If you don’t have disability insurance available through your employer as a group benefit, you probably don’t own an individual disability insurance policy. Come to think of it, when was the last time you ever saw an ad on television for disability insurance?
Jump ahead to these sections:
- What Is Disability Insurance?
- What Are the Different Types of Disability Insurance?
- What is Own-Occupation vs. Any-Occupation Disability Insurance?
- Are There Any Disability Insurance Riders?
- Who Typically Buys Disability Insurance?
- How Much Does Disability Insurance Cost?
- How to Find a Good Disability Policy
Most people don’t own an individual disability insurance policy for two reasons. First, insurance agents don’t push it. If they’re being truthful, an insurance agent will tell you that they don’t talk a lot with prospective clients about disability insurance because it pays lower commissions to the agent than other types of insurance policies.
It’s challenging to get these policies issued because of stringent underwriting standards, and their companies don’t push them to sell it because disability claims are typically very costly for insurers.
Secondly, most people don’t want to buy it. People complain about being “insurance poor,” meaning they feel they’re already paying for too many different types of insurance such as health insurance, life insurance, auto insurance, homeowner’s insurance, and travel insurance. They get a little more frustrated every month when they pay their premium for a policy they have never received a penny’s worth of benefit from in return.
Because people don’t know much about disability insurance and don’t want to pay for it, many people place themselves at unnecessary financial risk. This article will address those concerns and help you understand what disability insurance is, the different types, its cost, who typically buys it, and where you can find a good policy.
What Is Disability Insurance?
Perhaps the best way to introduce you to disability insurance is through a short story:
John was a physician (cardiologist) who took up rock climbing as a hobby. One day when he was climbing, a rope broke, hurling John 30 feet down into a steep ravine. Fortunately, John survived the fall, but he was left with a broken leg and a hand with many broken bones.
John’s health insurance paid for him to be air-lifted to the nearest trauma center, have multiple surgeries on his hand, and stay in the hospital for over three weeks. Including doctors and surgeons fees, John’s hospital bill was just over $250,000, which his health insurance provider paid.
Upon discharge from the hospital, John went home and underwent physical therapy to regain movement and flexibility in his hand (also paid for by his health insurance). One day John’s doctor delivered some bad news: John would never be able to practice medicine as a cardiologist again because of the irreparable damage done to his hand.
John was very dismayed and went through a difficult time grieving his career and income loss. Fortunately, John had been approached several years before the accident by his insurance agent, who recommended that John protect his income by buying a disability insurance policy.
John took his advice and bought the disability insurance policy, which resulted in the insurance company sending John a check every month until he turned age 65. As a result, John’s family remained in their home, the kids completed college, and John and his wife had everything they needed materially.
His disability insurance policy did what it was supposed to: replace John’s income because he couldn’t work. His health insurance paid his medical bills, and his disability insurance policy replaced his paycheck.
Now that we’ve defined what disability insurance is, let’s dive a little deeper and look at the two different types.
What Are the Different Types of Disability Insurance?
There are two different types of disability insurance: short-term disability insurance and long-term disability insurance. Let’s look at both.
Short-term disability insurance: Also known as STD, short-term disability insurance will provide you with a paycheck for up to two years when you become disabled and can’t work. There is a waiting period, which ranges from 0 to 14 days before the insurance company will begin paying you. Some people buy supplemental insurance, like critical illness insurance, to provide a cash payment during the waiting period.
Long-term disability insurance: Also known as LTD, long-term disability policies have a maximum benefit period that ranges from a few years to the rest of your life. You also select the waiting period, which can range from several weeks to several months.
At this point, you may ask yourself, “Okay, the insured gets a check every month, but for how much?”
Individual long-term disability policies will typically replace about 60–70% of an insured’s income when they meet the eligibility requirements. This may seem like a small amount that would still leave someone well short of what they were earning, but bear in mind that no taxes are taken out of the disability check each month.
Why don’t insurance companies replace the whole paycheck? They only replace a large chunk of your check because they want you to have a reason to go back to work, and they can then stop paying benefits.
Two Important Features of Both Types of Policies
It’s important to note that not only can someone have both STD and LTD insurance, but each type has two features you choose from that offer you added protection as a policy owner: non-cancelable and guaranteed renewable.
- Non-cancelable means that the only reason the insurance company can ever cancel your policy is that you didn’t pay your premiums. You have the right to renew your policy every year without increasing the premium or a reduction in benefits.
- Guaranteed renewable means that the insurance company can’t cancel your policy, BUT they can raise your rates as long as they do it for all other policyholders in the same rating class as yours.
You can tell by the difference in these features that non-cancelable provides you with better protection, but it also is more expensive than a policy that is guaranteed renewable.
What is Own-Occupation vs. Any-Occupation Disability Insurance?
Another important decision you have to make when you buy a disability insurance policy is whether or not you want “own-occupation” or “any-occupation” coverage. Here’s the difference.
Own-occupation coverage means that you will receive disability insurance payments from the insurance company for the length of time specified in your policy as long as you can’t work in the occupation you listed on your application.
Using John as our example again, since he listed “cardiologist” as his occupation on the application, even if he could do something else for a living, he will continue to receive a check because he can’t work at his own occupation.
Any-occupation coverage is not as liberal as own-occupation disability insurance. Any-occupation means that once you can work any other job following an illness or injury, your checks from the insurer will stop coming.
For example, John may not be able to be a cardiologist because of his disability, but if he can work in another profession (teaching, for instance), he won’t be eligible to receive benefits any longer.
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Are There Any Disability Insurance Riders?
Similar to life insurance companies, some insurers offer riders (options) for disability insurance that allow you to customize your policy. These are several that are available:
- Additional purchase option: Gives you the right to buy additional disability insurance in the future.
- Coordination of benefits: The size of the check you receive every month depends on any other benefits you’re receiving because of your disability. This rider makes sure that the insurance company will make up the difference of any amount you’re not being paid by other coverage and that you’ll receive the total benefit amount specified in your policy.
- Cost of living adjustment (COLA): This rider will increase your benefit over time based on the cost of living measured by the Consumer Price Index (CPI).
- Residual or partial disability rider: This provision allows you to return to work on a part time basis, collect part of your salary, and receive a partial payment from the insurance company if you’re still disabled.
- Return of premium: The insurer will refund part of the premiums you’ve paid if no claims have been filed for a period of time specified in the policy.
- Waiver of premium provision: You won’t have to pay premiums once you’ve been disabled for 90 days.
Who Typically Buys Disability Insurance?
There are four types of people that typically buy disability insurance. Let’s look briefly at each and see why they buy it.
The sole provider for the family: If this is you, you know your family can’t maintain their standard of living without your paycheck. Your income provides money for all of the basic needs of your family members (food, clothing, and shelter), as well as for other important things like the children’s education, insurance, medical bills, family vacations, and much more. To relieve this pressure, people buy disability insurance.
People in physically demanding roles: Many people who have occupations that require them to constantly stand, lift heavy items, walk a lot, etc., often buy disability insurance. People who work in office environments all day are not as likely to purchase coverage, though they can also become disabled due to a serious illness or off-the-job accident.
Parents: Even though a paycheck stops coming in, kids' appetites continue to grow, as does their propensity for emergency room visits and outgrowing their clothing.
People with recurring injuries: People in a profession that frequently causes physical problems like nagging injuries or back pain often buy disability insurance to continue getting paid while in therapy or rehabilitation.
How Much Does Disability Insurance Cost?
Like life insurance, the pricing of disability insurance is dependent on several different factors, such as age, gender, and medical history. In addition to those, these variables also determine the cost of a disability insurance policy:
- Benefit amount
- The length of the elimination (waiting) period before benefits begin to be paid (the longer the waiting period, the lower the premium)
- Daily benefit amount
- How many years benefits are paid (i.e., 2 years, 5 years, age 65, lifetime)
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How to Find a Good Disability Policy
It can be challenging to find a good disability policy because not all insurance companies offer this type of coverage since claims are costly and profit margins are lower than on other products, like life or health insurance.
You can find a good disability policy through a couple of channels:
- Employer-sponsored disability insurance coverage: Many larger companies offer disability insurance as a group insurance benefit, alongside group health insurance and group life insurance. The premiums for employer-sponsored disability insurance are usually lower than those for an individual disability policy. The downside: when you leave your employer, you can’t take your coverage with you.
- Individual disability insurance: A handful of companies offer individual disability insurance policies, such as Guardian, Mass Mutual, and Mutual of Omaha. Individual policies can become very expensive if you select a short elimination period with a longer payout period.
For example, a policy for a 40-year old male with a $200 daily benefit maximum, a 30-day waiting period, and benefits payable for life might pay $500 per month for his disability policy. In contrast, that same person with the same daily benefit maximum, a 90-day waiting period, and benefits payable for two years might pay $250 per month.
It Pays to Shop Around
If you decide that it would benefit you to have an individual disability policy, be sure to talk with several different companies about their policy features and their prices. Cost varies widely between carriers, and some have more stringent underwriting standards than their competitors. An independent insurance agent who represents more than one company can help you compare companies, policies, and premiums.
You can also apply for disability insurance online through brokers such as Breeze or websites like Policygenius.