The Basics of Disability Insurance
by Gary Fegan
Probably the single most important insurance coverage one can have is Disability Insurance. This product helps to protect you from a sickness or injury that inhibits your ability to work and earn a paycheck. If you become totally disabled with no protection, you may likely be financially decimated! Most people do not think that they will become disabled. However, statistics show that it is a high likelihood that you will need some protection during your working years.
What Is Disability Insurance?
A financial services product that protects your most valuable asset- your ability to earn an income. It triggers a benefit to help you replace lost income in the event you become too sick or injured to work. A common definition of Total Disability states that, solely due to injury or sickness, you are not able to perform the material and substantial duties of your occupation. The actual definition of total disability varies from company to company.
However, one of the most comprehensive definitions of total disability is a true own occupation disability insurance definition; this definition makes it possible for you to work in another occupation and still be eligible to receive total disability benefits. Other, definitions may be more broad and include “and you are not gainfully employed” or it may not cover you in your specific occupation.
What Are the Odds of Becoming Disabled?
Even though most people do not believe that they will become disabled, just over 1 in 4 of today’s twenty year-olds will become disabled before they retire.1Over 36 million Americans are classified as disabled, and this is approximately 12% of the total population. More than 50% of those disabled Americans are in their working years, from age 18-64.2
% more likely to become disabled than die
When Do My Benefits Begin?
You may ask- “When will my benefits begin? And how long will I receive the benefit?” Disability insurance benefits will be triggered to be paid out once the elimination period has been satisfied and you are otherwise eligible. The elimination period is the length of time that must elapse following the onset of the disability before benefits become payable. Most people choose a 90 day elimination period.
The benefit period that you select will determine how long you may be eligible to receive benefits. There are various benefit periods that you can select. Most companies offer some of the following options: 2 year, 5 year, 10 year, to age 65, and to age 67. Some carriers even often optional riders that extend benefits past the benefit period- for as long as one is alive.
You must be deemed disabled by the insurance company’s claims department before you will be eligible to receive benefits4. You may receive a portion of the monthly benefit if partially disabled or the full monthly benefit if you are totally disabled.
How Much Benefit Can I Qualify For?
The individual disability benefit amount that you may be underwritten for is based on your income and if you have any disability coverage in force at the time of your application. It is a good idea to determine how much you need monthly to pay your bills. If your monthly expenses are less than the amount you qualify for, you may want to consider reducing the benefit amount that you select. This will reduce the premium that you will spend.
What Types of Disability Coverage is Available?
There are two general types of disability coverage-
Individual Disability Insurance (IDI)– Individual coverage is a policy written solely for one person- That person would need to apply for coverage, be underwritten and then be approved for coverage. This type of policy is typically tailored to the individual's’ needs and is generally more comprehensive than group coverage. However, the premium is usually significantly higher. One can tailor many of the policy provisions to meet their needs and budget- elimination period, benefit period and adding or deleting various riders such as cost of living, residual/partial, catastrophic benefits, and many more.
Group Long Term Disability (LTD) Insurance- A group LTD policy is typically going to be a much lower premium. The terms and conditions are not as strong as a typical IDI policy. Also, if you leave that employer to work for yourself or someone else, you would lose that coverage. If you already have coverage with your employer, most likely it is a group long term disability policy.
Group policies typically are at no extra cost to you, but they do have limitations. The premiums are normally paid by the employer which means your benefit will be taxable. Most group policies have maximum benefit amounts. In most cases an individual policy may still be needed to offset some of the income not protected by a group policy.
What is the underwriting of my policy like?
The process of obtaining a policy is similar with most carriers- There is an application to complete and submit. You would complete a short telephone interview to detail your work and medical history. The next step would be to complete a paramedical. During a paramedical exam, you would meet with a paramedical professional and go over medical questions and give a blood and urine sample.
The underwriter may also request records from your doctor. You will also have to submit financial documentation to verify the amounts you are applying for. The process generally takes about 4-8 weeks.
How much does a disability policy cost?
The pricing of individual policies is going to vary greatly from carrier to carrier and contract to contract. However, the approximate cost would be roughly 2-3% of your income. The policies are priced based on your age, sex, benefit amount, your occupation, and the state where you reside. The younger and healthier you are, the lower your annual premium will be.
This is why we encourage clients to secure coverage as early as possible. Either way, it is never a bad time to obtain coverage. Please review policy terms and conditions carefully- the coverage varies greatly, and the price usually coincides with the strength of coverage. Disability insurance is very important coverage to consider and there are many details in a policy that can make a major difference in coverage and potential benefits.
Searching for price only can lead to major gaps in coverage. Make sure once you have made the decision to purchase this important coverage, you educate yourself and contact a disability specialist who understands the language and the contracts to assist you. You do not want to be in a situation where you become disabled and you find out your policy is not what you thought it was.
1. Social Security Administration, Fact Sheet March 18, 2011
2. U.S. Census Bureau
3. Mortality based on 2001 CSO Ultimate table (composite smoking status)
4. A person’s eligibility for benefits is determined on a case-by-case basis, taking into consideration the factual circumstances presented as well as the terms and conditions of his/her policy(s).
Disability based on 1985 CIDA, 90-day elimination period, occupation class 1. Statistics vary by occupation
Occupation Class 1: includes professional, technical and managerial occupations that are generally office duties only
1985 CIDA is the most current morbidity table for individual disability claim incidence adopted by most State Departments of Insurance
James Fegan holds a Financial Representative contract with The Guardian Life Insurance Company of America based out of New York, NY.
2018-52906 Exp 01/20