The risk of becoming disabled and not being able to work is one of the greatest risks that most of us face. The loss of even one paycheck can devastate one’s financial wellbeing. Yet, very few of us purchase disability insurance coverage. This is probably because most us do not fully understand what disability insurance is or how to evaluate disability insurance policies.
What is Disability Insurance?
Disability insurance is an insurance product that is intended to provide payments to a worker to replace a portion of the worker’s earned income when the worker is no longer able to work because of a non-work related injury or sickness.
Here is a more formal definition of the term “disability insurance policy:”
A legal contract between an insurance company and the insured where one party agrees to pay insurance premiums on behalf of the insured to an insurance company in exchange for the insurance company agreeing to make payments to the insured if the insured becomes disabled and unable to work.
What to Consider in Purchasing a Disability Insurance Policy
Because disability insurance policies are legal contracts, it is necessary to actually read the policy or contract terms in order to compare different disability insurance policies. This may sound daunting. It shouldn’t. There are a number of common policy terms that consumers should look for to compare different disability insurance policies.
Here are a few of the main terms that consumers should consider:
- Maximum benefit amount and benefit period
All disability insurance policies specify a maximum benefit amount and a maximum benefit period. The maximum benefit amount is typically no more than 75% of the worker’s pre-disability earnings. The maximum benefit period is also set out in the disability insurance policy.Disability insurance policies can be written to provide coverage until the worker reaches a specific age (e.g., 65 or 67), for a set number of years (e.g., 10 or 20 years), or for the worker’s entire life.Consumers should be prepared to pay more for disability insurance policies with higher benefit amounts and benefit periods.
- Definition of “disabled”
There is no single definition of the term “disability.” The term “disabled” as set out in a disability insurance policy may require the worker:
- to be totally disabled,
- to be unable to perform the duties of his or her “own occupation” due to his or her disability,
- to be unable to perform the duties of “any occupation” due to his or her disability,
- to not be able to return to his or her “own occupation” after a specified period of time, or
- to have a loss of income equal to some percentage of his or her pre-disability income
before the worker qualifies for disability insurance benefit payments.
Consumers should consider whether they are comfortable with the definition of the term “disability” in “own occupation,” “any occupation,” or other disability insurance policies. In many cases, workers should only consider a non-“own occupation” disability insurance policy if they cannot qualify for or afford an “own occupation” policy.
- Partial disability
Many disability insurance policies cover partial disabilities, as well as total disabilities. These policies will include a definition of the term “partial disability” and specify that the total disability benefit payment is to be reduced by some amount and that the benefit payments are to be paid out for a shorter period of time for partial disabilities.Consumers should determine whether the disability insurance policy covers partial disability and, if so, how partial disability is defined, what it covers, and how long the benefit is available for.Disability insurance policies that cover partial disabilities can be much more expensive than policies that do not provide this coverage.
- Wating period
Many disability insurance policies impose a waiting period, which is a period of time following a disability where benefits will not be paid. These periods help deter would be criminals from filing false disability insurance claims. Waiting periods in disability insurance policies are usually for 30, 60 or 90 days. The premiums are often higher for disability insurance policies that have shorter waiting periods.
- Waiver of premium payments
Disability insurance policies may also include a waiver-of-premium payments provision. A waiver of premium payments provision specifies that the worker does not have to continue to pay disability insurance premium payments after the worker becomes disabled. Disability insurance policies that include this provision will define a specific time period during which the worker does not have to make the disability insurance premium payments. This length of time varies from policy to policy. This type of provision is now standard in most disability insurance contracts.
- Automatic coverage
Almost all disability insurance policies provide that certain specified disabilities automatically qualify the worker for benefits. These automatic coverage disabilities may include the loss of one of the five senses (sight, touch, hearing, smell, or taste) and loss of both hands, feet, or a combination of one hand and one foot. Consumers should compare the disabilities that qualify for automatic coverage in different policies prior to purchasing any one disability insurance policy.
- Optional features
Many disability insurance policies allow the worker to add certain riders or extra terms. For example, workers can often add guaranteed insurability riders, cost-of-living adjustment riders and even Social Security riders. Workers should be prepared to pay extra for these extra disability insurance policy features.