Types of Disability Insurance Explained

Ian C. Langtree - Writer/Editor for Disabled World (DW)
Published: 2011/01/17 - Updated: 2022/06/30
Topic: Disability Insurance - Publications List

Page Content: Synopsis - Introduction - Main

Synopsis: Explanation of the different types of Disability Insurance, also called DI or disability income insurance, that insures income against the risk of disability. Since one of the top reasons for becoming disabled is getting hurt on the job, it is not surprising that the second-most important form of disability insurance is that provided by employers to cover their employees.

Introduction

Disability is broadly defined as the consequence of an impairment that may be physical, cognitive, mental, sensory, emotional, developmental, or some combination of these. A disability may be present from birth or occur during a person's lifetime. Disability is an umbrella term covering impairments, activity limitations, and participation restrictions. Impairments may include physical, sensory, and cognitive or developmental disabilities. Psychiatric or psychosocial disability and various types of chronic disease may also qualify as disabilities. A disability may occur during a person's lifetime or may be present from birth. Disability can be classified into several types of disabilities.

Main Item

Business Overhead Expense Disability Insurance

Business Overhead Expense (BOE) coverage is designed to reimburse a business for overhead expenses should the owner experience a disability.

Eligible benefits include Rent or mortgage payments, utilities, leasing costs, laundry/maintenance, accounting/billing and collection service fees, business insurance premiums, employee salaries, employee benefits, property tax, and other monthly expenses.

Employer-Supplied Disability Insurance

Since one of the top reasons for becoming disabled is getting hurt on the job, it is not surprising that the second-most important form of disability insurance is that provided by employers to cover their employees.

Several subtypes may or may not be separate parts of the benefits package: workers' compensation and more general (but very basic) disability insurance policies.

High Limit Disability Insurance

Traditional Disability carriers have limitations on the monthly benefits that can be purchased, limiting the benefits for high-income earners. Benefits will normally cap at $20,000-$25,000 monthly benefits until you go to the High Limit Disability markets. High Limit Disability Insurance is designed to keep individual disability benefits at 65% of income regardless of the income level.

Coverage is typically issued on top of already in force coverage.

With High Limit, Disability Insurance benefits can be anywhere from an additional $2,000 to $100,000 per month. Issue(one policy) and participation(other individual DI or Group LTD) has gone up to $30,000 with some companies.

Individual Disability Insurance

Those whose employers do not provide benefits, and self-employed individuals who desire disability coverage, may purchase their policies on the open market.

Premiums and available benefits for individual coverage vary considerably between companies, individuals in different occupations, and by State and Country. Generally, premiums are higher for policies that provide more monthly benefits, pay the benefit for a longer period, and start payments for benefits more quickly following a disability.

Premiums also tend to be higher for policies that define disability in broader terms, meaning the policy would pay benefits in various circumstances. Many web-based disability insurance calculators determine the disability insurance needed.

Make sure your broker is very knowledgeable in Disability Insurance because sometimes the less expensive policy at purchase time can be the more expensive at claims time.

Key Person Disability Insurance

Key Person Disability Insurance provides crucial benefits for any functioning business to protect the company from financial hardship that may result from losing a key employee due to disability.

Key Person coverage provides cash flow to help a company move forward and maintain a profit in the event a key employee becomes disabled. The company could use the disability benefits to hire a temporary employee should the disabled employee's prognosis appear to be a short-term disability.

In the unfortunate circumstance of a permanent disability, benefits would then be used to help defray the costs of hiring a replacement employee, such as recruitment, training, startup, loss in revenue, and unfunded salary continuation costs.

National Social Insurance Programs

In most developed countries, the single most important form of disability insurance is provided by the national government for all citizens.

The UK's version is part of the National Insurance; the U.S.'s version is Social Security (SS) specifically, several parts of SS, including Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI).

These programs provide a floor beneath all the other piecemeal forms of disability insurance in our societies. In other words, they are the safety net that catches everyone who was either (a) otherwise uninsured or (b) otherwise underinsured. As such, they are extensive, critical programs with many beneficiaries.

The general theory of the benefit formula is that the benefit is not large but is enough to prevent abject poverty.

Workers' Compensation

Workers' compensation (also known by variations of that name, e.g., workman's comp, workers' comp, worker's comp, compo) offers payments to employees who are (usually temporarily, rarely permanently) unable to work because of a job-related injury.

However, workers' compensation is, in fact, more than just income insurance because it may pay compensation for economic loss (past and future), reimbursement or payment of medical and like expenses (functioning in this case as a form of health insurance), general damages for pain and suffering, and benefits payable to the dependents of workers killed during employment (functioning in this case as a form of life insurance).

Workers' compensation benefits on-the-job accidents, but the weakness is the lack of coverage while not working. Statistics have shown that most disabilities occur while not working and, therefore, are not covered under workers' compensation.

Other

These policies offer payments to employees who are (usually temporarily, rarely permanently) unable to work because of any injury or illness, even if it is not job-related. Unlike workers' compensation, this coverage may not involve any aspect of health insurance, life insurance, or payments for pain and suffering.

Similar to most employer-supplied health insurance, these plans are essentially just open-market plans with the advantage of a negotiated group rate. They are similar to what an individual would buy but are purchased with a volume discount.

Another general fact about them is that they offer rather basic, low-end coverage because most people balk at paying for anything more. Sometimes each employee has the option to buy upgraded coverage if they are willing to pay for it.

Author Credentials: Ian was born and grew up in Australia. Since then, he has traveled and lived in numerous locations and currently resides in Montreal, Canada. Ian is the founder, a writer, and editor in chief for Disabled World. Ian believes in the Social Model of Disability, a belief developed by disabled people in the 1970s. The social model changes the focus away from people's impairments and towards removing barriers that disabled people face daily. To learn more about Ian's background, expertise, and achievements, check out his bio.