Disability income insurance is not intended to fully replace your income. Rather, the benefit should be sufficient to financially sustain you during your disability.
The two major types are:
Short-Term
Short-term disability benefit payments are usually based on a specified percentage of pre-disability income (e.g., 60%). The length of time benefits are paid varies from policy to policy, but the maximum benefit period is usually less than six months. Short-term disability coverage may be used to fill in the elimination period before long-term disability benefits begin.
Long-Term
Benefits may continue anywhere from five years to the remainder of an individual’s life, depending on what is purchased. Long-term disability insurance is generally considered protection against a catastrophic illness or injury, but many long-term disability claims result from common medical conditions that cause an increasing level of impairment over time. It is important when purchasing coverage to check a policy’s maximum benefit period.
The following policy provisions will impact the disability benefits you receive:
- Amount of Benefit - The insurance company will review your income history to determine the disability income benefit they will offer you.
- Definition of Total Disability - To receive benefits, you must meet the definition of total disability as defined in the policy. Each policy is different and you should check the definition of total disability within a policy before buying it. You should determine whether the policy pays benefits for disabilities resulting from both accidental injury and illness. An accident-only policy may not be adequate to meet your needs. Some policies will pay if work related or not, so be sure you understand the policy you are purchasing.
- Elimination or Waiting Period - The policy will specify the number of days you must be disabled before qualifying for benefits. Waiting periods may be anywhere from 0 to 730 days.
- Benefit Period - The policy will specify the length of time you will receive monthly benefits. Benefit periods may be a fixed period of time in months or years or for lifetime.
Many Disability Income Policies Offer Supplemental or Optional Benefits
- Cost of Living Adjustment (COLA) - Increases your disability benefits over time based on a flat percentage or on the increased cost of living measured by the Consumer Price Index.
- Increase in Benefit - Grants you the right to purchase additional coverage to increase the disability income benefit amount provided under the policy in the event your earnings increase..
- Return of Premium - Requires the insurance company to refund a portion of your premiums if no claims are made for a specified period of time stated in the policy.
- Partial Disability Rider - Allows you to return to work part-time and receive partial benefits if you are not ready to return to work full-time.
- Residual Disability Rider - A residual disability is one that prevents you from performing some of the duties of your occupation (as defined in your policy) or from performing your occupation on a full-time basis (same as partial disability). A residual disability can also happen when you return to work full-time but lose income because your business or practice has suffered due to your absence. A residual disability rider is a common benefit offered to self-employed people.
- Waiver of Premium Provision - Allows you to stop paying the premium for the policy if you are disabled longer than a specified period of time, usually 90 days.
- Guaranteed Renewable: The policy cannot be terminated (except for nonpayment of premium) and benefits cannot be reduced. However, premiums may increase.
- Non-Cancellable: The policy cannot be terminated except for non-payment of premium. Premiums cannot increase and even if your income decreases, the benefits cannot be reduced.
Some Disability Income Insurance Policies Exclude Coverage Under Certain Conditions
- Pre-Existing Conditions - If you have a severe or chronic health condition, the insurance company may exclude benefits permanently for the condition or they may refuse to sell you the policy.
- Act or Accident of War - Injuries or sicknesses that result from war.
- Alcoholism, Intoxication and Drug Addiction - Injuries or sicknesses that result from alcoholism, intoxication or drug addiction as defined and determined by the laws of the state where the loss or cause of the loss was incurred.
- Self-Inflicted or Work-Related Injuries - If your disability is self-inflicted or work-related, the disability income policy may not pay benefits.
A pre-existing condition is a health condition you already have when you buy a policy. Any condition, whether or not revealed on the application, for which symptoms existed prior to the effective date of coverage, causing an ordinarily prudent person to seek diagnosis, care or treatment, or one in which medical advice or treatment was recommended by or received from a physician may also be considered a pre-existing condition.
Make sure you understand the definition of pre-existing condition and how long such conditions will not be covered. Read the limitation and exclusion provisions of your policy very carefully.