“Everybody who relies on a paycheck should have this coverage,” says Keith Hoffman, the vice president of disability insurance at NFP Corp., an insurance brokerage and consultancy headquartered in New York.
Fact is, Most people overlook disability insurance, but before you disregard having one,you may need to review the benefits and how much you need it.
Understanding the Basics
What is Disability Insurance?
Disability Insurance, also known as DI,is a type of insurance that provides compensation to workers who are unable to work due to disability. In the event that the worker is incapable of performing his tasks due to psychological disorder or illness,injury or any condition that cause physical restraints, DI serves as an income protection plan to the worker.
What are the types of Disability Insurance?
There are two types of disability insurance, short-term disability policies and long-term disability policies. How do they differ?
- Short-term policies have a waiting period of 0 to 14 days with a maximum disability coverage of no longer than 2 years. This serves as a temporary income protection to workers who suffer from temporary disability. This is a great option since Social Security Administration do not provide coverage for temporary disability. Meanwhile:
- Long-term policies have a waiting period of several weeks or several months, but the coverage will last until you overcome your disability or may even cover you for the rest of your life. This a more permanent coverage and may even replace the disability benefits that you get from Social Security Administration.
Let us dig into details on how they differ:
Long term policies are composed of three types:
- Non-cancelable policy – has a fixed amount of premium and benefits. The insurance provider is not allowed to increase your monthly rate nor decrease your benefits for as long as you pay on time.
- Guaranteed renewable policy – the insurer is not allowed to change any of your benefits, however they are allowed to increase your premium yearly for as long as they will change everyone who belongs in the same class.
- Conditionally renewable policies – your insurance provider is allowed to change your premium and benefits and may even cancel your coverage if any of the conditions are triggered.
Other types of Disability Insurance include:
- Mortgage Disability Insurance – also known as mortgage protection plan. It covers your mortgage while you are unable to pay due to your injury. This is best when you do not qualify for life insurance or long-term policy.
- Supplemental Disability Insurance – which covers the gap between the disability benefits paid by the employer and the amount of money you will need to pay for your expenses when you can’t work.
- Social security disability insurance (SSDI)- is a federal government program that for disabled individuals and families. Application process may take up to 3 to 5 months – with a 60% chance of being denied and $1,000 coverage a month. Some say it is not a good plan to rely on, so it is best to have an alternative plan
- Business overhead expense (BOE) disability insurance – is a policy for business owners which help pay for their rent, utilities, employee salaries, payroll taxes, postage, accounting fees, and more incase they are unable to do so
- Self Disability Insurance – this is a misnomer. This just refers to your savings just in case something happens. It is not the best one, what if you do not have enough money saved?Plus: 65% of adults have no savings set aside for emergencies, so chances are this is not an option.
- Worker’s Compensation – it is a type of insurance that is required in every state. More often, people misconceptualized this plan as disability insurance- NO. This only covers the benefits incase the accident happened while you are at work.
Are there any exclusions and limitations on disability insurance?
Whilst paying a high monthly premium gives you a peace of mind that you are covered whatever incident may happen, some situations may prevent you from claiming your benefits. Here are some exceptions:
- Pre-existing conditions – if you have a pre-existing condition before you took advantage of a disability plan, the insurer may set a limit as for your coverage. There is a “look back” and “waiting period” that you have to know.
- Look back period is the time that they need to review your medical condition and history. They often range from 90 days to 6 months, but may even last as long as a year.
- Waiting Period – is the time that you policy starts to cover after they look back at your pre-existing condition. It may be as long as 1 to 2 years, but may vary depending on your policy and state.
- Mental or nervous limitation – while some policies may not set limit to this, you should not be surprised just in case you see one on your policy.
What does it mean? If your disability is contributed to or caused by a mental/nervous condition classified in the most current edition of the Diagnostic and Statistical Manual of Mental Disorders published by the American Psychiatric Association, your payment of benefits will be limited to the period set by your policy. Conditions often include stress, anxiety, depression, or dementia. The most common mental/nervous benefit period limitation is two years.
- Alcohol and substance abuse limitation – Coverage for this is often capped off at 24 months. However, if you are taking a certain drug for medication, your provider may need to check if you are taking it in moderation and not in the form of abuse. If in case you have exceeded your limit, your coverage may be denied.
What is a long-term elimination period?
Like any other insurance policies, your disability insurance requires you to pay your deductible before the coverage starts.For a long-term policy, the elimination period is the waiting period before coverage kicks in, starting from the first day of your illness or injury.
Elimination period is about 90 days, but you have the option to change it, the longer the elimination period is, the lower the premium would be.
Having this in mind, elimination period affects the cost of your premium and you may need to take note of the following:
- Pre-existing condition : Some plans may cover anything unless they exclude it. However, they will still cover your pre-existing conditions for 2 years maximum if you did not declare your illness.
- The accumulation period : This period satisfies the elimination period.Most policies have this, usually for a year and it doesn’t have to be consecutive. For example, you are given 90 days benefit period, and missed work for 30 days, tried to went back to work but still is unable to perform, therefore, you have 60 days more to consume.
- Recurring disabilities & elimination periods : If you experience the same illness for the second time, elimination period is no longer applied. Let’s say, you were diagnosed with cancer and in disability for a year, went back to work after but was diagnosed with the same illness again, you need not to wait for the coverage to kick in.
What is Total Permanent Disability Insurance?
Generally, a person who becomes totally incapable of working on their own or any occupation and perform training may be qualified for this type of insurance. They can insure themselves through permanent disability insurance or life insurance or even through worker’s compensation insurance. How do you qualify? Your doctor needs to assess your condition and may need to provide a medical writing that proves that you are permanently disabled. On the other hand, if they think that your condition may improve, you may not be qualified for this policy.
How much would Disability Insurance cost?
The average cost for a disability income insurance policy is 1% – 3% of your annual income?
|YEARLY COST||MONTHLY PAYMENT|
|$30,000||$300 – $900||$25 – $75|
|$50,000||$500 – $1,500||$60 – $125|
|$100,000||$1,000 – $3,000||$83 – $250|
|$150,000||$1,500 – $4,500||$125 – $375|
|$200,000||$2,000 – $6,000||$166 – $500|
What are the factors that may determine my premium?
- Coverage amount – refers to how much you will be needing for the period that you are no longer receiving paychecks.
- Benefit period – How long will you benefit last? Take note: the longer the benefit period, the higher the premium cost.
- Age – The older you are, the higher your rate is considering the health risks involved in your age.
- Health – The healthier you are , the lower you premium costs would be. Smoking and drug use may cost you a higher premium.
- Occupation – If you belong to the “accident-prone” jobs like stuntman,you may pay a higher amount than the others. Remember, the riskier the job, the higher the rate.
- Location – Premiums vary by state. It is best to ask your insurance provider about the cost of your policy alongside their products and services.
Who needs Disability Insurance?
“You never think it’s going to be you,” says Carol Harnett, president of the Council for Disability Awareness, an insurance industry group.
Based on statistics, 19,1 % of Americans are living with disability. Studies show that 1 out of 4 employees will suffer a disabling event before retirement.
The fact that you were missing days or months,even years of being on the job and providing food on the table just because you are unable to,is a major heartache.If you are employed and your family rely on your income, or you cannot go for months or years without paycheck,you may need to think about the following:
- Over 25% of American workers experience a long-term disability longer than three months at some point in their careers.
- 69% of workers have no long-term disability insurance coverage.
- 62% of all U.S. bankruptcies and more than 50% of all mortgage foreclosures stem from illness or injury-related medical issues.
People often disregard disability insurance because they are young and healthy, or they do not belong to the “accident-prone” kind of jobs. Those were misconceptions. In fact,even white collared jobs, like professors and lawyers consider getting this type of plan – in which they benefit more due to the high cost of their educational investment.
You may want to ask yourself, how long can I go without monthly income and paychecks? Think about it. You are protecting your most important asset- that is YOU and your ability to provide income.
What is the best Disability Benefit Plan for me?
The type of plan depends on the needs of an individual. If you think that you are unable to work for two years or more, then Long-term plans are the best option for you. If you consider the length of coverage, benefits received, cost, and ease of qualification, this should be your first in mind.
Short-term plans are best if you think that you will be better before your coverage stops, which is 52 weeks after it kicks in. Premium of this type of plan is almost the same as long-term policies, so if this is something that you consider, THINK AGAIN.
Thinking of buying a Disability Coverage, you may want you ask yourself:
- How much is the enough amount just in case i stopped working? Bear in mind that long-term disability benefits will pay around 60% of your gross monthly salary, short-term disability benefits up to 80%, and SSDI pays under $1,200 a month.
- How long would you want the benefits to last? Average disability lasts for around 3 years. A long-term insurance disability policy has a minimum duration of 5 years but a policy that lasts until retirement provides a maximum protection with comparable cost. When determining how long benefits should last, you should also consider when they start. Keep in mind that the elimination period is 90 days in usual.
- How much would it cost me? The amount of disability insurance depends on your ability to pay. The cost is determined by coverage amount and duration, along with other factors like age, health, and location. However, most people can expect to pay between 1-3% of the annual income on disability insurance. SSDI and workers’ compensation are free, and employer-sponsor disability benefits are subsidized.
Your greatest asset is not you car nor your house, but YOU and your ability to provide income. Afterall, your health is something that you should not compromise and is best to give your family no worries despite you being unable to work.
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