Disability insurance (DI) is a type of insurance policy that provides monthly income if someone is too sick or injured to work. It is the cornerstone of a solid financial plan and something that everyone who depends on their income should consider buying. 

Unfortunately, it’s a product that is often misunderstood. It’s a highly technical insurance policy with many nuances, and that means it doesn’t lend itself well to self-study. It’s very difficult to research disability insurance online because each policy is different. Those differences may be subtle, but they can be very important when it comes to getting a claim paid. This article will provide some guidance on disability insurance in general and then some more specific advice on how to make sure you’re getting the best policy for your situation. 

We will answer the following questions:

• Who needs disability insurance?
• What are the different types of disability insurance someone should consider?
• What are the most common features of a disability insurance policy? 
• What qualifies as a disability and how do I file a claim?
• How do I buy a disability insurance policy and will I qualify?
• I’ve already got coverage through my employer. Is that enough?

Who needs disability insurance?

First, some types of individuals who do not need disability insurance:

• People with enough money saved up that they can comfortably live off the interest. 
• People who have a large amount of passive income that would be received regardless of if they were working or not.
• People who are retired or not working full time.

If you’re one of the above individuals, you’re probably not reading this article anyways. But, if you’re not in one of the above categories, and if you depend on your income, you should have disability insurance. 

Most people don’t know anyone who was disabled, but that doesn’t mean it doesn’t happen frequently. 

• Just over 1 in 4 of today’s 20-year olds will become disabled before they retire.  
• Among all age groups, 30% of workers will suffer an illness or injury that lasts 90 days or longer.

With only 48% of the U.S. adult population indicating that they have 3 months of liquid savings to tide them over in the event of a disability, there needs to be a plan in place to secure living expenses and avoid bankruptcy. Social Security may not be the answer. The average Social Security Disability Insurance benefit in January 2018 was just $1,197 per month. And, this is assuming that you’ve waited the more than 18 months to have your claim processed, and were one of the lucky 34% of applicants that were approved for benefits.

Even if you’ve done well and have many months of cash reserves, it’s probably not something that you’d be able to rely on for an extended period. It’s also most likely money that you have earmarked for other purposes (education planning or retirement), and the need to use it for daily expenses would harm its intended use. 

If you rely on your income, have financial obligations that need to be met, and don’t have enough money saved up where you can easily meet those and other obligations, you should have a disability insurance policy. 

What are the different types of disability insurance?

There are different types of disability insurance that are designed to protect against different types of risks. 

• Short-term disability (STD) — Typically starts paying benefits after a couple of weeks of being disabled and continues for up to 3 or 6 months. Short-term disability insurance is usually only available through your employer. 
• Long-term disability (LTD) — Also offered through many employers, this type of policy covers a percentage of your income — usually 60% — and starts paying benefits after 90 days and until retirement age 65. 
• Individual disability insurance (IDI) — Similar to LTD, this type of policy also usually pays benefits after 90 days and until retirement age, but these can be adjusted to suit your needs and budget. 
• Business overhead expense (BOE) — Designed to cover the expenses that a business owner has on a monthly basis. Rent, staff salaries, equipment leases, etc don’t stop if the business owner is unable to work. BOE coverage can help pay for these types of expenses in order to keep the business open until the owner returns. 
• Business reducing term (BRT) — Often required by banks who provide loans to individuals buying a business. This type of policy pays the bank back the outstanding loan amount in the event of disability of the owner. 
• Retirement protection plus (RPP) — When a disability happens, an individual DI policy pays an income to cover monthly expenses, but what about savings? If you’re saving for retirement, an RPP disability policy will ensure that your retirement savings continue. Money continues to be invested for use after age 65.
• Disability Buy-Out — This type of policy provides funds so that a non-disabled business partner can buy out the ownership of a disabled partner. These types of policies are often coordinated with life insurance and the owner's written buy-out agreement.

What are the most popular features to include in a policy?

Disability insurance policies allow for the inclusion of optional riders to provide more valuable benefits. These additional riders come at additional cost, so it’s important to understand the benefits they provide.

• Partial or Residual — This is a critical rider that ensures that you’re paid a portion of your monthly benefit in the event that you are working part-time or recovering from being totally disabled.
• Cost of Living Adjustment (COLA) — Ensures that the monthly benefits increase to keep pace with inflation once a policy begins paying benefits. 
• Future Increase Option (FIO) — Allows the future purchase of additional coverage without medical underwriting. Financial underwriting is required.
• Catastrophic Disability Benefit — Pays an additional benefit if the disability meets the criteria for catastrophic disability. This usually requires the loss of the activities of daily living.

Having helped tens of thousands of clients since 1997, we’ve compiled a list of the most popular riders that people include on their disability insurance policies that you can review to see what people like you are including on their policies. ]

What is considered a disability, and how do I file a claim?

Each disability insurance policy has a definition of disability that defines what is considered a disability eligible for benefits to be paid. There are three major definitions of disability:

• True Own Occupation

A “true own occupation” policy says that benefits will be payable if a sickness or injury causes you to be unable to do the material and substantial duties of your own occupation even if you are engaged in another occupation. 

This is the best definition of disability available and is what most advisors recommend for professional occupations. It allows you to work in another occupation and still receive 100% of your disability insurance benefits, thereby getting your total income closer to your pre-disability income. 

For medical occupations, true own-occupation coverage adds another layer of protection. If you are a physician with specialized training and want the best disability insurance, a true own occupation policy with medical specialty language will ensure you get paid if you can’t do the specific duties of your medical specialty. This could allow you to teach residents or do something else within medicine and still collect your full disability insurance benefits.

• Modified Own Occupation

A “modified own occupation” policy is slightly different from a true own occupation policy in that if you are disabled from your current occupation and you chose to do something else, the income in your new occupation affects the monthly benefit that you receive. Under this type of policy, if you chose to not return to work, you could receive your full monthly benefit. However, if you do decide to return to another career, your benefits are reduced by the percentage of your lost income. For example, you are disabled from your current occupation making $100,000 and chose to take a new job making $50,000. You would then receive 50% of your monthly disability benefit under a modified own occupation policy. 

A modified own occupation disability insurance policy may not be as comprehensive as a true own occupation policy, but it usually comes at a reduced cost and might be a good solution for those who don’t want to be forced back to work, and still want a good basic level of protection.

• Any Occupation

A disability insurance policy with an “any occupation” definition of disability is not typically recommended for those with professional occupations or highly technical jobs. Under this type of policy, if the insurance company determines that you can do any occupation, then you are not considered disabled and benefits may not be payable. These types of disability insurance policies are usually available to occupations with a high degree of manual labor such as construction or farming jobs. 

Filing a claim

Regardless of which definition of disability insurance your policy has, if you have an accident or illness that prevents you from working, you may be eligible to file a claim. Each insurance company has their own claims process and examiners, but there are some constants. 

• Immediately file a claim if you think you may qualify. You do not need to wait until the end of your elimination period to begin the process of notifying the insurance company of your injury or sickness. 
• You will be assigned a claims examiner who will request information from you such as:
  • Your policy number, current address, and email
  • The date your sickness began or injury occurred
  • Your attending physician information so that they can request your medical records
  • Details regarding your employment and current income
• Once you file your claim, you will receive a claims form that provides instructions and authorization for the release of your medical information for review by the insurance company claims examiner. 
• Should your claim be approved, your examiner will provide more details on the methods of receiving payment.

How do I buy a disability insurance policy?

Before the internet, if you wanted to know how to buy a disability insurance policy, you’d have to find an agent to meet with who would then present you with options. As with anything else now, however, Google has made the act of buying disability insurance both simple and overwhelming. 

A simple Google search for “disability insurance” presents many thousands of pages on the subject, and dozens of websites offering free quotes. There are only a handful of sites, however, that truly specializes in designing disability insurance plans for professionals. When looking for a reputable agent to advise on your policy, be sure to ask the following questions.

• How long have you been selling disability insurance? 
• How many companies do you have access to?
• How many clients do you have, and how many of those work in my occupation?
• Do you own disability insurance yourself?

Since disability insurance is such a technical policy with lots of options, it’s important that you work with someone who has experience with your occupation, can discuss and provide different quotes, and who actually owns what they sell. You’d be surprised how many agents don’t own the very products the sell, and that should be a big red flag!

More options aren’t necessarily better

Once you’ve identified who you want to work with, you’ll start getting some quotes to review. Being sent a spreadsheet of 10 different options might seem like your agent is doing a good job, but they might not be. It’s easy to list many options and send it to the consumer and let them make the decision, but that’s not providing advice. It’s certainly not how you’d make any other important decision. Could you imagine your surgeon listing out 3 different options and prices and telling you to pick the one you want? 

Information without recommendation just creates confusion and, usually, inaction. The best agents will ask you questions, identify what is important to you, pick the insurance company that best fits your objective, and present you with a recommended policy. Don’t fall for the “more is better” approach. 

Applying for a policy

Once you and your agent have identified the best policy for your situation, it’s time to apply for the coverage. The application process can be slightly different with each company, but they all typically consist of the following steps.

1. Complete an application — usually an online form asking you questions about yourself and your occupation.
2. Answer medical questions about your health history — also online or via telephone interview
3. Have a blood test — Sometimes needed depending on the age of the applicant
4. Provide income documentation — Tax returns, paystub, or W2 are usually needed to substantiate income. 
5. Accept delivery of your policy — Once the underwriter has reviewed your application, medical history, and income documents, they will either approve or deny your application. 

Will I qualify for a disability insurance policy?

Medical history

When an underwriter reviews your application for coverage, they’re looking for certain things. Your medical history will play a major role, and many people who believe they are in great health may be in for a surprise. Things like chiropractic visits, mental health counseling, and other seemingly simple things can have a big impact on your ability to get a disability insurance policy. 

Disability insurance carriers do not cover pre-existing conditions. If you have a condition that was pre-existing to the application, the underwriter will handle it in one of two ways. They will either exclude it from the policy, or they will decline your application. 

If they determine that your pre-existing condition was relatively minor, and they chose to exclude it from the policy, you will simply not have benefits paid if you suffer a disability related to that excluded condition. Sometimes, these exclusion riders can be reviewed in a period of time and removed from the policy. Therefore, it’s important that your agent recognize this and has a method for following up with you to have your coverage reviewed at the right time. 

Financial history

In addition to your medical history and ensuring that you’re a good risk from a health standpoint, an insurance company also needs to make sure you’re a good risk from a financial perspective. Since the amount of disability insurance you can buy will be based on your income, this needs to be verified through a tax return, paystub, or employment contract. 

If income is below $20,000, if there is a history of bankruptcies, or if tax documents show losses, it can create a problem getting an application approved. From a financial perspective, underwriters like to see consistent income that is attributable to the occupation being insured.

Is my Long Term Disability (LTD) at work enough?

Many people have long-term disability (LTD) insurance at work. The typical LTD policy replaces 60% of one’s salary, but there are often issues to be aware of. 

• LTD benefits are often treated as taxable income when received. 
• LTD policies often have a modified occupation or any occupation definition of disability
• Many LTD policies are not portable
• Compensation in excess of base salary is often not covered under LTD policies

Taxable benefits

Many employers pay the cost of disability insurance for their employees. This usually means that when benefits are received by a disabled employee, the benefits are received as taxable income. Most people would find it hard to live on 60% of their paycheck. When that paycheck is further reduced by income taxes, it can often be only 50% or less of their pre-disability income. 

Definition of disability

Group LTD doesn’t have the best definition of what it means to be disabled. Many times, the group LTD plan will state that you will be considered disabled if you can’t do the duties of your own occupation and you’re not doing something else. This is the modified own occupation definition we talked about before. In many LTD policies, however, this definition changes after 24 months to an any occupation definition. It states that if the insured is able to do any occupation based on their education, training, or experience, they may no longer be considered disabled and thus, eligible for benefits. 

Portability

Portability is the ability to take your LTD policy with you when you leave your current employer. Some LTD policies allow for this, and some do not. Portability can be important when someone leaves their employer and is not provided with another LTD plan at their new employer. If someone is not in the best of health at this point, they may also be unable to buy their own personal policy and thus be left without any income protection.

Excess compensation

Many LTD plans only cover base compensation or salary. For those who have bonus income or compensation related to commissions or production, that income might not be covered by your group policy. 

The solution to these issues is to have a supplemental individual DI policy. An individual policy will provide you with additional benefit to supplement what you get from your LTD policy; give you a better own occupation definition of disability; allow you to take it with you from job to job; and, cover all your income, not just your base salary. 

Summary

What is disability insurance? 

Disability insurance is a type of insurance policy that is the cornerstone of a sound financial plan. It’s the only type of insurance that protects someone’s most valuable asset — their income. Most people underestimate the real risk of being disabled, and therefore don’t think about disability insurance as something important to have. The statistics show a different story. 

Although disability insurance policies are all designed to do the same thing — protect your income — they do so in different ways. There are different definitions as to what is a “disability”; there are different types of policies for persona and business use; and there are different optional benefits, or riders, that you should consider when buying a policy. You should engage an experienced disability insurance agent to walk you through these options when shopping for a policy. 

This experienced agent is also critical when applying for a policy and determining if you qualify based on medical history and financial documentation. They can help you design a policy to supplement what you have at work, and ensure that your income is as protected as possible so that in the event the unthinkable happens, you’re able to meet your financial obligations. 

Disability insurance is the only type of insurance that protects that which pays for all your other types of insurance and that funds your lifestyle — your income. Because of that, it really should be at the top of your insurance checklist. 

 ¹Social Security Administration, Disability and Death Probability Tables for Insured Workers Born in 1997, Table A

²Austin, Daniel A., Medical Debt as a Cause of Consumer Bankruptcy (2014). Maine Law Review, Volume 67, No. 1, pp. 1 – 23 (2014); Northeastern University School of Law Research Paper No. 204-2014. Available at SSRN.  See especially Table 1 (as cited by the Council for Disability Awareness).

³Federal Reserve, Report on the Economic Well-Being of U.S. Households in 2016 (PDF), page 26.

 ⁴ASPE, Poverty Guidelines 2018

 ⁵Social Security Administration, Annual Statistical Report on the Social Security Disability Insurance Program, 2016. Chart 11