What Is Disability Insurance? – Benefits And Why You Need Them

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:

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.

1. Health

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:

2. Income and finances

Financial underwriting typically requires applicants to provide documented proof of income, such as:

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.

3. Profession

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.

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.

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.

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:

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.

Last word

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?

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