With enough time to prepare, humans anticipate and plan well planned life events, such as marriage, motherhood, and retirement. However, most people find it hard to imagine, let alone prepare, for major and unexpected life changes.
Millions of Americans suffer from serious illness and injury every year, often with little or no warning. Most working adults have some form of health insurance or health coverage to absorb costs associated with catastrophic medical events or ongoing treatments for chronic conditions, such as cancer and diabetes. However, many others do not have disability insurance coverage, which compensates the policyholder for loss of income when they are unable to perform some or all of their duties due to a qualifying event or health problem. According to the Bureau of Labor Statistics, only 39% of American workers had short-term disability insurance and 33% had long-term disability insurance in 2014.
In the relatively unlikely event that you encounter a serious medical problem that prevents you from working for weeks, months, or even years, disability insurance can provide crucial financial support to help you maintain your standard of living and help you achieve success. reduce financial stress. on your loved ones. Like all forms of insurance, disability coverage comes with an ongoing cost, although some workers may pay little or nothing out of pocket for employer-sponsored plans.
Here’s a more detailed look at what disability insurance offers and how to choose the right policy for your needs.
What is disability insurance?
Also called income protection insurance, disability insurance comes in two forms: short term disability insurance and long term disability insurance. While policy terms and coverage vary by issuer, the following is an overview of the main distinctions between the two.
Short term disability insurance
Short Term Disability (STD) policies provide income protection to workers who are temporarily unable to perform their duties due to qualifying disabilities.
Each short-term disability claim is subject to a short elimination or waiting period, usually one to two weeks, during which the policyholder does not receive benefits. After the elimination period, the insured receives benefits for a consecutive period of disability, which usually does not last longer than 26 weeks. Benefits vary by policy and profession, but typically range from 50% to 70% of pre-disability earnings.
Short-term disability insurance policies may not cover loss of income related to work-related accidents. These incidents are the responsibility of the workers’ compensation insurance.
Long term disability insurance
Long Term Disability (LTD) policies provide income protection to workers who are unable to perform their duties for long periods of time.
Like short-term disability claims, LTD claims are subject to waiting periods. LTD wait times are longer than STD wait times, typically ranging from one to six months, but sometimes as long as 12 to 24 months. Each LTD policy also has an accrual period that extends up to twice the elimination period. During the accumulation period, the insured must accumulate sufficient accumulated disability time to exceed the elimination period. The policyholder does not need to be continuously disabled during the accumulation period, as long as the elimination threshold is reached.
Once the waiting period has been reached, benefits are paid until the contract holder is no longer considered disabled or for the duration of the contract. Some LTD policies last for a set period of two to 10 years, but many remain in effect until the insured reaches age 65. Some may even continue after 65, as long as the insured continues to work. Income replacement typically represents up to 70% of pre-disability income and can be personalized.
Group or individual disability insurance
Many workers have access to group disability insurance, which can lead to lower premiums thanks to the purchasing power of their employers or professional associations.
Others, such as the self-employed and entrepreneurs who work outside of traditional employer-employee relationships or who are not eligible to join professional associations, may purchase disability insurance policies in the personal market.
Group disability insurance policies
Group disability insurance is usually offered by employers and professional associations. The American Dental Association (ADA) group disability insurance is a good example of a group policy offered to members of a professional guild rather than to colleagues in a particular workplace.
Features and customization
Group disability insurance policies are often designed to meet the needs of the population covered. For example, the ADA group disability policy offers:
- Member premiums lower than current rates for comparable individual policies
- Residual benefits for beneficiaries returning to full-time work after a period of disability
- Coverage up to age 75 for full-time workers
- Benefits payable continuously up to age 67, or for 24 months when the insured become disabled between age 67 and 75
- A hospital exemption, which anticipates the monthly payment of benefits for beneficiaries facing long hospital stays.
- A voluntary rehabilitation program that can speed up the insured’s return to work.
Liability for premiums
Depending on the preferences of the group sponsor, in most cases, the employer or the professional association, premiums can be borne entirely by the group sponsor, entirely by the insured, or shared between the two. This has significant tax consequences; When the policyholder pays the premiums with after-tax funds, the benefits may not be taxable. For information relevant to your situation, consult a tax professional.
Waiting for service
Some employer-sponsored group policies may impose a wait for service. This is a probationary period during which newly hired employees are not eligible to file claims. Wait times for service are typically a few months.
Hours worked requirement
Some employer-sponsored group policies also have hours worked requirements that may effectively exclude part-time employees from coverage. Hours worked requirements typically vary from 24 to 32 hours per week, although amounts outside this range are not unknown.
Individual disability insurance policies
Individual disability insurance policies cover individual workers who do not have access to adequate group insurance plans. While their structure and basic features are similar to group disability insurance plans, they may charge higher premiums for comparable coverage and may not offer the same range of customization options.
Individual insureds are responsible for paying their own individual disability insurance premiums. If you are a sole proprietorship with a legal business structure, you may be able to pay your premiums from your pre-tax income. Typically, the hours worked requirements do not apply, as long as you can prove the income you want to replace.
Eligibility for Disability Insurance Coverage
Disability insurers use a comprehensive underwriting process that takes into account three key considerations: the applicant’s health, income and financial situation, and occupation.
With the high cost of replacing most of an insured’s income over months or years, the medical underwriting process is understandably rigorous. It usually consists of three parts:
- Health survey. This is a written or oral questionnaire that covers topics such as the applicant’s personal medical history, family history, lifestyle and habits. Information on nicotine use and mental health is particularly important for disability insurance providers.
- Medical examination or panels. Many policies require the applicant to submit to a physical examination. Some simply require blood or urine tests to screen for drug use and common chronic illnesses, such as kidney failure, diabetes, and cardiovascular problems. Some group policies do not require medical examinations or tests.
- Medical records. Some insurers ask for medical records for a period of five or 10 years before the request. This can lengthen the subscription process as it often takes weeks to obtain the necessary information.
2. Income and finances
Financial underwriting typically requires applicants to provide documented proof of income, such as:
- W-2 and 1099 statements
- Tax returns for the previous year
- Bank account statements
- Profit and loss accounts, if available
Financial underwriting may be less burdensome for applicants for employer-sponsored policies and more complex for the self-employed. However, it is important in all cases that applicants provide full income documentation, as police benefits are a direct function of income.
Finally, the professional category of a candidate is an important determinant of risk. Occupations considered more dangerous, such as certain manufacturing or outdoor occupations, are classified as higher risk than white-collar occupations, which are considered less dangerous. Applicants from lower occupational classes may have difficulty qualifying for coverage, and those who receive it may receive lower monthly benefits than workers in upper classes.
Types, Features and Benefits of Disability Insurance Coverage
Here’s a more in-depth look at the main types of disability insurance coverage, the policy’s potential benefits, and common policy features.
Types of coverage
Disability insurance comes in two main types of cover: all occupation and own occupation. The distinction between these types of coverage is important, and potential policyholders are encouraged to carefully consider the potential ramifications of their choice on lifetime income and career success.
- Any profession. “Any profession” coverage meets a strict definition of disability. Even if the policyholder is unable to perform pre-disability functions, coverage for any occupation cannot be activated unless the policyholder is found to be unable to perform productive functions, including eligible functions.
- Own profession. The “Own occupation” cover comes into effect when the policyholder is judged incapable of performing his specific functions before the disability. This type of coverage is common for high-income professionals whose roles have high cognitive demands. If you are unable to work in your pre-disability occupation due to a covered disability, you are considered totally disabled for the purposes of your own occupation policy.
Potential benefits of the policy
These are among the most common benefits of disability insurance policies. Some apply only to STD or LTD policies, while others refer to both.
- Adjustment of the cost of living. This automatic and phased increase in benefits paid offsets the effects of inflation. It can be set at a predetermined threshold, such as 2% or 3%, or calculated annually on the basis of current prices.
- Partial or residual invalidity clauses. These allow insured persons considered to be partially disabled to claim certain benefits, even if they can carry out productive part-time work.
- Reimbursement of the premium. This guarantee allows the partial reimbursement of insurance premiums paid after a specified period. Premium return riders vary widely from issuer to issuer, but the amount refunded typically ranges from 50% to 100% over the period specified, less any benefits paid.
- Additional purchase. This reserves the right of the policyholder to purchase additional disability cover at a later date.
Important features of the policy
Potential policyholders should take these important features of disability insurance into account. Some apply to STD or LTD, while others apply to both.
- It cannot be canceled. Non-cancellable LTD policies cannot be canceled by the issuer in the absence of overdue premiums. Non-cancellable policies provide policyholders with valuable peace of mind, as they cannot be revoked or amended due to changes in health or the whims of insurers. Non-cancellable policies may have higher premiums than equivalent cancellable policies.
- Renewable guaranteed. Limited term LTD policies can be guaranteed to renew, which means that the issuer cannot refuse the policyholder’s renewal request at the end of the policy term. Policies can be guaranteed renewable for up to 65 years or for life. Guaranteed renewal status generally corresponds to higher policy premiums, especially when policies have a lifetime renewal guarantee.
- Elimination period. The elimination period is the period during which a disabled insured person is not eligible for benefits. The insured does not need to lose income during the elimination period; The fact that they are considered disabled but are still able to perform some or all of the professional tasks does not affect their possible eligibility for benefits. STD elimination periods usually last less than two weeks; LTD withdrawal periods last from one month to two years. All other things being equal, policies with longer elimination periods have lower premiums than policies with shorter elimination periods.
- Accumulation period. In an LTD policy, the accrual period is the interval during which an insured must accumulate sufficient cumulative eligible disability time to meet the elimination period. The accrual period is usually double the withdrawal period. The invalidity time does not have to be consecutive as long as the elimination threshold is reached. For example, during an accumulation period of 24 months, an insured may be eligible for disability benefits by accumulating three non-consecutive disability intervals of four months each, for a total of 12 month. Longer accrual periods equate to lower policy premiums.
- Temporary recovery. If a disabled policyholder regains their ability to work and then becomes disabled due to the same underlying condition or cause, this benefit allows them to reopen their claim without having to undergo another elimination period.
- Coordination of benefits. When the policyholder receives income replacement benefits from multiple sources, such as Social Security Disability Disability (SSDI), this provision ensures that the disability policy does not pay more than its share of those benefits. For example, if the policyholder aims to replace $ 5,000 of monthly income and other sources replace $ 2,000 per month, the disability policy replaces the remaining $ 3,000.
- Rehabilitation plan. This provision covers some or all of the approved costs associated with returning to work after a long period of disability. These may include physiotherapy and occupational therapy, child or family care, job search fees, and professional development fees.
- Incentives and Responsibilities for Return to Work. A return-to-work incentive may maintain benefits for the first or two years after the insured person returns to part-time employment. In most cases, the incentive combines benefit payments and earned income to replace 10% of the policyholder’s pre-disability income.
- Reasonable accommodation. This benefit reimburses employers, including self-employed workers, for reasonable accommodations made to ensure the comfort and well-being of the insured upon his return to work.
Is Disability Insurance Right For You?
The situation of each worker is unique. However, you can apply common best practices and strategies when choosing a disability insurance policy and determining if disability insurance is economical and convenient for you in the first place. Here are some questions to ask yourself.
1. Are your emergency savings sufficient to cover short-term expenses?
There are three types of savings you need to keep: emergency, retirement, and personal. As a general rule, your emergency savings reserves should amount to at least three months of income. The ideal emergency reserve is equivalent to six months of income.
By the way, six months is how long you can expect a health insurance policy to replace your income in the event of a disability. Instead of paying the monthly premium for an individual STD policy that you may never need, consider making corresponding monthly deposits to a savings account, money market account, or certificate of deposit insured by the FDIC. If you are temporarily unable to work at some point in the future, you can always draw on this fund to cover necessary expenses.
This logic only applies to STD policies that require refundable premiums. If your employer offers an STD policy as an added benefit without any contribution from the employee, membership is financially free.
2. Do you have large recurring expenses or debts that cannot be easily carried over?
Even frugal people have to pay bills. If you have large recurring expenses or debt that cannot be easily postponed, refinanced, or canceled, disability insurance can provide a vital financial safety net for you and your family. These debts and expenses may include:
- Rent or mortgage payments, including property taxes and home insurance
- Student loan debt
- Large credit card debt
- Auto financing and insurance
- Alimony and child support
It never hurts to contact your lenders for information on hard-hitting programs that can temporarily reduce or eliminate your monthly payments. However, there can be no assurance that your situation will be considered a hardship or that a pardon will eliminate the need for disability insurance.
3. Have you invested a lot in your career?
As the cost of education rises and employer demand for graduate workers increases, Americans are spending more than ever on career development.
Members of professional corporations, such as doctors and architects, spend particularly large sums on their education. According to the Association of American Medical Colleges, the average out-of-state tuition fee for public medical schools was $ 58,668 for the 2016-2017 school year, or $ 234,672 over four years. The benefits of a LTD insurance policy can save this investment, even if the return after disability is lower.
4. When do you plan to retire?
Early in your career, the cumulative financial and occupational impacts of partial or total disability can be devastating. Although unfortunate, a disability at the end of your career is not likely to affect your financial or professional situation in the same way. If you have reached the age of 59.5, you may be allowed to withdraw funds from your tax-advantaged retirement accounts without incurring a tax penalty, although you will still have to pay taxes on withdrawals from certain types of accounts. .
5. Are you the sole or main breadwinner in your household?
If you are the sole or primary breadwinner in your household, your family may depend on your disability benefits for basic needs, such as secure housing, clothing, and livelihoods. While your family may be eligible for some public safety net programs, these may not be enough to cover your living expenses. In addition, key programs, such as housing assistance, may have waiting lists of several years.
6. Do you have any pre-existing illness?
Despite the potentially rigorous medical underwriting process, workers with pre-existing health conditions that increase their risk of temporary or permanent disability may be more inclined to seek LTD coverage than their healthy peers. Job seekers with pre-existing conditions may want to look for employers who offer group disability insurance without exam, if this is common in their field.
7. What is your premium budget?
Premiums for direct disability insurance vary widely, ranging from virtually nothing to hundreds of dollars per month. Your policy premium depends on the amount of your benefit, the length of time, and key features such as the elimination period, and whether you offer self-employment coverage or any other coverage. As a general rule of thumb, try to keep your total premium less than 2% of your gross employment income, for example $ 1,000 per year with a salary of $ 50,000 before taxes.
Disability insurance is not the only possible source of direct financial assistance for workers unable to perform their duties due to partial or total disability. It is not even the only possible source of alternative income for workers with disabilities. Those with a sufficiently long service history may be eligible for Social Security Disability (SSDI) administered by the Federal Social Security Administration. The Social Security Administration’s SSDI website has more details on qualification requirements, service requirements, eligibility, and waiting periods for SSDI applicants.
Do you have a disability insurance policy? Why or why not?