Disability Insurance

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Disability Insurance Overview | Short Term Disability Insurance | Long Term Disability Insurance | What to Look for in a Disability Plan

Disability Insurance Overview

Here is an explanation of disability insurance along with the benefits of owning a disability policy.

What is disability insurance?

How long could you maintain your present living standards without your current income? For almost anyone who works for a living, to be disabled and to be unable to earn an income, even for a short time, can mean financial stress - and even disaster.

Disability income protection is designed to replace the income lost as a result of disability from illness or accident by protecting your earnings and your earning potential - perhaps your most valuable asset.

Why disability insurance?

To guarantee income continuity in the event of sickness or accident.
To avoid a company having to fund the continuing salary for a disabled employee longer than may be otherwise desirable.
To pay the expenses of the business which would continue to be payable in the event of a principal owners disability.

If you're like most people, you have only two months savings in the bank as a protection against emergencies.

Even if you save ten percent of your income for ten years, it may take only one year of mortgage payments and meeting other bills to devastate your savings completely. Now the question is, what will you have to live on for the next four years? Today, your income is doing a double job for you. It provides for today's necessities and helps you save for tomorrow's hopes.

But if a disabling injury or illness strikes and you have no income, your needs for the basic necessities will continue. You'll still be obligated to meet the mortgage, car and credit card payments, as well as medical costs not covered by your insurance. But plans for a comfortable retirement, the children's education and a better life may have to be put off, if not discarded altogether.

Short Term Disability Insurance

According to the American Council of Life Insurers, nearly one-third of all Americans will suffer a serious disability between the ages of 35 and 65. Do you have disability insurance?

What is short term disability coverage?

A short term disability plan would pay a portion of your salary if you become disabled for a limited time. If you become unable to work due to injury or sickness the disability plan would kick in. A regular short term disability plan might provide you with a weekly portion of salary ranging from 50-66% for 13-26 weeks. This is excluding on the job injury.

You generally start receiving benefits from your policy within one to 14 days after sickness or disability. The actual time for coverage to kick in depends on whether you suffer an illness or injury. If you suffer an injury, your benefits will be paid immediately. If you suffer an illness, it will take longer because there needs to be enough time to show disability.

Do I need disability insurance?

If you have enough in savings to last until you go to work again (maybe approx 6 months), you probably don't need to buy short term disability insurance or an individual accident policy.

Long Term Disability Insurance

The ins and outs of long term disability insurance - just remember - cheaper if you're in a group policy.

Long term disability benefits assume the role of paying you after short term disability benefits expire. This will occur approx. 3-6 months after disability. The percentage of salary compensation ranges usually from 50-66%. You would receive benefits until you are at the age of 65. A group long term policy could price in the few hundred dollars per year. Remember: group rates are usually cheaper than individual.

If you pay your own premiums and do so with after-tax dollars, your disability benefits will be tax-free. If your employer pays for the policy, most likely with pre-tax dollars, your disability benefits will be taxable.

Most disability insurers will work with employers to try to get you back to work as soon as possible. While disability insurers want to see people healthy, rehabilitated, and back to work, they also save significant dollars if a claimant quickly returns to work.

What to Look for in a Disability Plan

Here are some things to look for when reviewing long term disability and short term disability plans.

Definition of disability

Some types of policies pay benefits only if you are unable to perform the duties of your normal occupation, while others will pay only if you cannot work in any job at all.

Payment trigger date

Other policies will allow you to decide when the payments begin. You can choose a shorter or longer waiting period at the time of your application.

Extent of disability

Some policies require that you be completely disabled before payments begin. Other policies pay out for partial disability for a limited time, but most often only if the partial disability follows a period of total disability for the same cause.

"Residual" benefits

Residual benefits can help bridge the difference in your income if you are able to work, but are limited in your responsibilities due to your disability.

Presumptive disability

Other policies will pay some benefits if you are still able to work but still have loss of sight, speech, hearing, or use of limbs.

When payments begin

You can choose to begin getting disability payments anywhere from 31 days to the first six months. The longer you wait for a payment start date, the less your premiums will be.

Length of coverage

Usually, coverage will pay you for two years, five years, or until you turn 65. The longer you receive payments, the more your premium will be.

Keeping pace with inflation

You can also purchase a cost-of-living adjustment (COLA) to add to your basic disability insurance policy. This provision generally increases payouts by 4 to 10 percent each year.

Waiver of premium

Most policies contain a "waiver of premium" provision so that you do not have to pay premiums if you are disabled for 90 days or longer.

Source:
National Organization on Disability