Disability insurance is designed to pay monetary benefits during times when an illness or injury prevents the insured from earning an income. It is an income replacement policy that pays money when a disability arises from some cause recognized in the policy, such as an accident or illness, to qualify the insured for benefits. Disability has been referred to as “the living death” policy, because it leaves the survivors in much the same position as death would, without the physical passing. Most people think they have protected themselves from illness and accident if they have adequate medical insurance, but that coverage does not replace lost income. The chances of becoming disabled for more than three months are greater than the chances of dying at any age.
At age 30-Odds of disability are about 3.5 times greater than death
At age 40-Odds of disability are about 3 times greater than death
At age 50-Odds of disability are about 2 times greater than death.
Disability coverage comes from several sources:
• An employer’s or association’s group insurance policy
• An individual disability income policy
• Workers’ compensation for a disability incurred in the line of work
• Social Security
Disability policies are often designed to cover only certain types of disabilities. Some policies limit benefits to disabilities that have a specific cause, such as an accident, and exclude those that fall outside those listed in the policy, such as an illness that is not covered under an accident policy.
Disability policies can be occupational or non-occupational.
• An occupational policy pays regardless of whether the disability was the result of an accident on or off the job. It also pays benefits regardless of whether the disability is covered by workers’ compensation.
• A non-occupational policy only covers non-work-related disabilities that are not covered by workers’ compensation. Workers’ compensation pays for disabilities arising from employment activities or accidents, although such coverage can be inadequate.
Disability Insurance Policies
Individual Disability Coverage
A disadvantage to group disability coverage is that it is not portable or convertible. Insured's cannot take the coverage with them when they leave one employer and go to another, or if they leave one employer and become self-employed. With an individually purchased policy, insured's are always covered as long as they continue to pay premiums, no matter how or where they work.
Features of a Disability Income Insurance Policy
Disability income policies offer considerable flexibility in terms of the length of time they pay benefits-from several years, to age 65, to life. The longer the period, the higher the premium. It is prudent to have the benefit period extend to a time when other income might be available. At that time, the disability income may be unnecessary.
It is possible to buy a disability insurance policy that covers an individual from the first day of disability, but such a policy is generally very expensive. Disability policies include a choice of waiting or elimination periods during which no benefits are paid; these periods are usually expressed in increments of (30, 60, 90, 180, 360) days. The longer the waiting period, the lower the premium.
Some policies provide for recurrent disabilities. This means that if a person experiences a period of disability and receives benefits under the policy, he or she would not have to satisfy another elimination period if suffering a relapse within a specified time.
Limitations and Exclusions for Disability Income Insurance
Disability insurance plans do not cover all disabilities. An exclusion is a condition or result not covered by the contract. Typical exclusions include self-inflicted injuries, disabilities not under the care of a physician, and pre-existing conditions before the coverage was applied for. Another limitation is when an individual is engaged in a hazardous occupation. Some carriers avoid selling disability insurance to self-employed individuals, because proving income is more difficult.
Disability Income Policy Riders
Waiver of Premium Rider
Generally included with guaranteed renewable and non-cancelable individual disability income policies. This rider is a valuable provision, because it exempts the policyowner from paying the policy’s premiums during periods of total disability. To qualify for the exemption, the insured must experience total disability for more than a specified period, commonly three or six months. In some cases, the waiver retroactively applies to the original date of disability, and any premiums paid for that period are refunded. The goal is to have the waiver apply to the entire period of total disability rather than to just the benefit period.
Social Insurance Rider
Provides for the payment of additional income when the insured is eligible for social insurance benefits but those benefits have not yet begun, or the benefits have been denied or have possibly begun in an amount less than the benefit amount of the rider. Usually covered under the definition of social insurance are disability benefits from Social Security as well as state and local government programs or workers’ compensation programs.
Social Security Rider
Applies specifically to the receipt of Social Security disability benefits and comes in two forms:
• An all or nothing rider that only pays benefits if Social Security does not.
• An offset rider that is reduced by any amount payable by Social Security.
Cost of Living Adjustment Rider (COLA)
Provides for indexing the monthly or weekly benefit payable under a disability policy to changes in the consumer price index. Typically, the benefit amount is adjusted on each disability anniversary date to reflect changes in the CPI. When the disability ceases, the policyowner can elect to maintain the policy at the new benefit level by paying additional premiums or can opt to let the benefit return to the originally scheduled amount for the same premium that was paid before the disability began.
Guaranteed Insurability Rider
A disability income policy can have a guaranteed insurability rider attached. This option guarantees the insured the additional amounts of disability income coverage at predetermined times in the future without evidence of insurability. Most guaranteed insurability riders require the insured to exercise the option for additional coverage before a specific age. This helps to ensure that one’s disability benefits keep up with the policyholder’s increasing income and financial obligations.
Return of Premium Rider
Insurance companies offer cash value and return of premium riders, which entitle the insured to a refund at the end of a specified period. When buying an individual disability policy, the following are things applicants should be aware of:
• Make sure the policy is guaranteed renewable up to age 65 or 70. This means that the company must renew the policy if the insured continues to pay the premiums until reaching age 65 or 70, no matter what the insured’s health condition or occupation.
• Buy a policy where the premium cannot be increased over the term of the policy. This policy would be level premium and non-cancelable. The non-cancelable, guaranteed renewable policy provides the most protection. It is the most expensive type of disability policy.
• Make sure the policy pays benefits if the disability arises from either an injury or illness. Some policies limit coverage to injury, but some cover both. Some policies stipulate that benefits are payable for life if the insured is disabled as a result of an accident, yet they pay benefits for only two years if the disability is caused by sickness. Some disability policies pay benefits only until the policyholder reaches age 65 for an illness but pay for life for an injury.
Other Individual Disability Income Policies
Mortgage Disability Insurance
These policies pay an amount equal to the monthly mortgage payment so long as the mortgager is disabled.
Credit Disability Insurance
Similar to mortgage disability insurance, credit disability insurance is offered by credit card companies and other creditors to maintain an individual’s monthly payments should he or she become disabled.
Business Disability Income Insurance
Business disability insurance protects businesses and their employees from the consequences of the disability of a key member of the company. Several important business reasons present themselves for buying business disability insurance above and beyond the replacement of the disabled worker’s income, such as
• Covering business expenses during a period when a key employee is not generating income
• Loss of a key person’s services during his or her period of disability
• Disposing of the disabled person’s business interest when it becomes obvious that he or she is not likely to return to work.
Business Overhead Expense Insurance
Business overhead expense insurance is disability insurance that pays the routine business expenses of a business owner while he or she is disabled.
Key Employee Disability Insurance
Key employee disability insurance provides disability benefits payable to an employer to offset losses as a result of a key employee being disabled.
Disability Buy and Sell Insurance
Many business buy/sell agreements have been adopted that specify what is to happen in the event a business owner dies. Life insurance is purchased to make sure the person or entity that is obligated to buy the interest of the deceased owner has the money to make the purchase. The death that necessitates the buyout also makes available the money to complete the buyout. What can a business owner do if an operator/owner becomes disabled? The buyout disability contract was created to fill this need.
The business overhead expense policy has a short elimination period, often no more than a month, so that expenses can begin to be covered right away. The benefit period should be long enough to cover the business for an extended disability and to determine if the owner is going to be able to return to the business, perhaps in one to two years. If, at the end of this period, it is clear that the disabled owner cannot return, the disability buy/sell begins. Its waiting period corresponds to the benefit period of the BOE policy, which is one to two years, after which time money to purchase the business is payable as a lump sum or in installments.
Eligibility for Other Benefits
If a person is a Social Security disability beneficiary, benefits from some other sources may affect his or her disability payment. To newly entitled disability beneficiaries, it often comes as a surprise that they will not receive full Social Security disability benefits.
Disability benefits are not payable if one receives other Social Security benefits. If the beneficiary is entitled to more than one monthly benefit, the amount he or she receives is usually equal to the larger of the two amounts. A reduction method for disability was instituted to avoid windfall benefits to some workers. Before the reduction became effective, some Social Security beneficiaries received more in combined public disability payments than they had been earning when they were working.
If one is a disabled worker under 65 and also receives disability payments from federal, state, or local government programs like workers’ compensation, combined payments to the claimant and to the claimant’s family are limited. Payments cannot exceed 80 percent of the claimant’s average current earnings before he or she became disabled. And all earnings covered by Social Security, including amounts above the maximum taxable by Social Security, can be considered when figuring average earnings.