What Is Disability Insurance
As its name suggests, disability insurance is a type of insurance product that provides income in the event that a policyholder is prevented from working and earning an income due to a disability.
In the United States, individuals can obtain disability insurance from the government through the Social Security System. They can also purchase disability insurance from private insurers.
What Does Disability Income Insurance Cover
Different long- and short-term disability insurance policies define a disability in different ways. Before purchasing a policy, it’s important to understand what it covers. A policy distinguishes between own occupation disability and any occupation disability . Policies may not cover preexisting conditions. Disability income policies typically cover:
Individual Disability Insurance Features
When shopping for a plan, ask about what features may be right for you. For example, many Guardian plans offer some of the following features:
- Waiver of premium: Waiver of premium for disability is a provision in an insurance policy that states the insurance company will not require the insured to pay the premium if they are disabled and receiving benefits. Unlike most other insurance companies, well also continue to waive premiums for six months after you recover and benefits end.
- Hospice care benefit: If youre admitted into a qualified hospice program, youll be considered totally disabled and in many cases, the policy elimination period will be waived so you can receive benefits sooner.
- Unemployment premium suspension: Suspends premiums while youre unemployed, allowing you to stop paying premiums but continue owning the policy. However, coverage is also suspended while youre unemployed, so if you become disabled during that time, you wont receive a benefit.
- Occupational rehabilitation and modification and access benefit endorsement: Helps pay for occupational rehabilitation expenses plus the cost of modification to your work environment to accommodate physical limitations.
Plus, several optional disability plan riders are available:
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What Other Types Of Riders Offer Added Protection
Many other riders are typically available, and some of the most popular choices include:
- Basic or enhanced partial disability benefit rider: These options protect you by paying a partial benefit if you suffer an injury or illness that limits your ability to work but doesnt cause total disability.
- Student loan protection rider: This optional benefit provides extra money to make student loan payments during a specified period. It is particularly useful for early-career professionals such as doctors and lawyers who have invested heavily in their education.
Future purchase option: This lets you increase coverage in the future as your income rises, without having to undergo a medical exam or provide proof of insurability.***
The Importance Of Disability Insurance For Working Professionals
June 12, 2015 By Katie Brewer
Do you have disability insurance? If so, have you reviewed whats covered in your policy?
If you dont have disability insurance, do you know how important it is to your financial future?
Disability insurance is one of the most overlooked pieces of coverage. Most Americans dont have it, and they need it.
In this post, you will learn why disability insurance is so important for working professionals, which type of policy is most important, and three main ways you can find coverage.
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How To Apply For Long Term Disability
All long term disability insurance plans are backed by an insurance company in some way or another. However, there are various ways you can go about doing so.
For example, one common way is to sign up for group coverage. This is most commonly done through an employer. You may also find group coverage through:
- Unions
- Industry associations
- Membership organizations
Many employers offer group disability insurance coverage to their employees as a workplace benefit. In fact, employers often pay some or even all of the premium cost.
Another option is to buy your own personal policy. You can do this through an insurance agent or directly from a reputable insurance company that offers individual long term coverage.
Your Comprehensive Guide To Understanding Your Disability Insurance Policy
Understanding your disability insurance policy is very important. There is a lot of technical information on this website. To be concise, a term or concept might not always be defined. This series of comprehensive posts will define all terms and moving parts in a disability insurance policy. It is broken up into three parts: Policy design, disability insurance underwriting , and disability insurance companies. Alternatively, you can start here.
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Two Types Of Disability Policies: Short Term And Long Term
Short term disability insurance is for temporary disabilities and is designed to replace up to 60%-80% of your income for a short period of time. STD is often provided through your workplace, either as a mandatory or voluntary benefit. The typical benefit period is 3-6 months , or until you can get back to work.
Long-term disability insurance is for more severe and even permanent disabilities. Its sometimes offered as a workplace benefit, but is often purchased as an individual policy. The benefit is designed to last for many years through retirement if needed replacing up to 60%-80% of your income if something were to happen and you could no longer work.
How Much Can You Earn In Your Lifetime
For most working Canadians, this number is well over a million dollars.
Depending on your income, some of you may have earned multiples of millions of dollars by the time you reach age 65.
For example, if you are 35 and make $50,000 annually, your potential earning to age 65 is almost $2.2 million .
The table below shows the potential earnings at different starting ages and annual income.
| $788,449 | $1,051,266 |
As you can see, the goose is worth a lot. In fact, it is your greatest asset.
Thats why more than anything else, you need to insure your ability to earn an income.
But you might be thinking youre already insured through work or that the government has your back.
In reality, these sources have severe limitations and dont offer the most comprehensive benefits.
Lets take a look at each source of disability income in the next section.
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How Much Income Protection Do You Need
The amount of income protection needed depends on your monthly expenses covered by the income product. Consider such things as mortgage or rent payments, insurance premiums, car payments, credit cards, loans, food, clothing, utilities, day care costs and health care expenses not covered by insurance. Then consider how long the current resources, like employer-provided sick leave and sick leave bank, state retirement system benefits, Workers Compensation, Social Security and non-salary income from investments, would last.
How Can You Buy Disability Insurance
There are three ways to buy disability insurance, through your employer/association, directly from the insurance company, or through an insurance advisor.
With the first option, you lose your coverage if you decide to change jobs. The second option gives you worse coverage at a higher price. Only by buying through an insurance advisor will you get the best coverage at a reasonable price that you can keep for lifeno matter where your career takes you.
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Complexity Of Insurance Policy Contracts
Insurance policies can be complex and some policyholders may not understand all the fees and coverages included in a policy. As a result, people may buy policies on unfavorable terms. In response to these issues, many countries have enacted detailed statutory and regulatory regimes governing every aspect of the insurance business, including minimum standards for policies and the ways in which they may be advertised and sold.
For example, most insurance policies in the English language today have been carefully drafted in plain English the industry learned the hard way that many courts will not enforce policies against insureds when the judges themselves cannot understand what the policies are saying. Typically, courts construe ambiguities in insurance policies against the insurance company and in favor of coverage under the policy.
Insurance may also be purchased through an agent. A tied agent, working exclusively with one insurer, represents the insurance company from whom the policyholder buys . Just as there is a potential conflict of interest with a broker, an agent has a different type of conflict. Because agents work directly for the insurance company, if there is a claim the agent may advise the client to the benefit of the insurance company. Agents generally cannot offer as broad a range of selection compared to an insurance broker.
Types Of Disability Contracts
Several other specialized disability contracts are available to the businessperson:
- Business overhead expense: Covers expenses such as staff salaries, rent, telephone, utilities, malpractice insurance and other expenses necessary to keep a business open.
- Key person disability: Reimburses the business for the loss of a key employee and allows funding of temporary replacement or training of a successor.
- Disability buyout: Provides income to fund a buy-sell agreement triggered by the total disability of a shareholder/business owner. Payouts may come in the form of a lump sum, monthly installments or a combination of the two.
Caution: Highly-compensated employees should be aware of payment caps in many group long-term disability policies. While some programs will provide disability income payments at 60% or 66% of salary, many have a relatively low dollar limitation, such as $3,000 per month.
Note: State Farm does not offer Business overhead expense or Disability buyout insurance.
These materials were reproduced with the permission of Advisys, Inc. No State Farm® entity prepared these materials nor does State Farm represent or warranty the opinions or statements expressed therein. These materials are being provided for information purposes only.
State Farm Mutual Automobile Insurance CompanyBloomington, IL
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What’s The Difference Between Critical Illness And Disability Income Insurance
Critical illness insurance and disability income insurance can both help to provide money when you’re dealing with health issues. Whether you stop working temporarily or face high out-of-pocket expenses, these policies might play an important role but they work differently. Critical illness insurance covers a specific, predefined set of medical conditions. Disability income insurance provides benefits to insureds who are disabled as a result of injury or illness and cannot perform normal work duties.
How Employers Should Offer Long
Long-term disability insurance is usually provided and paid for by employers. In fact, 93% of plans are paid for by the employer. A variety of different plans are available for employers to offer as part of a comprehensive employee benefits package.
If a company doesnt offer long-term disability insurance or if an employee wants additional coverage, he or she has the option of purchasing an individual long-term disability plan from an insurance agent.
Most frequently, though, long-term disability insurance is available through the employer it is expensive to purchase as an individual employee. Consequentially, some employers, if they do not provide long-term disability insurance will develop a relationship with a long-term disability insurance company to create an employee discount for their staff who choose to purchase a long-term disability policy.
Because it is so expensive for an individual to purchase, long-term disability insurance is often available through an employee’s professional associations at a discounted rate.
Long-term disability insurance, provided by an employer, may be inadequate to meet a disabled employee’s needs. This is the second reason employees might want to consider purchasing supplemental long-term disability insurance.
Additionally, payments to the employee from their employer’s long-term disability insurance are taxable income whereas payments from an employee purchased plan are usually not.
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Regular Or Own Occupation
The definition of “regular or own occupation” plan means you’ll receive benefits if you’re unable to perform the main duties of the job you had at the time the disability started.
You’ll still receive benefits even if you can work in a different job from the one you had before your disability, based on your training, experience and education. Some policies don’t allow you to get benefits, or may reduce your benefits, if you begin working in a different job.
In group policies, it’s common that policies have regular or own occupation plans for a specified period of time. At the end of the specified period of time, usually after the first 2 or 5 years, the disability policy will often change to the any occupation definition.
Own occupation plans that never change in definition are often purchased individually and usually cost more than any occupation plans.
You may want to consider an own occupation plan if you have a specialized occupation that would require you to take a significant pay cut in order to work in another field.
Your Normal Weekly Earnings
Some earnings shown on the earnings chart are allocated at the rate of your normal weekly earnings. Generally, your normal weekly earnings correspond to your regular weekly salary, before deductions, from your employment that paid the earnings. When you receive a weekly wage, the normal weekly earnings are calculated by multiplying the number of hours normally worked per week by the hourly wage rate.
Conversion examples for determining normal weekly earnings
- Your hourly rate of pay is $10.00 per hour and you normally work 40 hours per week. The normal weekly earnings will be $10.00 x 40 = $400.00.
- Your bi-weekly salary is $800. The normal weekly earnings will be $800 ÷ 2 = $400
- Your semi-monthly salary is $866.66. The normal weekly earnings will be $866.66 x 24 ÷ 52 = $399.99
- Your monthly salary is $1,733.33. The normal weekly earnings will be $1,733.33x 12 ÷ 52 = $399.99, or
- Your yearly salary is $20,800. The normal weekly earnings will be $20,800 ÷ 52 = $400
In addition to wages paid for normal and overtime hours, the normal weekly earnings can also include:
- regular shift premiums
- incentives or cost of living allowances
- a percentage paid as vacation pay included with each pay, and
- commissions paid at regular intervals or other amounts
Example 1
Example 2
Example 3
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The Shortfall In Long Term Disability Coverage
“In 2018, 42% of private industry workers had access to short-term disability insurance plans and 34% to long-term plans. Twenty-six percent of state and local government workers had access to short-term coverage and 38% to long-term benefits.”
The Council for Disability Awareness has collected data from unpublished and published sources to reach these conclusions.
- “At least 51 million working adults in the United States are without disability insurance other than the basic coverage available through Social Security
- “Only 48 percent of American adults indicate they have enough savings to cover three months of living expenses in the event theyre not earning any income.
- “Almost half of American adults indicate they cant pay an unexpected $400 bill without having to take out a loan or sell something to do so.
- “More than one in four of todays 20-year-olds can expect to be out of work for at least a year because of a disabling condition before they reach the normal retirement age.
- “5.6 percent of working Americans will experience a short-term disability due to illness, injury, or pregnancy on average every year. Almost all of these are non-occupational in origin.”
While this percentage of employees covered has risen since 2008, a significant percentage of employees remain uncovered.
Take a look at why this is not positive for employers.
What Does The Government Provide
There are a variety of government disability programs:
- Social Security disability insurance pays benefits to qualified individuals under age 65.
- Supplemental Security Income pays benefits if you are over 65.
- All states offer workers’ compensation, but only if your injury or illness is work related.
- Military personnel are entitled to veterans’ benefits only if their disabilities are service related. If you’re injured in a traffic accident or at home, you may be out of workand out of an income.
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Short Term Disability Insurance
On the other hand, short term disability income insurance pays out benefits for those who experience temporary injuries and ailments. It is typically provided through an employer group plan.
Although you can purchase an individual short term disability insurance policy through some companies, many financial experts advise against it. Thatâs because the cost of the premiums may not justify the amount you would receive in benefits. If you canât get short term coverage for free from your employer, you should establish an emergency fund.
Short term disability insurance will typically replace between 40 to 60 percent of your pre-disability income. Benefits generally last three to six months. Some policies may pay as long as two years. Benefits typically begin 14 days from when disability occurs.
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Two Types Of Disability Insurance
There are two main types of disability insurance:
- Short-term policies cover disabilities that last for a few weeks or months.
- Long-term policies can provide coverage for anywhere from two to five years, or even until you reach age 65.
If your employer offers a disability insurance policy, it is most likely short term. In this case you may want to purchase additional long-term coverage on your own. This will also protect you in case you leave your job.
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What Is Underwriting
Underwriting is the process that an insurance carrier uses to determine how its policies are issued.
According to Merriam-Webster, the term goes back to the 14th century when it simply meant to write under or at the end of something.
Its roots in insurance surface around the 17th century, when ship owners, importers, and exporters would publically post proposals to insure their goods while in transit. Typically limited to marine insurance, those wishing to provide coverage would literally write their name under the proposal, also indicating what percentage of liability they were assuming.
Today, underwriting is used in evaluating and issuing every type of insurance imaginable.
This process can vary greatly by product, carrier and desired coverage. It is the underwriting guidelines of the company and the risk analysis of the underwriter, the person who applies those guidelines to each application, who ultimately decides if youll be offered a policy, what it will cover, and how much it will cost.
Depending on the product, the underwriting procedures will be different. Insuring property is obviously a different process than insuring a person. Consequently, insuring someone from an untimely death is very different than insuring someone from a disability.
Since our agency focuses on insuring peoples incomes, we tend to focus on disability insurance and term life insurance. Even these two products, which have similar uses, have wildly different underwriting requirements.