What Is Disability Insurance?

Disability insurance exists to protect your income. Offering you the utmost financial/ income protection in the face of the unexpected. 

This type of coverage will replace your monthly income should you become unable to work due to illness or injury. This can provide your family with the financial protection they may need if their most consistent asset (your paycheck), were to be put on pause.

Disability insurance may also be referred to as disability income insurance or income protection.

How Does It Function?

Disability insurance exchanges a monthly payment made by you or your employer, in return for a monthly benefit amount, should you need it. Your policy is essentially an agreement between you and your insurer to ensure protection in the event that you become unable to work due to a disability. 

It is designed with the intention of supplementing a portion of your lacking income while you are unable to work. While health insurance may help cover the costs of some of your medical expenses, it will not help replace your income.

 For many, this can be the difference between being able to continue to provide medication, food, and shelter for their families.

 

The Specifics

A disability insurance policy will encompass many specific details. Some of these details include:

• Your monthly premium
• Terms for qualifying disabilities 
• Benefit amount
• Benefit duration

Your monthly premium refers to the dollar amount you are expected to pay each month to your insurer in exchange for benefits.The terms for qualifying disability are, the explicit terms the insurer will use to determine whether or not you are ineligible to work.

In some cases, if the insurer deems that you are still able to perform an alternative job for pay, you may be denied benefits.

Your benefit amount will determine the percentage of your income that your insurer will pay out to you. This amount is usually between 60 to 80 percent of your regular income. While your benefit duration determines how long you are entitled to compensation.This amount can be defined in terms of months, years, or up to a certain age as defined by your policy.  

 

What Does It Cover?

There are countless incidents which could render you unable to work. Many of these can be a direct result from injury or illness. Disability insurance helps account for those injuries and illnesses that can affect your ability to work and/or the quality of your work. 

When you consider the fact that disabilities and injuries can occur to virtually anyone, you will understand the need for this type of coverage. Statistics support this notion when you take into account that, at least 25% of all 20 year olds will suffer an event that renders them unable to work for at least three months or longer.

Some common precursors for disability to watch for are:

• In fact almost 90% of all long-term disability claims can be traced back to an illness rather than injury. However, this still leaves room for a sudden injury to give you yet another reason to opt for this kind of coverage. 

Types of Disability Insurance

There are two types of disability insurance and you will likely run into both options when shopping for disability insurance. Although the two options are very similar, they also contain various distinguishing factors. We will walk you through each of the two :

Short Term Disability Insurance 

Short-term disability insurance stays true to its name in the sense that it will last for a shorter period of time. This type of insurance has a benefit duration period of usually only a couple of months and no longer than a year. 

You should note that, if your employer offers you short-term disability benefits, your long-term disability benefits would only kick in, after your short term benefits have been depleted. 

Long-Term Disability Insurance 

Long-term disability insurance exists to offer your long-term coverage. If you are unable to work for an extended period of time due to a serious illness or injury, your long term disability would then kick in. 

This payout can last anywhere from several months, years, or up until recovery. Once recovered, your benefits would end. However, your benefit period can last anywhere from 10 years all the way up to age 65. 

This type of coverage is more costly than short term coverage however, offers you far more support. Some policies may even cover wages lost from taking on a lower paying job due to your disability. 

 

SSDI (Social Security Disability Insurance)

Social Security Disability insurance or SSDI is a government program designed to pay benefits to those unable to work due to a disability. While this program can be offered to some at no cost, there are important factors to consider. 

You must qualify for Social Security Disability by meeting the following criteria:

• Worked for a qualifying period of time under Social Security
• Worked for a job covered by Social Security 
• Must have a debilitating condition which affects walking, sitting, standing, lifting, etc
• Must have a medical condition with meets SSDI criteria
• Unable to work for over a year

Other points to note are that those earning over $1,220 per month while disabled, will likely not qualify for SSDI. Additionally, if Social Security deems you as able to work an alternative job, you will not qualify. 

On average, a mere 35% of applications submitted for SSDI are approved. Even then, your approved benefits may only cover a small portion of your previous income. 

 

Where Do I Get Disability Insurance?

Your disability insurance will always come from an insurance carrier. There are several options to consider when obtaining DI. These options include:

Individual Coverage

Obtaining an individual disability insurance policy can be accomplished by working with a licensed professional. This policy will belong to you and therefore, you will be responsible for the monthly premium amount assigned. Your premium amount will be fixed unless you opt for increased coverage.

If you choose to shift careers or lose your job, your coverage will remain intact.This option offers you the most security.

Group Coverage

Accepting coverage as part of a group or group coverage plan, may be an option offered by your employer. This is often offered to you as an employment benefit. Additionally, your employer may also offer to cover some or all of your associated premium costs. 

This type of coverage requires no underwriting and all who apply are approved and enrolled.

There are however, ways to lose your group coverage such as:

• If you leave or are let go by your employer, you will lose your coverage.
• If your employer chooses not to renew their group policy, you will lose your coverage.

This coverage option relies heavily on your employer and employment within your current role. Meaning that any shifts in your career could jeopardize your current coverage. This is why individual coverage is often more reliable and thus, more widely recommended. 

 

States Requiring Coverage

Some states legally require for their employers to offer a group disability insurance plan. This means that you may be covered if you live and work in any of these five states:

• Hawaii
• California
• New Jersey
• New York
• Rhode Island

You should note that: State disability insurance may be subject to various limitations. Click here to learn more about State disability insurance.

 

Worker’s Comp

Worker’s compensation or worker’s comp, is NOT disability insurance. 

Workers comp is paid for by your employer and is categorized as accident insurance. This means that you would only receive compensation for medical bills if injured on the job. Some workers comp will, partially cover lost wages and/or offer a death benefit if killed on the job. 

Unlike disability insurance, workers comp only offers coverage if you were hurt while on the job and while working. This is why you should not rely on workers compensation to protect your income. 

 

Applying For Coverage

When applying for disability insurance you will likely go through an underwriting process. The underwriting process is used by insurers to determine your risk. Insurers wish to determine your likeliness of using your insurance policy. 

The goal of the underwriting process is to assign risk to each applicant and determine whether or not to extend coverage. The underwriting process will also help determine your monthly premium amount which corresponds directly to your individually deemed risk level. 

When assessing your risk level, here is what insurers are closely examining:

 

Age

The cost of disability insurance will increase directly with your age.This is because insurers deem you more likely to file a disability claim as you age. This is due to the implications on your health and age. For this reason, purchasing disability insurance as a healthy young professional is the best option. 

 

Gender

Gender also plays a role in accessing your likeliness to file a claim. Historically women are known to file more and longer claims than men. Women can also expect to pay up to 40% more in higher premiums because of this. 

 

Health Profile

Your health profile can provide a great deal of insight into your likely claim patterns. These health factors are most commonly considered:

• Blood & urine scores
• Chronic conditions
• Height to weight ratio
• Family health history
• Tobacco use 

Job Occupation

Some jobs are more physically demanding than others, they may also place you in the higher risk category. This is because jobs like construction worker, fire fighter, or police officer, allow for more opportunity to get hurt on the job. 

Additionally, those working in a specialized field, may also be deemed more of a risk to insure. This is because their job may be more difficult than others to perform while disabled or ill.

 An example of this would be, a newly wheel- chair bound office worker versus a wheelchair bound plumber. The office worker may still be able to perform their day to day job whereas, the plumber would likely not. 

If an applicant has more than one occupation, then the occupation with the greatest risk will be evaluated during underwriting. 

Annual Income

Disability insurance benefits, correspond to a percentage or your annual income. Therefore, insurers will consider your annual income amount in their review. Higher income earners will be deemed as more of a risk. This is due to the potential larger payout insurers may face when trying to account for 60 to 80% of their usual income. 

 

Location

Where you live, will also be taken into account. During the underwriting process insurers will access average claim history and costs of living in your state.

 

Policy Details

Your policy will contain many factors to familiarize yourself with. The most common policy factors to consider are:

• Benefit Period- Amount of time you will receive benefits for
• Waiting period- How long after becoming disabled you will have to wait for benefits
• Coverage amount- The amount of money paid out to you by your insurer
• Exclusions- Criteria or exclusions that may limit your ability to receive benefits

Who Needs Disability Insurance?

If you rely on your income to meet your needs or the needs of your family, you need disability insurance. 

It is most advised for healthy professionals who wish to protect their future. Especially for those, who recognize that a temporary or long term disability, could severely jeopardize their financial situation. 

It serves to protect everyday people who can no longer complete their jobs due to the unexpected. It is for the artist who can no longer use their hands, the airline pilot with sudden vision loss, and so many others.  

If you are unsure if disability insurance is for you, ask yourself the following questions:

• How long could I go without a paycheck?
• Would I qualify for government assistance?
• Does my employer offer a group plan and what are its limitations?
• What would my current life look like if I suffered a disability or illness? 

In Summary

While there is no way to answer these questions with full certainty, they serve as good starting points for accessing your DI needs. Disability insurance is for virtually everyone who receives and relies on an income.

 Prepare for the unexpected by putting in place a disability insurance plan today.