The basic concept of disability insurance is simple: If you get sick or injured and can’t work because of a disability covered by your policy, you receive benefits. But that simple statement describes a huge range of real-life possibilities, so there are important issues that will need to be cleared up before you can get a disability policy. That’s why you need to have an agreement, a mutually binding contract, with an insurance company that answers the following questions about exactly how your disability insurance benefits will work:
1. what is the policy’s definition of disability?
Some types of catastrophic injuries or illnesses make you clearly unable to work, but others may not be so obvious. There must be a clear understanding of what it means to be disabled in order to qualify for benefits under your policy. There are several different definitions of disability and they will vary by provider. it can also itemize different specific levels of disability, such as a “partial disability,” along with the percentage of the total disability benefit you can receive based on that definition.
There is also another vital issue that needs to be clarified in the definition of disability:
Own occupation or any occupation?
A long-term disability policy will include this distinction in its definition of disability, and the implications are significant. With an own occupation policy, you only need to be unable to perform your current job or profession to qualify for benefits. For example, a surgeon who can no longer use his or her hands to perform surgery would likely qualify for benefits, even if that surgeon were healthy enough to do other work.
With an any occupation policy, you only qualify for benefits if you can’t do any work. If you are still able to work any job, even a much simpler, lower paying position, you would not qualify for the full benefit amount and may not be eligible for any benefits. That’s why this type of policy is almost always less expensive.
If you have a long-term disability policy through work, it will likely be divided into an own occupation portion (which usually lasts 24 months), followed by an any occupation portion. In this case, you may still qualify for disability benefits while working at another job or a modified version of your original occupation, while earning up to a certain percentage of your pre-disability wages.
Note that in a short-term disability policy, this generally does not apply because it is assumed that you will only be out of work for a short time before returning to your current occupation. however, most policies allow part-time work while benefit payments are being made.
2. What is the policy’s waiting period?
every policy has a waiting or “elimination” period. this is the period of time you must wait after becoming disabled until benefits begin and the insurance company begins to replace your income. it will generally be shorter for a standard policy and longer for a limited policy. it can also be longer or shorter depending on the specific company and policy: a longer elimination period tends to lower your premiums a bit, and a shorter period tends to increase them.
3. What is the benefit amount?
This is the amount of money that will be paid to you, usually on a monthly basis, once the elimination period has been met, clearly one of the most important aspects of a disability policy. most financial professionals suggest that you should be looking to replace around 60-80 percent of your after-tax income.
4. what is the benefit period?
This is the maximum time you can receive benefits. on a short term policy this will typically be between 3-6 months and rarely more than a year. for a long-term policy, there is a much wider range of possibilities. the benefit period could be as short as two years (as is the case with one of the guardian’s group policy options), or it could extend to age 65, 67, or social security average retirement age (unless to recover from his disability).
5. What are the characteristics and options of the policy?
Remember: A disability policy is a contract, and like many contracts, it contains fixed terms and provisions, but there are also optional provisions, called riders. Be sure to read all of the provisions to understand the terms of your contract and the circumstances in which you will receive a benefit.
For example, there may be one or more provisions that say whether you’re allowed to do any work, even part-time, while still qualifying for some benefits. One of the most popular optional provisions is a cost-of-living (or tail) adjustment clause3 which states that the insurance company will increase your benefit to account for inflation and/or cost-of-living increases.
6. How much will you pay for disability coverage?
Expect to pay 1 to 3 percent of your annual income for disability insurance as an individual.4 If you receive disability coverage through work, the rate will vary. The actual premiums you pay for a policy will depend on the following factors: