Disability Insurance

Disability Insurance

What is it for?

According to government statistics, the risk of an unexpected disability is higher than a premature death among working adults. In addition, the financial impact is potentially more devastating. Yet few people are adequately prepared for a disability.

Disability insurance replaces lost income when a person cannot work due to a disability. Benefits are paid monthly, and the amount paid is established as a percentage of a person’s income, which is usually 60%. However, the person can choose a lower amount. If a person has a partial disability, then the benefit will be adjusted proportionately.

Most people get disability insurance through work, since it’s the most economical alternative, and the eligibility rules are very favorable. However, group insurance has strict conditions with regards to the claims process, benefits may be limited for highly compensated employees and coverage is lost when a person switches jobs.

Highly compensated employees, small business owners and self-employed persons should consider an individual disability insurance policy. With these policies, the insured retains ownership and can choose benefits that are specifically suited for his or her situation.

Basic Terms

Elimination Period

This is the period the person must be disabled before any benefits are paid.

Benefit Period

This is the period during which the person will receive benefits.

Total Disability

The person is completely unable to work according to the conditions stated in the definition of disability.

Partial Disability

The person is partially unable to work. It is usually based on a minimum percentage.

Issue Age

It’s the age range during which a person can qualify for a disability income policy.

Occupational Class

Similar occupations are classified according to their risk level to determine premium rates.

How Benefits are Paid

Benefits are paid monthly, and the amount paid is established as a percentage of a person’s income, which is usually 60%. However, the person can choose a lower amount. If a person has a partial disability, then the benefit will be adjusted proportionately.

Types of Disability Insurance Policies

Short Term Disability Policies

Short Term Disability policies will provide disability benefits for up to 2 years. These policies are suitable for individuals with little or no savings with immediate income needs.

Long Term Disability Policies

These policies can provide benefits for more than two years and all the way to retirement age. These policies are suitable for people who have enough resources to cover their immediate financial needs and are more concerned with the catastrophic consequences of a long-term disability.

Business Overhead Expense

This type of disability insurance reimburses a business owner for operating expenses incurred to keep the business running during a disability.

Buy Sell

This type of policy is used in conjunction with a buy-sell agreement between business partners. It pays a lump sum benefit that is used to buy out a partner who becomes totally and permanently disabled.

What You Should Look for in a Policy

Disability Definition

It establishes the conditions to receive disability benefits. Some policies only cover disabilities caused by accidents. Since most disabilities are caused by an illness, look for policies that cover disabilities caused by accident or illness.

The inability to work is another key condition. The best policies provide benefits if you cannot perform your specific job. Policies that only pay benefits if you are unable to do any job are more restrictive.

Renewability

This is the right to keep the policy in force. At the very least, policies should be guarantee renewable which means the policy will automatically renew regardless of the person’s health.  On the other hand, non-cancelable policies guarantee that premiums will not increase. Policies that are guarantee renewable and non-cancelable provide the best of both worlds.

Future Insurability

When a person’s income increases over time, the future insurability feature provides the ability to increase the disability benefit accordingly regardless of any changes in health.

Partial Disability Benefits

Some policies will only pay benefits if the person is completely unable to work. Higher quality policies will pay benefits if the person can only work part time. The benefit will be adjusted proportionately.

Recurrent Disability

When a person becomes disabled again from the same cause after having recovered. This feature avoids triggering a new elimination period and benefit payments can resume right away.

Presumptive Disability

When a person suffers a severe illness or physical impairment and is not expected to recover, he or she is deemed to be permanently and totally disabled. When this happens, the person’s condition is no longer subject to periodic re-evaluations.

Cost of Living Adjustment

This feature provides an increase in the disability benefit over time to keep up with inflation.

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