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Disability Insurance

What is Disability Insurance

Disability insurance protects you from the financial risk of losing your income when you become disabled and can’t work. That’s the gist of it, but understanding disability insurance can be confusing if you aren’t familiar with all its components.

For example, what does a disability insurance policy actually cover? How does the coverage translate into benefits when you become sick or injured? What goes into the costs you pay to get that coverage? Your disability insurance policy answers all these questions, but if you’ve never encountered the language used in your policy you might find it difficult to parse.

The following disability insurance definitions are common words and phrases you’ll find while shopping for a policy. Knowing them will not only help you make an informed decision about the disability insurance coverage you need but also to get the most use out of a policy you already have.

Any-occupation

When you purchase disability insurance, your insurer may make a distinction between any-occupation and own-occupation coverage. You may get to pay lower rates for any-occupation coverage, but that’s because it’s harder to qualify for benefits if you get disabled. Under own-occupation disability insurance, you need only show that you can’t work at your current or most recent occupation anymore to start receiving benefits.

Under any-occupation coverage, however, if you can work another job besides your regular one, you aren’t considered disabled enough to receive benefits. That could mean having to take a job with fewer or less strenuous responsibilities, often at a significant pay cut.

Attending physician’s statement

When you apply for disability insurance (and life insurance), you’ll go through a process called underwriting. During underwriting, the insurer will confirm all the details about your health to make sure you were telling the truth when you applied for coverage. Sometimes, the disability insurance company will request an attending physician’s statement, or APS, from your doctor that lays out all the information the doctor has about your health.

Automatic increase benefit

Disability insurance works by paying you disability insurance benefits that are meant to replace the income you would’ve had if you could still work. Occasionally, in exchange for a higher premium, the disability insurance company will raise your benefits. The automatic increase benefit is usually offered as a rider, and you have the option to accept the increase or not.

Benefit

Coverage under disability insurance is measured by the amount of benefits you receive when you become disabled and can’t work. Benefits are paid monthly, similar to a paycheck, and you choose the amount of the benefits when you take out the policy. You’ll receive benefits for the entire benefits period, which with a long-term disability insurance policy could be anywhere from five years to retirement, or until you recover from your disability.

Your benefit amount is one of the most important factors in determining your premium, and it should be enough to coverage between 60% to 80% of your pre-tax income before you became disabled. Benefits are not usually taxed, unless you pay for your policy with pre-tax dollars or you have a group insurance policy paid in part by your employer.

Disability insurance companies offer benefits in other ways too, such as a rehabilitation benefit, which go toward the cost of your recovery.

Benefit period

The benefit period is the time during which you receive benefits. You choose how long you want your benefits period to last when you take out your policy. Because the carrier will only have to pay benefits during the specified benefits period, it will offer you a lower premium in return for a shorter time. The benefits period ends when you recover from your disability.

Claim

In order to start receiving benefits, you need to file a claim with your disability insurance company after you become disabled. The claim will include a claim form on which you will thoroughly describe the nature of your disability, including when it began and what kind of treatment you’ve been receiving for it. You should file the claim as soon as possible, as you’ll have to wait out an elimination period.

Claim form

When you file a claim, you’ll submit a claim form that contains all the information the disability insurance company needs to confirm your eligibility to receive disability insurance benefits. The claim form will have a section for you to fill out as well as sections for your employer, if applicable, and your doctor. Having these extra sections helps the disability insurance company make a determination about whether you meet its definition of disability, which states how disabled you need to be to receive benefits.

Cost-of-living adjustment

The cost-of-living adjustment rider adds a provision to your disability insurance policy that additional disability insurance benefits will be paid to account for increases in your cost of living.

Coverage

Coverage is what your policy offers you when you become disabled under its definition of disability. Essentially, it’s what you pay for when you take out a policy. This includes not only benefits but also services like rehabilitation or a provision to receive benefits when caring for somebody else. What’s covered and what’s not will be outlined in your policy.

Definition of disability

In order to receive disability insurance benefits, you need to meet the carrier’s definition of disability. There may be several definitions of disability spelled out in your policy, like total disability, partial disability, and catastrophic disability. Each describes a level of severity that needs to be reached in a given disability before you become eligible for benefits under the respective definition, and what percentage of the total benefit amount you can receive under that definition and for how long.

Under some definitions of disability, such as presumptive disability, you may not be subject to an elimination period.

Elimination period

The elimination period, also known as the waiting period, is the length of time you need to wait after you become disabled to start receiving benefits from the disability insurance company. The elimination period, under disability insurance, usually ranges from between 30 days to 365 days, although under short-term disability insurance the elimination period may be only a few weeks.

The elimination period begins on the date you become disabled, not the date you file a claim. Once the claim is successfully processed, you need only wait out the remaining days. Waiting periods help the insurer keep its costs low as if you recover during that time you become ineligible for benefits. For that reason, choosing a policy with a shorter elimination period could result in higher premiums.

Exclusion

An exclusion is a condition or activity in your disability insurance policy for which you will not receive disability insurance benefits should you become disabled due to that condition or activity. Pre-existing conditions are a common exclusion, but not all pre-existing conditions are excluded. Other types of exclusions include risky hobbies or lifestyle choices, such as smoking.

Future purchase option

The future purchase option, also called a future increase option, is a provision of disability insurance that allows you, up to a certain age, to increase your coverage even if your health has declined since taking out the policy. While you’ll have to pay higher premiums, you won’t have to take another medical exam.

Group disability insurance

Group disability insurance is an insurance policy you receive from your employer. Because it’s offered to a large group of people – your fellow employees – you’ll be offered a discounted rate, which may even be wholly or partially subsidized by the company. However, employer-sponsored disability insurance may offer lower coverage than a private disability insurance policy, and if you leave your job you’ll lose that coverage.

Guaranteed renewable

Most disability insurance policies are guaranteed-renewable policies, which means that the insurance company won’t cancel the policy or change its terms, such as the benefit amount, as long as you continue paying your premiums.

It’s easy to confuse the guaranteed-renewable provision with the non-cancelable provision. The latter enhances the guaranteed-renewable provision by prohibiting the insurance company from raising premiums.

Long-term disability insurance

Long-term disability insurance (LTDI) is a type of disability insurance policy that lasts for many years. When you take out the policy, you pay premiums in return for coverage and if you become so disabled that you can’t work and lose your income, you’ll receive benefits that are paid out every month for a (benefits period)(#benefits-period) that could last until you retire.

Like other kinds of disability insurance, LTDI doesn’t cover excluded conditions or activities, and your higher coverage needs will result in a higher premium. You’ll have to meet your disability insurance company’s definition of disability, but your benefits should replace between 60% and 80% of your income. Many people get long-term disability insurance as part of an employee-benefits package, but you can get an individual plan as well with higher benefit amounts and a longer benefits period.

Medical exam

An important part of the disability insurance underwriting process is taking a medical exam. The medical exam confirms to the carrier the information about your health that you gave when you initially applied. It may also uncover new conditions which could affect your eligibility for coverage, render a higher premium than you were originally quoted, or cause those conditions to be excluded from coverage.

Non-cancelable

non-cancelable policy is one in which the disability insurance company can’t raise your premiums as long as you keep paying them. It may be included as part of your policy, or it may need to be added as a rider, sometimes at an additional cost. The non-cancelable provision works in tandem with the guaranteed-renewable provision, which states that your policy can’t be changed or altered as long as you’ve been paying your premiums.

Overinsurance

Overinsurance is when you purchase more coverage than you need. Most people only need benefits that equal about 60% to 80% of their pre-tax income, which roughly aligns with their take-home pay. If you sign up for more coverage than that, you’ll pay much higher premiums. Because of the risk of your policy lapsing, your carrier will make sure you’re not over insured.

Own-occupation

Own-occupation coverage, also known as regular-occupation coverage, is part of the definition of disability that describes what kind of work you must be too injured or ill to perform to be eligible for disability insurance benefits. Under an own-occupation policy, you only need to be too disabled to do your current or most recent occupation; if you can still do a type of less physically demanding work, you may be eligible for benefits.

That’s in contrast to an any-occupation policy, which means you have to be too disabled to do any kind of work in order to receive benefits. Own-occupation policies may cost more because it’s more likely that the carrier will have to pay out.

Policy

Your disability insurance coverage is described in the policy, which is a document that thoroughly spells out the various definitions of disability, the conditions under which you can receive benefits, the exclusions unique to your coverage, and details such as the premium, benefit amount, and the benefits period.

Your policy functions as an agreement between you and the disability insurance company, and its terms, if followed correctly, are binding. Additional coverage may be added in a rider.

Pre-existing condition

pre-existing condition is any kind of medical issue that you had before taking out the disability insurance policy, from conditions as minor as anxiety to as severe as cancer. Many pre-existing conditions are excluded from coverage, meaning that you won’t receive benefits if your disability is caused by the one. However, depending on your disability insurance carrier, some pre-existing conditions may be covered, albeit with a higher premium.

Premium

The premium is the monthly or annual amount you pay to keep you (policy)(#policy) in force. The rate is calculated as a factor of your pre-existing conditions; your coverage needs, including benefit amount; and the benefits period. If you choose a more lenient [definition of disability](#definition-of-disability], such as own-occupation coverage your rate may also be higher. You should expect to pay between 1% and 3% of your income in premiums.

Reconsideration period

The reconsideration period is a part of some exclusion riders that lets you ask the disability insurance company to consider removing the exclusion from your policy, thus letting you receive coverage due to a disability caused by an excluded condition. If the reconsideration period is offered, you may be eligible for it within a few months or years of taking out the policy, and you’ll need to show that the condition is resolved and not getting worse.

Rider

rider is a provision of additional terms to your policy that enhances the coverage in the policy. Some riders are included automatically, but others must be requested and can increase your premium. In disability insurance, a rider may attach additional conditions under which you can become eligible to receive benefits or increase your coverage amounts to meet different needs that may arise.

Short-term disability insurance

Short-term disability insurance (STDI) is like long-term disability insurance except that its benefits period lasts for a much shorter time. While long-term disability insurance is meant to provide coverage for years or even until retirement, short-term disability insurance only lasts for a few months and almost never more than a year. However, STDI also has a much shorter elimination period.

Simplified issue

Simplified issue is a type of underwriting where your premiums are determined without you undergoing a medical exam. With a simplified-issue policy, you can get coverage must faster because you may not be asked for an attending physician’s statement or even your medical records. However, the benefit amount may be smaller than a more traditional disability insurance policy, and you may be ineligible beyond a certain age or with certain coverage needs.

Social Security disability insurance

For people who become disabled but can’t afford a private disability insurance policy, Social Security disability insurance (SSDI) may be an option. The government pays Social Security benefits to people who become disabled much like a long-term disability insurance policy, but the Social Security administration’s definition of disability is much more strict than a typical disability insurance plan, and the large majority of applicants are rejected. Additionally, SSDI benefits are much smaller than those offered by private plans.

Survivor benefit

survivor benefit is a feature of some disability insurance policies in which the carrier will pay your designated beneficiary a small benefit if you die while receiving disability insurance benefits. The survivor benefit is usually equivalent to a few months’ worth of your usual coverage, so it may not be enough to cover any of the beneficiary’s expenses you were paying while alive. For that, you should look into a life insurance policy.

Underinsurance

The opposite of overinsurance is underinsurance, where you get less coverage than you need. Sometimes you may understate your coverage needs because it may result in a lower premium, but it could come back to haunt you if you become disabled and need to replace your income with disability insurance benefits. You should aim to purchase coverage that replaces between 60% and 80% of your pre-tax income.

Underwriting

Underwriting is the point during your application process when the disability insurance company will determine your actual premium rate. Up to then, you only had an estimated quote, but during underwriting the carrier will take a look at your medical records, the results of your medical exam, and your finances, including tax returns, bank statements, or paystubs.

By weighing your risk and what you can afford against your coverage needs, the disability insurance company will use a formula to calculate what you’ll need to pay in premiums. Some people may be able to expedite the underwriting process by purchasing a simplified-issue policy instead.

How does disability insurance work?

It’s easy to pretend accidents or ailments don’t happen, but the odds aren’t exactly in your favor. In fact, per the U.S. Social Security Administration, around one in four 20-year-olds will become disabled before they retire. That’s a scary stat, but there’s a way to at least set up a safety net. Long-term and short-term disability insurance protects your paycheck — and by extension, your family — if you can’t work due to illness or injury.

Once you have the right long-term disability insurance policy in place, you’ll start paying your monthly premiums. In the event that you’re injured or too ill to work, here’s what you’ll need to do:

  • 1. File a disability claim. An LTD claim generally requires information about your job and diagnosis (usually statements and documents from your physician). The insurance company will review the claim and either approve it, request more information, or deny it as appropriate. You need to be able to show that you are unable to work.
  • 2. Wait out the elimination period. We mentioned this earlier. All LTD policies require a claimant remain disabled for a period of time between when the disability begins and the benefit payments start. (Otherwise, short-term disability insurance applies.) Most commonly, these periods are 30, 60 or 90 days, but there are longer waiting periods of 180 and 365 days also available. Typically, the longer the elimination period, the lower the premiums. Just remember, you’ll have to cover costs out-of-pocket until coverage kicks in. We typically recommend a 90-day elimination period.
  • 3. Receive your benefits. Once a disability claim is approved and the elimination period expires, you’ll receive your monthly benefit for as long as your disability lasts, for up to the defined “benefit period.” Companies provide benefit periods as short as two years and as long as right up to retirement age (67), when Social Security benefits would take over (PolicyGenius recommends going the “until retirement” route). The longer the benefit period, the higher the premium.
  • 4. Return to work when you’re able. Payments end if and when you can fully return to your regular occupation. However, depending on your policy and/or the riders you purchases, you can sometimes still collect benefits if you can return to your regular occupation in a limited capacity or only work in a different occupation.

How Does Short-Term Disability Work?

As we mentioned earlier, short-term disability insurance is most commonly obtained through an employer-sponsored group plan. Those plans are “guaranteed approval,” meaning you won’t have to take a medical exam or go through the stringent underwriting associated with an LTD policy. If you’re applying for STDI with a private insurer, however, you’ll likely take a medical exam.

Policy terms vary by employer. Some cover your premiums completely, while others ask you to pay a small portion to participate. It’s also common for coverage to kick in only after you’ve worked for a set period of time or if you work at least 40 hours a week.

State law plays a role here, too, though. Some states, including California, Hawaii, New Jersey, New York or Rhode Island, actually require employers to provide short-term disability coverage. Still, here are a few general policy guidelines:

  • STDI plans typically cover up to 80% of your gross income.
  • Disabilities generally include chronic conditions like back injuries, cancer, and heart disease, off-the job injuries and, sometimes, pregnancy. They don’t include injuries sustained at work; those fall under workers’ compensation.
  • Most short-term disability benefits replace a portion of your income for 30 to 120 days, with a maximum benefit period of 52 weeks. There are sometimes caps on the monthly payment amount, too.
  • Coverage usually kicks in between one to 14 days after the injury or diagnosis, though the exact timeframe could vary, depending on whether you’re ill or injured.

To receive payment, you’ll have to file a claim with the insurer, whether you’re working with them directly or through an employer. To learn exactly how your short-term disability policy works, be sure to review your coverage with a human resource representative or broker.

How Much Does Disability Insurance Cost?

It depends. Long-term disability premiums are based on age, gender, occupation and features, but you can generally expect to pay between 1% to 3% of your annual salary for a policy. Remember, you’ll want the benefit amount to cover you if you’re out of work for an extended period. The good news here, though: When you buy an LTD policy (as opposed to signing up for one offered by an employer), the benefits aren’t taxed. That means a policy that pays out 60% of your gross income would effectively replace most of your take-home paycheck.

Note that if you have a pre-existing condition, it could cost more to get covered.

Short-term disability, on the other hand, can cost anywhere between $0 and way too much, depending on where you get it from. That’s why we generally only recommend short term disability insurance offered by your employer. Private policies almost always falls into the “way too much” category, so you’re better off just self-insuring for the short term — i.e. socking those “premiums” away in an emergency savings account — and purchasing a LTD policy instead.

Recommendation Recap

  • An untaxed monthly benefit of approximately 60% of your total gross income and close to your take-home pay.
  • 90-day elimination period between the start of your disability and the receipt of your first check.
  • An own occupation policy, which defines a disability as the inability to work at your regular occupation, even if you still can work at another occupation.
  • non-cancelableguaranteed renewable policy so your premiums are locked in and your policy isn’t up for cancellation.
  • benefit period to age 67, meaning if you get permanently disabled from working in your 30s, you’ll be covered until 67 when your retirement benefits take over.
  • Residual disability coverage, which pays benefits if you can work some time but not all of the time due to a disability. (It covers the partial loss of income with a partial payout of your disability benefit.)

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