Your guide to Disability Insurance

Since most jobs aren’t going to provide a year’s worth of leave, how would you guarantee a consistent income if you found yourself in this type of situation? The answer is with disability insurance. Read on to learn how disability insurance works and how, when worst comes to worst, it can save your life. First, let’s look at a disability insurance definition.

What is Disability Insurance?

Disability insurance is a form of insurance that pays a portion of your income if you can no longer work – that’s why it’s also referred to as  “income protection.” You can think of it as “income insurance” specific to disabilities.

As with other kinds of insurance, you’ll pay a premium each month that keeps your plan in force.

If you develop an illness or injury that makes it impossible to  perform your job, regular payout will begin after a waiting period (also called an “elimination period”) established in your policy.

You can  use this money any way you want – to pay for groceries, phone bills, your mortgage, etc. – just as if it were your normal income. Disability insurance is grouped into two main types: short-term disability insurance and long-term disability insurance. As you might guess, the primary difference between these is how long you’ll receive payments if you continue to be disabled.

Short-Term Disability Insurance

Short-term disability insurance is geared toward injuries or illnesses that impede your ability to work for a shorter period of time – usually between 3 and 6 months. Think a broken leg, recovery after surgery, or an illness that has you in bed for a few months. These policies pay between 40 – 60 % of your salary, and the waiting period is usually about 14 days.

Most people get short-term disability insurance through their employer. This is much more common than buying an individual plan directly from an insurance provider. Guardian disability insurance, for instance, is only available through an employer. In what’s known as state disability insurance five states – New York, California, Rhode Island, Hawaii, and New Jersey – actually require employers to provide short-term disability insurance.

One perk of group coverage through your employer is that you won’t have to go through an underwriting process – this is where you’re evaluated individually by the insurance provider and given a unique premium dependent on, for example, your current health. Another is that your employer will pay part or even all of the premium cost.

The main drawback of getting short-term disability insurance through your employer is that the policy is tied to your job. If you lose or change jobs, you’ll no longer have that plan. This is where short term disability insurance not through an employer comes in – you can buy an individual policy that isn’t connected to your job. Of course, this also means disability insurance for self-employed people is available.

With an individual policy you’ll have say over what riders are included, for example, and you won’t have to pay taxes on the provided income. Even if you do have a disability policy through your employer, these benefits may mean you want to also get supplemental disability insurance.

Finally, although they’re sometimes confused, it’s important to note that short-term disability insurance is not the same thing as workers’ compensation. Workers’ compensation applies only to injuries that occur on the job.

Gender – Because women statistically file more claims than men, they’re charged higher premiums. Life insurance policies, on the other hand, are more expensive for men since women have longer average lifespans.

Health – The current state of your health can tell providers a lot about how likely you are to file a claim in the future. Smokers, for instance, are more likely to develop lung cancer than non-smokers, while obesity is correlated with diabetes. The better your overall health, the lower your disability insurance premium will be.

Occupation – It goes without saying that people working in certain professions have a higher risk of becoming disabled than others – a career as a police officer or construction worker is more dangerous than that of an accountant, for instance. Insurance providers will take this into account when calculating your rate

Definition of Disability – Earlier we mentioned that disability insurance will provide monthly payouts if you can no longer work. But what does “no longer work” actually mean? Does it mean you can’t

work at your current job, or that you can’t work at all? The answer depends on whether or not your policy is “Own occupation” or “Any occupation.” With an “own occupation” policy, you’ll receive benefits if you can’t perform your job whereas, with an “Any occupation” policy, you’ll only receive benefits if you can’t perform any job. An own occupation policy will cost more, but will be well worth it if you have a specialized, high-paying job.

Length of Waiting Period – The longer the waiting period before your benefits kick in, the less your premium will cost. For instance, say you want to pay a lower overall premium on your long-term disability. However, you’d have to ask yourself if that’s worth it – you’d need to make sure you have enough money saved up to make it through those initial 180 days without an income.

Length of Benefits – Every policy has an amount of time it will continue to provide benefits. The longer the amount of time, the higher the premium. A policy that carries you all the way to retirement, for example,  will cost more than one that’ll cover you only for 2 year!

Riders – Riders are optional “add-on” features for your policy. Some of them are important to have but will nonetheless increase the cost of your policy. Some riders for disability insurance include:

• Residual disability rider – this rider is for people who are disabled but can still work in some capacity. If you’re now working in a lower-paying job due to a disability, a residual disability rider will get your income closer to what it was.
• Cost of living adjustment (COLA) rider – a COLA rider will intermittently increase your policy’s  payout to adjust for inflation.
• Automatic Benefit Enhancement rider – this will increase your coverage if your income at your old job increases.
• Non-cancelable rider  – this will ensure that your premium rate stays the same over time, and so is one rider we strongly recommend adding to your policy.