation (also known by variations of that name, e.g., workman’s comp, workmen’s comp, worker’s comp, compo) offers payments to employees who are (usually temporarily, rarely permanently) unable to work because of a job-related injury. However, workers’ compensation is in fact more than just income insurance, because it may pay compensation for economic loss (past and future), reimbursement or payment of medical and like expenses (functioning in this case as a form of health insurance), general damages for pain and suffering, and benefits payable to the dependents of workers killed during employment (functioning in this case as a form of life insurance).

Non-cancelable insurance is the most desirable form of disability insurance. Under the terms of such policies, the insurer cannot increase insurance rates, reduce your benefits, cancel your policy, or refuse to renew. You have the right to renew the policy every year without an increase in the premium or a reduction in benefits. Most public insurance and group coverage, as well as some private insurance, is non-cancelable.

Guaranteed renewable insurance cannot be cancelled by the company and gives you the right to renew the policy with the same benefits. However, your insurer has the right to raise your premium so long as the change affects the entire category of policyholders as you. Some private disability insurance falls under this category.

Conditionally renewable insurance is the lowest quality long-term disability policy. Here, nothing is guaranteed. The insurance company reserves the right to cancel or adjust the quality of coverage, and has the ability to raise insurance premiums whenever deemed appropriate. Some private disability insurance falls under this category.

You may be eligible for a public insurance program. If you have a disability that is expected to last at least twelve months or result in death and the disability leaves you unable to work, you may want to look into Medicare or Medicaid coverage. Be sure to check out the HealthCareCoach.com articles, “About Medicare” and “About Medicaid.”

For more information on disability insurance, types of policies, and eligibility requirements, take a look at this article from the Health Insurance Association of America , an association of insurance companies.

Disability Claims.

The important variables regarding claims are listed below. Not every variable matters to every type of disability insurance, but most of these are generally relevant.
Was the disability unpredictable (not resulting from previously-known chronic illness)?
Was the disability incurred in the course of performing job-related duties?
How long is the waiting period before claim payments start?
What other insurance policies will pay claims for this event?
How much money will be paid per week/month/pay period?
For how many weeks/months/pay periods will payments continue?
What if the beneficiary is not totally disabled, but only partially?
Was the disability unpredictable (not resulting from previously-known chronic illness)?
For example, a potential policyholder seeking a regular individual policy on the open market must warrant that he is in good health and to the best of his own knowledge is not currently HIV-positive. The reason is obvious and is not mere discrimination: Someone who is HIV-positive has an unusually high risk of getting sick and missing work over the next 20 years. This is simply a fact. A general principle of insurance is that the policyholder sells risk that, to the best of his knowledge, is not higher than the stated circumstances imply. Withholding relevant circumstances or hiding them is selling something that is not what it is represented to be. Analogies are insider trading using material non-public information and making fraudulent (incomplete or false) seller disclosure in a real estate transaction.

Was the disability incurred in the course of performing job-related duties?
For example, workers’ compensation policies are not obligated to pay claims for disability that is not job-related. Insurance for such risks can indeed be purchased, but because the risks are more inclusive, the premiums are higher. A policyholder always needs to understand what she is or isn’t buying with her premium. And the insurer is legally obligated to specify exactly what coverage is or isn’t being sold.

How long is the waiting period before claim payments start?
Because most disability events are temporary, insurance coverage for them is cheaper when the policyholder agrees to wait longer before receiving claim payments. For example, if you break a finger, it may only be 2 months before you are able to do your job again. If you agreed to wait 60 days before receiving claim payments, then the insurer will not have to pay a claim for your event. This reduction to his risk is reflected in the lower price that you paid to purchase coverage (lower premiums).

Another important example in this category is that the standard waiting period before starting to collect Social Security’s disability benefits is one year.

What other insurance policies will pay claims for this event?

For example, if an auto accident renders you unable to work for 5 months, your auto insurance policy with Company A may include coverage for lost income during this period. (Often lost-income coverage is a separate rider to the auto insurance policy that you must pay extra for if you choose to have it.) In this case, you may choose to make a claim with Company A and either (1) make another, secondary claim with Company B, who issues your disability income insurance, or (2) decide that the primary claim is enough and avoid making an unnecessary claim with Company B. Sometimes there is a previously established order of priority that rules that Company B is liable for the claim only to the extent that Company A’s coverage is not enough.

Another important example in this category is that if your injury is someone else’s fault, their liability coverage from, say, an auto, home, or personal umbrella policy may pay for your lost income, and therefore you will not make a claim on your own policy.

How much money will be paid per week/month/pay period?

For example, it is rare for any policy to pay the full amount of the beneficiary’s regular salary. (Policies that do are expensive, “high-end-of-the-market”-type policies.) Generally it will pay only some percentage, such as 80%, or it will pay only a flat amount, such as $1500/month, regardless of the normal salary amount. The idea behind this reduced benefit is that it is enough to protect you from mortgage foreclosure, or to keep you from running up huge debts, during your convalescence, even though it is not enough to live a carefree lifestyle on. In return for this trade-off, your premiums are lower. This is a good trade-off when you remember that hopefully, you will never have to make a claim anyway, so why pay higher premiums than you have to?

For how many weeks/months/pay periods will payments continue?

Most policies in the lower and middle areas of the market will have a cap, for example, 5 years. More expensive policies will pay all the way to the age when the national social insurance program takes over as the primary income source. For example, in the U.S., this is at age 65, when Social Security takes over.

What if the beneficiary is not totally disabled, but only partially?

Most policies in the lower and middle areas of the market will only pay claims if there is no job that the beneficiary can possibly do. Others, referred to as own-occ policies, will pay the claim as long as you cannot return to your own occupation. Own-occ policies cost more to buy (higher premiums) than non-own-occ, because their claims risk is greater. For example, suppose that your normal job involves lifting heavy boxes and getting paid $4000/month. Then you get injured, and can’t lift so much weight. However, you are still capable of doing light assembly work at a workbench for $2000/month. If your policy is a less-expensive model, the insurer will tell you that no claim will be paid, because you are capable of working (although not at your own occupation). But if your policy is an own-occ policy with a claim amount of 75% of your normal salary, it will pay you a claim of $3000/month. This payment will recur monthly until (a) you are able to do your normal job again; or (b) the cap is reached (for example, 5 years later); or (c) you reach age 65 (when the policy ends and you begin collecting Social Security).

Disability Income Insurance in everyday terms.