Disability insurance, also known as disability income insurance, will protect you and your family if you suffer a disabling injury or medical condition that keeps you from working. The insurance company will pay out a percentage of your pre-disability income until you recover or until the benefit period ends.
It’s common to hear people saying they don’t need disability insurance. Indeed, most people don’t expect to be forced to stop working until they’re much older or reach the age of retirement. But the truth is that we are all at risk of a disabling injury or illness. In fact, 1 in 4 people aged 20 will be unable to work because of a disability before retirement. Disability insurance can be just what you need to help you through a difficult time.
But purchasing the right insurance plan can be overwhelming. You don’t want to be in a situation where you realize the policy you’ve been paying every month will do nothing for you. In this article, we go through key aspects of disability insurance policies that you should keep in mind when shopping for this type of coverage.
Short-term Disability vs. Long-term Disability
There are two types of disability insurance: short-term and long-term. Short-term disability (STD) insurance will only cover you for a few months (or up to a year or two, depending on the policy), while long-term disability (LTD) insurance can cover you for several years, most commonly 5 or 10, but some policies will cover you until you reach retirement age (65 or 67).
You don’t have to select one type over the other—you can purchase both. Once the short-term disability benefits stop, the long-term disability benefits start. This course of action would make sense for people who aren’t sure whether they will be able to recover from a disability quickly. If they don’t, the LTD coverage will be there to protect their income.
Group Policies vs. Individual Policies
The most common way of purchasing disability insurance is through your employer's group policy. Many companies and businesses will partner with insurance companies to offer their employees a suite of coverages that can include life, health, accident, and disability insurance. Employers will negotiate a lower rate, and some will also pay a portion of the premiums to make it more affordable for their employees. Apart from being less expensive than purchasing your own coverage, most insurance companies won’t ask you to undergo a medical examination (known as underwriting) to see if you’re eligible. However, if you change jobs, you’d likely lose coverage. Also, group policies are less customizable, whereas individual policies will let you choose from a wide range of benefit options and optional riders.
If your job offers you a group disability insurance policy, you may consider getting an individual policy to supplement your group LTD. Though they are a bit more expensive, you have more room to customize the plan and make sure you will be well protected should you become disabled. Additionally, benefits you receive through an individual policy are not subject to taxation because you are paying the premiums with after-tax money. If you have a group policy where the payroll deduction is made before taxes, the benefits you receive will be taxable.
A Universe of Benefit Options
If you opt for an individual disability insurance policy, you’ll be faced with a long list of options for benefits. You may feel overwhelmed by unfamiliar terms, so take a look at our glossary of disability insurance terms before continuing. Below, we'll go over the most important benefits you should consider.
The elimination period, also called waiting period, is the length of time you must wait from the day your disability starts to the day the insurance company starts paying you benefits. That can be as little as 15 days or as long as a whole year, but the average elimination period is 90 days. When deciding on a period, think about how long you can afford to go without a salary, basing your calculations on your savings and any other income you may receive. A short elimination period can be costly, but a long elimination period means you will go without benefits for longer.
Benefit Percentage and Maximum Monthly Benefit
The benefit percentage is the portion of your pre-disability income the insurance will pay out to you once the elimination period is up. For STD, you will usually be able to select between 40-60% of your salary. Since LTD will sustain you for longer, the benefit percentage ranges from 60–80%. The higher the percentage, the costlier the policy. On the other hand, the maximum monthly benefit is the highest amount the insurance will pay, regardless of the percentage rate selected. If the chosen percentage amounts to more than the maximum benefit, you won’t be paid the full amount.
The benefit period is the total amount of time the insurance will pay you benefits if you become disabled. For STD insurance, this will usually be a few months or up to a year (maybe two, depending on the policy). For LTD, it will be years or up to age 65 or 67. The shorter the benefit period, the least expensive the coverage will be. But consider that a serious disability may keep you from working for years or forever.
Disability insurance policies have other benefits built into the policy, such as a Home Modification Benefit, which pays a benefit to help policyholders adapt their home to their disability, or a Vocational Rehabilitation Benefit, which lets policyholders acquire skills to return to work or find a new job within the limitations of their disability. Another popular benefit is Presumptive Total Disability: if you become completely disabled (loss of eyesight, hearing, speech, or use of two limbs), the elimination period is waived, and you will begin receiving benefits immediately.
These are only a few of the benefits included in many policies. When comparing policies, take a look at what they offer and what is most important to you in the case of disability. That is one reason why it’s important to shop around instead of selecting the first policy you find.
Riders are optional coverages that extend or modify the terms of the basic policy. In the case of disability insurance, for example, there are riders that change the definition of “disability” under the policy. Often, disability is defined as the inability to perform any occupation (called “any occupation” policies), which means you must prove you can’t work at all. An Own Occupation Rider changes the definition to mean “the inability to perform your own occupation,” which means that, if you can’t perform the tasks you did before the disability, you will qualify for benefits, even if you might be able to find another job with other functions.
You can add riders to your policy for an additional cost. Some riders change your premiums minimally, while others are pricier. When shopping around for an insurance company, compare their riders as well, since they are a key part of customizing your policy to fit your needs.
What Your Insurance Won’t Cover
Like every other insurance, disability insurance policies have exclusions. Below, we include a few common exclusions, but the list is in no way complete. Ask your insurance agent about your policy’s exclusions. It’s important to know what they are and how they can affect you before you sign on the dotted line.
Pre-existing Condition Exclusion
If you were suffering from a condition and receiving treatment for it before you bought a policy, it’s possible that the insurance company will limit the benefits you can receive for it if the condition causes you to become disabled. Depending on your policy, you may not be covered at all, or you may have to wait a certain amount of time before the insurance company will pay—this is called an exclusion waiting period, and it often extends for two years. Some companies offer a rider that waives this exclusion, but they tend to be costly. However, don’t lie about your pre-existing conditions. That constitutes insurance fraud and can cost you a lot more than being denied benefits.
Mental Illness Exclusion
Some policies don’t cover mental illness at all. Other policies will set a limitation period on the claim so that benefits are only paid out for a certain amount of time. After this, the benefits for a mental illness disability will end. This is not universal; some policies do cover mental illnesses, as well as substance abuse. If you suffer from one of these conditions, shopping around for an LTD coverage is crucial.
Hazardous Activities Exclusions
If you are a scuba diving enthusiast, your insurance will likely refuse to pay out benefits if you become disabled in a diving accident. Activities the company considers dangerous—scuba diving, rock-climbing, skydiving, and car racing, to name a few—are usually not covered by disability insurance.
Once you are ready to shop for a policy, check out our Top 10 Disability Insurance Companies.