What is disability insurance?
Disability insurance is a type of insurance protection that provides income to the insured if he or she is unable to work because of a disability due to a qualifying injury or illness.
Generally, these income benefits are paid out on a monthly basis to help pay debt obligations. The payments can be for a set number of months or years, or even until the insured reaches retirement age.
These benefits can help the insured with paying their regular living expenses including things like mortgage payments.
What does disability insurance cover?
Disability insurance is designed to replace a portion of a person’s income if they become disabled and are not able to work due to a serious illness or injury. Think income protection insurance.
There are numerous variables involved in a disability insurance plan. However, the key components consist of an income amount that will be paid out to the insured individual upon a triggering event.
Individual disability insurance policies will typically allow the policyholder to receive benefits of between 60 and 80 percent of his or her current income. Because the insured on an individual disability insurance policy usually pays the policy premiums out of pocket, benefits from these plans are generally received free from income tax.
Even if you have disability insurance through an employer-sponsored group plan, this coverage may not be enough to help you with paying all of your living expenses. Also, if you leave the employer, you will typically lose the coverage.
On the other hand, when you own an individual disability insurance policy, the plan will remain with you – as long as you continue to pay the policy’s premiums.
Therefore, you can continue to maintain the peace of mind in that you will have an income should you suffer an unexpected illness or injury and be unable to work and earn an income on your own.
Cost of disability insurance
Just like with other types of insurance coverage, the cost of a disability policy will be based on several factors. These include:
- Insured’s age
- Insurance carrier
- Amount of benefit
- Inflation protection
- Insured’s occupation
- Waiting period before benefits begin
- Own occupation versus any occupation
- Length of benefit (i.e., the number of months or years that the benefit is to be paid out)
What are the different types of disability insurance?
Disability insurance can either provide coverage for a short term disability or the long term disability for individuals. See the difference below.
With short term disability benefits, the income is typically paid out for a maximum of one year. For example, a short term plan may have a benefit period of 3 months, 6 months, or 12 months.
In some cases, short term disability coverage may only last for a set number of weeks. With this type of disability policy, the benefits would begin after the insured satisfied a short waiting period (which is also known as an elimination period).
A long term disability insurance policy may pay benefits for just a couple of years, or conversely, until the insured turns age 65 or older, and is ready to retire. Frequently, the benefit period on a long term disability insurance policy may be correlated with when the insured will be eligible for his or her full Social Security retirement benefit.
Own occupation vs Any occupation
One of the critical criteria concerning a disability income policy is whether the policy is “own occupation” or “any occupation” when it comes to triggering the payout.
If the benefits from the policy are paid based on own occupation, it means that you will receive benefits if you are unable to perform the duties of your own current occupation. Therefore, if you are a surgeon, for example, and you are no longer able to perform surgery based on a qualifying illness or injury, then you can receive benefits from the policy – even if you are able to perform the duties of other types of jobs.
A policy that pays benefits based on any occupation, however, means that the insured must be unable to perform the duties of any job to receive benefits. Therefore, using the example above, if you are not able to perform the duties of being a surgeon, but you can work at another type of occupation, then you will not receive benefits from the disability insurance policy.
Disability Benefit Coverage Definitions
When designing a disability insurance policy, several benefit options need to be considered. These include the following:
- Monthly Benefit – When applying for disability coverage, a monthly benefit will be chosen. Typically, the monthly benefit will be somewhere between 60 and 80% of the insured’s monthly earnings.
- Inflation Protection – To ensure that the monthly income benefit on a disability policy will keep pace with rising inflation in the future, an insured may opt to add inflation protection so that the benefit will go up over time.
- Waiting / Elimination Period – Disability income policies will also typically require that the insured meet a waiting, or elimination, period before the policy will start to pay out its benefits. With short term disability coverage, the waiting period may only be a few days or weeks. With a long term disability insurance plan, though, the waiting period may be as short as 30 days, or as long as two years. A common waiting period option, though, with long term disability coverage is 90 days. This means that the insured will have to pay his or her own living expenses, even after being deemed as disabled, for 90 days before the income benefits will begin.
- Benefit Duration – The benefit duration will depend on whether the disability plan is short term or long term. With a short term policy, the benefit duration will generally only last for one year, whereas with a long term disability policy, benefits may be chosen that will last for a set number of years, or until the insured reaches retirement age.
- Renewability – How a disability policy renews is another option to consider when you are purchasing this type of coverage. In this case, there are several different options concerning policy renewability. These include non-cancellable, guaranteed, or conditional. With a non-cancellable policy, no change will take place concerning the benefits or the premium that is charged. This option, then, offers the most amount of protection to the policy holder. With guaranteed renewability, the insurance company is not likely to make any changes, however, the carrier does have the right to do so. Alternatively, with the conditional renewability option, it is not only allowable, but it is likely, that the amount of premium will go up over time. This is particularly the case if the insured has a disability that worsens as time goes on.
What disability insurance won’t provide*
Even though disability insurance can provide coverage to help with paying bills due to an illness or injury, there are some things that this type of policy won’t provide, such as coverage for:
- Doctor’s visits
- Surgical procedures
- Medical supplies and / or equipment
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