What would you do if you were unable to work because of an illness or injury? The financial impact of a disability can be devastating. 51 million American workers have no disability insurance other than Social Security.
Disability insurance pays a benefit if you can’t work because of injury or illness. It can protect both individuals and businesses. Here's the "Cook's Tour" of what's out there.
Contact an independent insurance agent. Learn how to protect yourself and your family if a disability keeps you from working.
What Does Disability Insurance Cover?
Disability insurance pays a benefit if you can’t work because of illness or injury. It covers you for total disability and partial disability.
Disability plans have a “Definition of Disability” that describes when benefits are payable. The benefit period is how long they are payable. The elimination period is how long after disability occurs benefits are payable.
What Does Disability Insurance Not Cover?
Disability plans also have exclusions that describe when benefits aren't payable. Common exclusions are injuries caused by suicide attempt, or the commission of a crime. Disability because of a preexisting condition or illness may also be excluded.
Disability plans may also limit coverage for certain conditions. Mental illness and substance abuse benefits are often limited.
When Does Disability Insurance Pay Benefits?
Disability plans pay benefits when the definition of disability is met and the elimination period is satisfied.
Long-Term Disability Insurance
Long-term disability insurance has a benefit period of 2 years, 5 years, or to age 65. You can select elimination periods from 30 days to 1 year. There are three definitions of disability to choose from: true own occupation, modified own occupation, and any gainful employment.
- True own occupation is the most expensive. Benefits are payable if you can’t do your specific job. It doesn’t matter if you are receiving income from a different job. It is designed to protect professionals and specialists.
- Modified own occupation is very common. It pays benefits if you can’t do your specific job. You cannot receive income from any other employment.
- Any gainful occupation is the least expensive and offers basic protections. It pays benefits if you can’t do any job that you are “reasonably suited for.”
Long term disability plans exclude benefits for pregnancy as well as the standard exclusions.
Short-Term Disability Insurance
Short-term disability insurance usually has a benefit period of 1 year or less. Benefit periods are usually 0 to 30 days. Short-term disability often has a modified own occupation definition of disability.
Individual Disability Insurance
Individual disability insurance is bought privately. Coverage is available for professionals, executives, business owners, office workers, and many trades. Individual disability insurance is available as long-term or short-term.
Individual long-term disability can be customized with riders to fit specific needs and budgets.
Social Security integration riders offset benefits by the amount of Social Security disability benefits received. This rider reduces the plan cost.
- Inflation riders increase the benefits payable each year.
- Guaranteed purchase riders provide additional coverage when your income increases.
Individual long-term disability policies can be:
- Guaranteed renewable: The insurance company cannot cancel the coverage. They may raise the premium on a group or class of people insured. The state insurance department must approve the change.
- Noncancelable and guaranteed renewable: The insurance company can’t cancel the coverage and cannot raise the premium.
- Conditionally renewable: The insurance company has the right to cancel the coverage or raise the premium. Generally, conditionally renewable policies should be avoided.
There is an application process for individual long-term disability called underwriting. The insurance company will need medical and financial information to issue a disability policy. Insurance companies limit the amount of benefits to 70% of salary.
Individual short-term disability plans are an affordable coverage option. However, the benefits are more limited than individual long-term disability plans.
The benefits for individual disability plans are not taxable if the premiums are paid personally.
Group Disability Insurance
Group disability insurance is offered by employers as a benefit. The employer may contribute to the cost depending on the plan. Group disability plans are cos- effective and easy for employees to take part in. Group disability plans are sometimes offered by professional associations.
There are three types of group disability plans.
- Short-term disability : Pays a benefit for a limited period, usually less than a year. The elimination period is often coordinated with the employer’s sick time and leave programs. Short-term disability covers off-the-job injuries and illness. Workers' compensation will cover the employee while on the job. Pregnancy is covered under short-term disability and/or the employer's sick leave policy. Premiums are paid by the employer.
- Basic long-term disability: Pays benefits for 2 or more years. The elimination period is coordinated with the plan’s short-term disability benefit period. The premium is paid by the employer. These benefits are typically offset by Social Security disability payments received.
- Voluntary long-term disability: The premium is paid by the employee. Voluntary long-term disability may supplement basic long-term disability. It can also be a standalone plan.
Supplemental disability is individual coverage bought to supplement group coverage.
Group disability definition of disability
The standard definition of disability in group insurance plans is “modified own occupation” for 24 months. After 24 months, it is “any occupation which you are suited for by education and training.”
Tax on group disability benefits
If the employee pays the group premium, benefits paid are not taxable. If the employer pays the premium, the benefits paid are taxable for the employee.
Group disability coverage is not portable to a different employer.
Social Security disability insurance
Social Security Disability benefits are based on the worker’s contributions. They are also difficult to get. Only 34% of people who apply are awarded benefits. Minor children and a spouse caring for them may also be eligible for benefits. The average SSDI payment in 2019 is a very modest $1,234.
State disability programs
5 states have statutory disability programs, California, Hawaii, New Jersey, New York and Rhode Island. The benefits are 26 weeks except in California. California benefits are 52 weeks. Maximum weekly benefits range from $170 in NY to $1,216 in CA.
Each state has its own workers' compensation program. Employers are required to carry insurance that meets the state’s requirements. Workers' compensation covers injuries and illness occurring in the workplace.
Disability Insurance for Businesses
Business overhead expense
This coverage is for small businesses. If an owner becomes disabled, the coverage will reimburse routine overhead expenses. Rent, utilities, employee salaries, and payroll taxes are all covered. Business overhead expense does not cover salary for the owner.
Disability buyout is for businesses and professional firms with many owners or partners. If an owner becomes disabled, the coverage provides funds for the other owners to buy them out.
Banks and credit card companies may offer disability insurance to cover payments due. Disability insurance to cover mortgage payments is also available.
Why Go It Alone?
Disability insurance is an important part of smart financial planning. There is a lot to know about the coverage. Disability insurance quotes are available from your independent insurance agent. They can simplify the process for you.