Disability Insurance 101

 

How Much Does Disability Insurance Cost?

  • Benefit Amount - The benefit amount is the monthly payout from the policy while on disability claim. The maximum benefit amount is determined by your income when you submit your disability application.

  • Elimination Period - There are different lengths of time which the insured has to wait to receive their benefits should they go on a disability claim. This waiting period is called the elimination period and can be thought of as a deductible period for your policy. The most common elimination period for a long term disability policy is 90 days. However, there are also 60, 180 and 360 day elimination periods. Electing to have a shorter elimination period will result in a much higher premium whereas electing a long waiting period will result in a decrease in premium which does not save you much money for the risk you take on.

  • Benefit Period - The benefit period is the maximum length of time you are able to collect benefits from the carrier while on disability insurance claim. Once your elimination period is over you will begin to receive monthly benefit checks. You will receive your monthly benefit checks for as long as your benefit period states. The most common benefit period options are 2 years, 5 years, 10 years, Age 65, Age 67 or Age 70.

  • See below for additional Riders.

Optional Riders

There are various features which you can add to a based policy for additional protection. Below find an explanation of the most common riders offered by most carriers.

  • Catastrophic Disability Benefit - This provides an additional monthly benefit in the event someone is catastrophically disabled. Catastrophic disabilities are generally one of the following:

    • Cognitive Impairment such as Dementia or Alzheimer's.

    • Permanent loss of sight, speech, hearing, both hands or feet or one hand and a foot.

    • Inability to perform two out of six activities of daily living, which are eating, dressing, bathing, toileting, transferring or continence.

  • Cost of Living Adjustment Rider - This increases the monthly benefit after one year of disability. This rider otherwise known as COLA is a rider is designed to protect you from against inflation. The COLA rider is an important option because if you are on an extended claim inflation can increase your day to day living expenses. Some common options are 3%, 5% or based on the consumer price index (CPI).

  • Future Increase Option - The future increase option allows you to protect your future earnings. Your initial monthly benefit is based on your income when you applied for the policy. If you are expecting a substantial gain in income in the future this rider allows you to increase your monthly benefit without going through medical underwriting. One of the worst case scenarios is taking out a small disability policy with no future increase option and then not being able to take out more disability coverage due to a change in health when older.

  • Partial Disability - As the name suggests, should you become partially disabled the residual benefit of the policy will pay out a partial monthly benefit. The percentage of the monthly benefit is usually 50 percent or less of the benefit you would earn if you were totally disabled.

  • Residual - This pays you a percentage of benefit if you go back to work in your occupation and generally suffer a loss of income between 20% and 75%.

Definitions of Total Disability

  • Pure Own Occupation - This pays you a monthly benefit if you can't work in your occupation, your specialty, regardless of what you do for a living, regardless of how much money you earn, in your new profession.

  • Modified Own Occupation - If you return to work in another occupation, the monthly benefit period will be in proportion to your percentage loss of income.

  • Transitional Own Occupation - This is similar to the modified own occupation, in that if you can't work in your occupation, and choose to stay home, you receive your full monthly benefit. If, however, you decide to work in some other capacity, then as long as the income that you earn in your new occupation and the total monthly disability benefit you receive does not exceed your pre disability income, there will be no reduction in benefit. If the income that you earn from your new occupation and the total monthly benefit you receive exceeds your pre disability income, then there will be a reduction in your disability benefit dollar for dollar.

  • Inability to Work in Any Occupation - This pays you a monthly benefit if you are unable to work in your occupation, and are not working in any other occupation.

Occupational Classification

Your occupational class is determined on your specialty. Depending on your occupational classification, insurance companies will have different rates and policy features.

Policy Provisions

  • Disability Waiver of Premium - If you become disabled your premiums will automatically be waived until you are no longer on a disability claim.

  • Non-Cancellable Guaranteed Renewable - This guarantees no policy provisions can change as long as you pay the premiums due. The premiums are guaranteed till Age 65. You have the ability to continue the policy beyond Age 65 if working full-time, subject to class rate change at that time by the carrier for all policy holders

Other Income Sources During Disability

There are other sources from which you can receive income should you become disabled. These include: workers compensation, social security disability insurance and state disability insurance. It is important to remember that long term disability insurance is an important supplement to short-term benefits which expire generally after three to six months.

  • Savings, Family or Bank Loan - These kinds of income are hard to obtain and not guaranteed. Most banks will not give a loan to someone who is unemployed or suffering from a disability. Although, family or friends may help it will not be a long term solution to the income loss that comes with suffering from a disability.

  • Social Security - Qualifying for social security disability insurance requires that you suffer from a disability that prevents you from working in any occupation and that has no hope of recovery for a period of atleast a year.

  • Worker’s Compensation - Worker's Compensation benefits are limited as they only cover sickness or injury in relation to your job.