A disability due to injury or sickness can cause significant financial hardship. According to the Society of Actuaries, a disabling injury occurs every 1.5 seconds. In addition, 50% of mortgage foreclosures in the U.S. are due to a disability.
Consumers purchase disability insurance in order to provide guaranteed income during for themselves and their loved ones during times of need. Disability insurance can replace a significant portion of lost income for all types of workers.
The primary purpose of disability insurance is to replace lost income due to a covered accident, injury, illness, sickness or pregnancy.
Once policy provisions are met, insurance companies provide monthly income for the chosen amount of time. This is known as the benefit period and can be either for a short time period or many years. Some policies will only pay benefits for 6 months while others can provide income into your 60’s.
The income stream will be subject to an elimination period, say 30 days, which is also chosen by the insured. Disability income is not usually taxed by the I.R.S. or other state or local governments.
Benefits will not begin until the elimination period has been satisfied and will end once the benefit period has been reached or the insured has recovered. It is important to note that income provided by the insurance policy is usually a percentage of the worker’s lost wages, but not the entire amount.
Several factors will determine the cost of a disability policy – including age, gender, benefit amounts, occupation classification, additional riders, and whether or not individual or group coverage is purchased. As with most health insurance coverage, the younger you are, the more affordable the policy.
Typically, those who need to protect lost income are the sole providers for their respective families, but not always. Professionals like doctors, dentists, lawyers, and the like will purchase insurance as their income would be difficult to replace. In this way, they have more to lost should they not be able to preform their duties at work.
Other professions requiring specialized skills or that have higher incidents of disability like a construction worker, police officer or fireman will offer group disability insurance, but workers might also investigate individual coverage in order to replace the maximum amount of income possible.
Disability income benefits will vary depending on the type of coverage and the nature of the disability. Thus, like any insurance plan it is important to understand what a policy will and will not cover. For example, the following are two important definitions used in disability policies:
- Own Occupation: Sometimes referred to as total disability. This type provides benefits if the insured cannot perform the duties of his/her own job.
- Any Occupation: This type provides benefits if the insured cannot perform the duties required of any occupation to which he/she is reasonably suited.
Total disability, as defined by the policy, provides the most benefit to the insured. It will pay out for a set period of time if the insured is unable to perform the duties of his or her current occupation. These polices are less common, more expensive and usually have a limited period of time during which it provides benefits.
In contrast, a policy with an “any occupation” definition accounts for more employment opportunities than an “own occupation” definition and is thus less lenient to the insured. A policy with an “any occupation” will only provide income if the sick or injured party cannot perform the duties of any occupation to which he or she is reasonably suited.
Often times, however, policy language will provide benefits based on a combination of the two definitions. A modified policy might only pay for a set period of time, say 2 years, if the insured is unable to perform his or her “own occupation,” but would not continue to pay if the insured can perform the duties of “any occupation” to which he or she is reasonably suited.
Different insurance companies will offer different coverage levels and modifications. Additionally, insurance premiums and benefits can vary depending on whether the insured applies for and is accepted for Social Security Disability benefits.
Some polices provide a proportional disability benefit if the insured cannot work as much time or perform as many duties at their current place of employment – this is know as partial income replacement.
In other words, a percentage of the benefit relative to time missed is paid to the insured. In addition, some policies provide a presumptive disability benefit. In this case, benefits are paid to age 65 regardless of the benefit period if the disability or sickness results in the permanent loss of sight, speech, hearing or limbs.
Most insurance companies offer riders to their policies at an additional cost. Return of premium is one option, while other riders allow the insured to purchase additional coverage to keep up with salary increases or inflation- regardless of any health changes. While premiums can increase based on claims to the insurance company, disability insurance is guaranteed renewable meaning the coverage cannot be cancelled.
In summary, a disability can be a significant financial burden for many individuals and families. Workers compensation, Social Security Disability or savings may help to replace some lost wages for a period of time, but individual and/or group disability insurance is a very secure means to replace lost income for professionals of any nature.