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Disability insurance pays an insured
person an income when that person is unable to work because of an
accident or illness. The answers to the questions below offer you
more information about this coverage.
How
can I insure against loss of income?
If you were disabled and unable to
work as a result of an accident or illness, what would you and your
family do for income?
Disability income insurance, which complements health insurance, can
replace lost income. At age 40, the average worker faces only a 14
percent chance of dying before age 65 but a 21 percent chance of
being disabled for 90 days or more.
There are three basic ways to replace income:
-
Employer-paid disability insurance
This is required in most states. Most employers provide some
short-term sick leave. Many larger employers provide long-term
disability coverage as well, typically with benefits of up to 60
percent of salary lasting from five years to age 65, and in some
cases extended for life.
- Social
Security disability benefits
This can be paid to workers whose disability is expected to last
at least 12 months and is so severe that no gainful employment can
be performed.
- Individual
disability income insurance policies
Other limited replacement income is available for workers under
some circumstances from workers compensation (if the injury or
illness is job-related), auto insurance (if disability results
from an auto accident) and the Department of Veterans Affairs.
For most workers, even those with
some employer-paid coverage, an individual disability income policy
is the best way to ensure adequate income in the event of
disability. When you buy a private disability income policy, you can
expect to replace from 50% to 70% of income. Insurers won’t replace
all your income because they want you to have an incentive to return
to work. However, when you pay the premiums yourself, disability
benefits are not taxed. (Benefits from employer-paid policies are
subject to income tax.)
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What
are the types of disability insurance?
There are two types of disability
policies: Short-Term Disability (STD) and Long-Term Disability
(LTD):
- Short-Term
Disability policies (STD) have a waiting period of 0 to 14
days with a maximum benefit period of no longer than two years.
- Long-Term
Disability policies (LTD) have a waiting period of several
weeks to several months with a maximum benefit period ranging from
a few years to the rest of your life.
Disability policies have two
different protection features that are important to understand.
-
Non-cancelable means the policy cannot be canceled by the
insurance company, except for nonpayment of premiums. This gives
you the right to renew the policy every year without an increase
in the premium or a reduction in benefits.
- Guaranteed
renewable gives you the right to renew the policy with the
same benefits and not have the policy canceled by the company.
However, your insurer has the right to increase your premiums as
long as it does so for all other policyholders in the same rating
class as you.
In addition to the traditional
disability policies, there are several options you should consider
when purchasing a policy:
- Additional
purchase options
Your insurance company gives you the right to buy additional
insurance at a later time.
-
Coordination of benefits
The amount of benefits you receive from your insurance company is
dependent on other benefits you receive because of your
disability. Your policy specifies a target amount you will receive
from all the policies combined, so this policy will make up the
difference not paid by other policies.
- Cost of
living adjustment (COLA)
The COLA increases your disability benefits over time based on the
increased cost of living measured by the Consumer Price Index. You
will pay a higher premium if you select the COLA.
- Residual
or partial disability rider
This provision allows you to return to work part-time, collect
part of your salary and receive a partial disability payment if
you are still partially disabled.
- Return of
premium
This provision requires the insurance company to refund part of
your premium if no claims are made for a specific period of time
declared in the policy.
- Waiver of
premium provision
This clause means that you do not have to pay premiums on the
policy after you’re disabled for 90 days.
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How are disability premiums determined?
Disability premiums are based on
your age, sex, occupation and the amount of potential lost income
you are trying to protect. In general, the lower the chance that
your occupation puts you in harm’s way, the lower the premium. The
higher the chance of injury, the bigger the premium. So, for
instance, an accountant working in an office would have much lower
disability premiums than a construction worker.
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How can I
save money?
There are two ways to keep the cost of
disability insurance down:
- Electing a
longer waiting period before benefits begin
If you have enough resources to cover expenses during the first
three months of disability, your premiums will be lower than with
coverage that starts after 30 days.
- Electing a
shorter benefit period
In this case, benefits are payable to age 65—the age at which you
would normally retire—instead of for a lifetime. However, choosing
a benefit period of two-to-five years, ending before normal
retirement age, could be penny-wise and pound-foolish. You might
save money on premiums, but you could be without coverage when you
need it most. Disability of long duration poses the greatest
financial hardship.
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Will my
employer provide disability coverage?
Most employers offer some kind of disability insurance, but you
should find out exactly what your employer offers before you have to
file a claim. Most allow some short-term sick leave, which might
last from a few days to as much as six months. In some states, such
as Hawaii, New Jersey, New York and Rhode Island, state law requires
employers to provide disability benefits for up to 26 weeks.
Check with your benefits department to see if you are covered and if
so, how long you must wait before benefits begin and how long
payments will last while you are still disabled. Also, ask if your
employer’s disability plan takes other disability programs, such as
Social Security, into account when calculating your disability pay.
No laws require employers to offer long-term disability (LTD)
coverage, but about half of large and mid-sized employers offer it
to their workers. Typical group long-term disability benefits
replace about 60 percent of the worker’s usual salary. These
benefits usually start when short-term benefits are exhausted and
continue from five years to life. Usually, group long-term
disability insurance is fully paid for by employers, with no
contribution expected from employees. When you receive employer-paid
disability income, you must pay federal and state income tax on the
benefits, unless your company pays it for you.
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Insurance Information Institute
www.iii.org/individuals/disability/ |
