Disability Insurance: What is Covered and for How Long

Definition

Disability Insurance

Disability Insurance, often called DI or disability income insurance, is a form of insurance that insures the beneficiary's earned income against the risk that disability will make working (and therefore earning) impossible. It includes paid sick leave, short-term disability benefits, and long-term disability benefits.

Main Digest

Not every variable matters to every type of disability insurance, but most of these are relevant. The critical variables regarding claims are listed below.

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• Was the disability unpredictable (not resulting from previously-known chronic illness)?
• Was the disability incurred in the course of performing job-related duties?
• How long is the waiting period before claim payments start?
• What other insurance policies will pay claims for this event?
• How much money will be paid per week/month/pay period?
• For how many weeks/months/pay periods will payments continue?
• What if the beneficiary is not totally disabled, but only partially?

Examples of How Each Variable May be Important

Was the disability unpredictable (not resulting from previously-known chronic illness)?

For example, a potential policyholder seeking a regular individual policy on the open market must warrant that he is in good health and, to the best of his knowledge, is not currently HIV-positive.

A general principle of insurance is that the policyholder sells risk that, to the best of his knowledge, is not higher than the stated circumstances imply. Withholding relevant circumstances or hiding them is selling something that is not what it is represented to be.

Analogies are insider trading using material non-public information and making fraudulent (incomplete or false) seller disclosure in a real estate transaction.

Was the disability incurred in the course of performing job-related duties?

For example, workers' compensation policies are not obligated to pay claims for disability that is not job-related. Insurance for such risks can be purchased, but the premiums are higher because the risks are more inclusive.

A policyholder always needs to understand what she is or isn't buying with her premium. And the insurer is legally obligated to specify exactly what coverage is or isn't being sold.

How long is the waiting period before claim payments start?

Because most disability events are temporary, insurance coverage is cheaper when the policyholder agrees to wait longer before receiving claim payments. For example, if you break a finger, it may only be two months before you can do your job again. If you agree to wait 60 days before receiving claim payments, the insurer will not have to pay a claim for your event. This reduction in his risk is reflected in the lower price that you paid to purchase coverage (lower premiums).

Another important example in this category is one year's standard waiting period before collecting Social Security disability benefits. Disability insurance claim approval from the insurance companies can often be delayed for a similar length.

It is common for a claimant to receive Social Security disability benefits but be denied benefits from an insurance company because it uses a different definition of qualifying disability.

What other insurance policies will pay claims for this event?

For example, if an auto accident renders you unable to work for five months, your auto insurance policy with Company A may include coverage for lost income during this period. (Often, lost-income coverage is a separate rider to the auto insurance policy that you must pay extra for if you choose to have it.) In this case, you may choose to make a claim with Company A and either (1) make another secondary claim with Company B, who issues your disability income insurance, or (2) decide that the primary claim is enough and avoid making an unnecessary claim with Company B.

Sometimes, there is a previously established order of priority that rules that Company B is liable for the claim only to the extent that Company A's coverage is insufficient.

Another important example in this category is that if your injury is someone else's fault, their liability coverage from, say, an auto, home, or personal umbrella policy may pay for your lost income. Therefore you will not claim on your policy.

How much money will be paid per week/month/pay period?

For example, it is rare for any policy to pay the full amount of the beneficiary's regular salary. (Expensive Policies, "high-end-of-the-market"-type policies.)

Generally, it will pay only some percentage, such as 80%, or it will pay only a flat amount, such as $1500/month, regardless of the normal salary amount. The idea behind this reduced benefit is that it is enough to protect you from mortgage foreclosure or to keep you from running up huge debts during your recovery, even though it is not enough to live a carefree lifestyle.

In return for this trade-off, your premiums are lower. This is a good trade-off when you remember that hopefully, you will never have to make a claim anyway, so why to pay higher premiums than you have to

For how many weeks/months/pay periods will payments continue?

Most policies in the lower and middle areas of the market will have a cap, for example, 5 years.

More expensive policies will pay to the age when the national social insurance program takes over as the primary income source. For example, in the U.S., this is usually at the individual's Social Security full retirement age; for most individuals, age 66.

Also, in the U.S., most long-term disability insurance policies require those receiving benefits to apply for Social Security disability benefits.

What if the beneficiary is not totally disabled, but only partially?

Most policies in the lower and middle areas of the market will only pay claims if there is no job the beneficiary can do.

Others, referred to as own-occ policies, will pay the claim if you cannot return to your occupation. Own-occ policies cost more to buy (higher premiums) than non-own-occ because their claims risk is greater. For example, suppose your normal job involves lifting heavy boxes and getting paid $4000/month. Then you get injured and can't lift so much weight. However, you are still capable of doing light assembly work at a workbench for $2000/month.

If your policy is a less-expensive model, the insurer will tell you that no claim will be paid because you are capable of working (although not at your occupation). But if your policy is an own-occ policy with a claim amount of 75% of your normal salary, it will pay you a claim of $3000/month. This payment will recur monthly until (a) you can do your normal job again; (b) the cap is reached (for example, five years later); or (c) you reach age 65 (when the policy ends and you begin collecting Social Security).

Types of Disability Insurance Explained

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