Disability Insurance can be the most confusing and overwhelming variety of coverage. Understanding disability could be crucial, however, to obtaining the best protection possible when an unforeseen illness or uncontrollable circumstance occurs.
The first aspect of disability insurance that is important to understand is that there are two different kinds — short term and long term. Aspects of each vary among individual policies, but there are a few basic characteristics that are common among most. For short term:
- Covers temporary injuries or illnesses
- Sometimes has a short waiting period, usually of about 1-2 weeks
- Benefit period lasts 13-26 weeks
- Offers up to 100 percent of salary replacement, depending on employer
- Premiums paid by employer
- Benefits are taxable to employees
Long Term Disability is much more complicated and varies more among policies, but here are a few typical attributes:
- Requires longer waiting period of about 90 days, on average
- Benefits paid out for 5 years, or up to age 65
- Pays up to 70 percent of income, pre-tax
- In premiums paid by employee (most are), benefits are tax-free
From there, there are three different designations of Long Term Disability — Own Occupation, Regular Occupation and Any Occupation.
- Own Occupation means that your disability prevents you from performing your own occupation, or the job in which you have experience and the work that you have been formally trained to do. According to the World Institute on Disability, “…The insurance company will consider your occupation to be the occupation you are engaged in at the time you become disabled, (and) they will pay the claim even if you are working in some other capacity.”
This is the most expensive type of disability, and it tends to be purchased mostly by professionals of a skilled trade, like a dentist. Certain jobs do not even qualify for this type of coverage.
- Regular Occupationis more restrictive. It is used when employees are “unable to perform the essential duties of their ‘regular occupation’ (that is the occupation in which they were engaged at the time of disability), under the care of a physician and not otherwise gainfully employed,” as stated on the Financial Highway website. In other words, you would not be forced to take up another occupation.If you do choose to work in another occupation, a partial benefit will usually be paid if there is a loss of income. This is typically the most common type of disability insurance being purchased.
- Any Occupation is the strictest of the three Long Term Disability Insurance plan definitions. To qualify for this, one has to be unable to perform the duties of any occupation, as the name notes. Benefits will not be paid out if there is a chance the insured person can perform a different job, based on education and past work experience.
Both Short Term and Long Term Disability plans are some of the most expensive kinds to purchase due to high claim rates, and rates of being declined for both of these insurances are high, as well. Luckily, most employers offer disability, but there are pros and cons to both group and individual plans. Group plans are often cheaper, and do not require a medical examination. The company or employer is the policy owner. For individual plans, there is more flexibility in choices and changes, as you are the owner. However, those aspects make individual plans more expensive.
Regardless of the plan chosen, most Short Term Disability (STD) policies have a “cap,” where there is a maximum benefit amount each month. In STD, there is also a limit on the amount of time you can receive benefits — up to two years, according to the InsuranceInformation Institute (III). The Council for Disability Awareness list the most common cause of STD claims are illnesses such as cancer, heart attack, diabetes complications, back pain and arthritis. Pregnancy or maternity can be used as a STD claim, as well, to extend the government-guaranteed leave. On-the-job injuries are not covered through this type of insurance, as those wounds obtained that way are covered by Workers’ Compensation Insurance.
Long Term Disability picks up where short term leaves off.Insure.com states that most disability insurers work with employers to help employees return to work as quickly and safely as possible.
“While disability insurers want to see people healthy and rehabilitated, they also save money if a claimant quickly returns to work,” the website said.
If a disability occurs and benefits are provided, paying premiums is no longer necessary in most cases. Most policies contain a “waiver of premium” provision that states you can stop paying if you are disabled for more than 90 days. Furthermore, the III disclosed that most policies are sold on a”non-cancellable” or a “guaranteed renewable” basis.
“With a non-cancellable policy (which requires an initial medical exam), the insurer cannot cancel the coverage or raise your premiums. If you buy a policy on a guaranteed renewable basis, the insurer cannot cancel the coverage as long as you pay premiums, but it can raise rates on a class or group of insured people who have the same policy, work at the same place or share another, non-risk-associated characteristic,” theinstitute stated. The III also said that most individual policies have elements that allow benefits to keep pace with inflation or gradual salary increases.
Most people don’t go into the workforce believing they will get injured. However, according to the Council for Disability Awareness, three in 10 people will become disabled before retiring. The average absence from work, long term, is 2.5 years, and one in seven people can expect to be disabled for five or more years. Could you go that long without a steady income? That’s when your insurance company will help you protect your well-being.
