Lee Parker
Regional Manager / Healthcare Reform Specialist
 
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What is Disability Insurance?

Disability insurance is a form of coverage that will replace a percentage of your income should you be unable to work because of injury or illness. Most policies are written for a specific monthly benefit - the face amount of the coverage. The upper limit is typically between 50% and 70% of your earned income.
 

Types of Disability Insurance

 
  1. Individual disability insurance - this type of policy is written specifically for the covered individual, with choices for coverage amounts, periods, exclusions, etc. The more comprehensive the coverage, the higher the cost. Policies are subject to standards of health, age, occupation, etc.
  2. Group disability insurance through an employer - with employer provided plans, many of the decisions about policy definitions and structure have already been made. Coverage is more readily available to persons with health problems, but coverage stops when employment is terminated.
  3. Group disability insurance through an employer - with employer provided plans, many of the decisions about policy definitions and structure have already been made. Coverage is more readily available to persons with health problems, but coverage stops when employment is terminated.
  4. Social Security disability benefits - Federal programs that pay benefits to all disabled persons under age 65, and pay supplemental benefits to persons over age 65 who have limited incomes.
  5. Workers compensation - state mandated coverage that pays benefits for persons disabled because of work related injuries or illnesses
  6. VA benefits - Federal program that pays veterans who are disabled due to service related health problems
  7. Federal Employees Retirement System - Program that covers Federal employees and pays up to 60% for the first year and 40%, thereafter.
  8. State-sponsored coverage - several states (including California, Hawaii, New Jersey, New York and Rhode Island) pay short-term benefits to residents who are disabled due to issues not related to work.
 

Short-term vs. Long-term Disability

Policies can be purchased to cover either short-term or long-term disabilities. Short-term disability policies pay benefits for period up to two years. Long-term disability policies pay benefits for periods ranging from a few years up to age 65.
Waiting Periods
 
A disability policy will require that a person be out of work for a certain period of time before benefits will be paid. This “elimination” period in a long-term disability policy can be as short as 30 days or as long as two years. Ninety days is common.
 

Key Definitions

Understanding these terms is critical to purchasing the right coverage
  • Total disability - Unable to work due to injury or illness
  • Partial disability - Unable to perform all of the duties of your occupation after returning to work following a disability - this is a transition state
  • Residual disability - Similar to partial disability, but payable based on reduced earning capacity - generally payable for the long-term
  • Presumptive total disability - Disability resulting from named occurrences such as loss of sight, hearing or limbs
  • Own occupation - Terminology used to define disability as the inability to perform the customary duties of one’s own occupation
  • Any occupation - Terminology used to define disability as the inability to work at any occupation, perhaps with the qualification of a comparable level of education or training
     
 
 
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Increasing Need - Injuries and illnesses that once resulted in death are increasingly treatable and result in longer life spans. However, they often result in periods of inability to engage in meaningful employment. You are far more likely to suffer a long-term disability before age 65 than you are to die before age 65.
 

Putting the Odds in Perspective

Disability occurs for many reasons. Some relate to hazards of employment and may not concern you. The most common causes of disability, however, are heart disease and back problems, ailments which can hit anyone. Other common causes of disability into automobile accidents, cancer, and head injury.
Disability occurs far more often than other events that are commonly insured. It occurs more often than premature death. It occurs more often than fires in the home. It even occurs more often than serious automobile accidents. Roughly half of the disabilities that keep someone out of work for six months or more still have them disabled after five years. One employee out of seven will suffer a five-year disability before age 65.
 

Quantifying Your Need for Coverage

Your need for coverage is based on several factors, including:
  • Your fixed expenses
  • Your available assets and non-employment income
  • The income of your spouse
  • The age of your children
  • Your existing entitlement to disability benefits
  • The potential for increased living expenses due to the need for medical care, household help or child-care
    The most complex of these factors to grasp is your entitlement to other disability benefits. While you may qualify for Social Security benefits, you should understand that the definitions used by the Social Security Administration are very restrictive. You should also understand whether your group coverage is short-term or long-term and what percentage of your income would be paid in benefits. A comprehensive analysis is necessary to determine the exposure you should cover with a private disability policy.
 

Maximum Coverage Available

Insurance companies will not write policies for 100% of your income. The maximum varies from company to company, but typically ranges from 50% to 70% of earnings.
 
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