Disability insurance is one of the most commonly overlooked types of insurance, but a lack of comprehensive coverage can have major ramifications in a person’s life. Just about all of a person’s expenses are dependent on his or her ability to earn an income. It is staggering to learn that a disabling accident occurs in the U.S. about once every second which equates to about 18.5% of the U.S. population living with a disability at any given time. In terms of incidence rate, about one quarter of the working population will suffer from a disability prior to retirement. These figures are alarming and they make the need to understand disability insurance all the more important.
What Is Disability Insurance?
Disability insurance is a type of insurance designed to replace a worker’s income if he or she becomes disabled. The benefit amount of coverage varies, but is generally about 45% to 65% of the person’s total income and this benefit is often paid on a tax-free basis. Disability insurance covers illnesses or injuries and accidents that prevent a person from earning income. This typically also includes psychiatric disorders which might prevent the person from working.
How Does Disability Insurance Differ from Worker’s Comp?
An important difference between disability insurance and worker’s comp is that disability insurance is a broader type of insurance. Worker’s comp is designed to cover employees who are hurt on the job; however, worker’s comp does not cover accidents that occur while the person is off duty. Depending on a person’s career and general lifestyle he or she is often much more likely to suffer a disabling injury while not at work. Worker’s comp generally also only covers illnesses that develop as a result of hazardous working conditions. However, many disabling illnesses occur for non-occupational reasons, and would thus not be covered by worker’s comp.
What Are the Different Types of Disability Insurance Policies?
Disability insurance is often categorized as either a group policy or an individual policy. Like life and health insurance, group policies are those that are offered through the person’s work. They may be paid fully or in part by the person’s employer. Individual policies are those that the person takes out individually and which are not related to the person’s employer in any way. These policies are paid for solely by the insured.
Disability insurance may also be classified as either short-term or long-term according to the elimination and benefit periods. Short-term disability insurance is generally classified as having a short elimination period such as 7, 15, or 30 days, and a relatively short benefit period of 13-26 weeks. A long-term policy will generally have an elimination period of 30 days or longer, and a benefit period ranging anywhere from two years up until age 65.
Other types of disability insurance policies may be called “guaranteed renewable” or “non-cancelable” to refer to policies that the insurance company must renew and cannot cancel. “High-limit” disability policies pay out 65% of the person’s income even if they are high earners. Thus benefits might be anywhere from $2,000 to $100,000 per month.
How Is the Cost of Premiums Determined?
The cost of premiums for disability insurance is affected by multiple factors. Some of the most common major factors include the following:
Age – Older people will generally pay more for disability insurance than younger people.
Gender – Females generally pay more for disability insurance than males.
Smoking Status – Smokers generally pay more for disability insurance than non-smokers.
Benefit Amounts – The higher the benefit amount the higher the cost of premiums
Benefit Period – The longer the benefit period (period of time over which benefits are paid) the higher the cost of premiums.
Elimination Period – The shorter the elimination period (waiting period before benefit payments begin) the higher the cost of premiums.
Occupational Class – People with higher-risk jobs, such as construction workers for example, will pay more than people will lower-risk jobs, such as office workers.
Benefit Features – Some policies may have added benefit features which raise the cost of premiums.
Health Conditions – Certain health conditions can make a person more likely to suffer a disabling accident or develop a disabling illness. People with these conditions may pay higher premiums as a result.
Determining whether or not you need disability insurance can be a daunting prospect. It will depend on many factors such as your income, risk level at work as well as in your personal life, how high your financial obligations are, or how many dependants you have, your personal savings and general financial situation, and even your personal tolerance or aversion to risk. Discussing these issues with an insurance agent and getting estimates on policies can be very beneficial for those who are unsure of whether or not they want or need disability insurance.