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Disability

Disability Insurance

Protects Your Most Valuable Asset – Your Ability to Earn an Income
Disability insurance pays cash benefits to the policyholder in the event that the insured is unable to work due to sickness or injury. The cash benefits range from 50% to 70% of earned income. The reason that benefits paid will not exceed 70% is to provide assistance while still giving policyholders an incentive to return to work.

Disability Policy Features

Elimination Period

The period of time the insured must wait after becoming disabled to receive benefits. Typical waiting periods are 30, 60, 90,120,180, and 360 days. The longer the elimination period, the less expensive the policy.

Benefit Period

The period of time the benefits will be paid following the elimination period. The benefit period could be from 2 years to age 65 to lifetime. The longer the benefit period, the more expensive the policy.

Amount of Benefit

The larger the pay-out the more expensive the policy. The benefit will not normally exceed 70% of income.

Residual Benefit

Percentage of benefit paid if policyholder returns to work and is still partially disabled, preventing policyholder from returning to work full time and earning full income.

Own-Occupation

Pays a benefit if you are unable to return to your present occupation but can work doing something else. For example, a doctor who is a surgeon that cannot return to surgery but can teach. This is the most expensive type of disability policy.

Reasonable or Any Occupation

Pays a benefit while disabled, but stops when you are able to return to work at a job that matches your education and experience. This policy is less expensive than an Own-Occupation policy.

Occupation

Occupation is a factor used in determining rates. For example, a doctor’s rate would be much lower than a blue-collar worker.

Guaranteed Renewable

These policies cannot be cancelled by the insurance company even if a change in the insured’s circumstances would make him or her a greater risk. The insurance company cannot make any changes to the provisions of the policy or add restrictions.

Presumptive Disability

Presumptive disability means that you are considered totally disabled and eligible for benefits for the loss of sight in both eyes or the loss of two limbs. Some contracts also presume total disability for the loss of hearing, loss of the power of speech, or the loss of the use of two limbs.

Optional Disability Benefit Additions (May Cost More)

Protection Against Inflation

A benefit that can be added that offers a cost-of-living adjustment for inflation during a long-term claim.

Automatic Increase Rider

Automatically increases monthly benefits for a specified period of time. A typical increase is 5% compound.

Future Increase Options

Allows the insured to purchase additional benefit amounts without proof of insurability.

Capital Sum Benefit

Pays the insured a lump sum benefit up to 12 times the monthly benefit if the insured loses the sight of one eye with no possibility of recovery or has a hand or foot severed. This benefit is paid in addition to the other benefits.

Rehabilitation Benefit

To help a disabled insured return to work, this benefit will pay some of the expenses incurred when the insured enrolls in an approved rehabilitation center. This benefit is paid in addition to the other benefits.

Transplant and Cosmetic Surgery Benefit

Under this benefit, any disability arising from donating a transplant organ, improving your appearance or correcting a disfigurement will be covered by the policy.

Types of Disability Insurance Coverage

Social Security

Social security provides income for both retirement and disability. To receive social security benefits, individuals must apply. Applications, quotes, and other information can be found on the social security website. Eligibility is based on being unable to work; applicants must have been disabled for five months and must expect to be disabled for at least 12 more months.

Group Long Term Disability (LTD)

Group LTD is carried by almost half of mid-size to large employers and provides long term benefits for at least 5 years covering about 60% of salary. The premium is usually very low, does not require proof of insurability, and often is fully paid by the employer.

Individual Policies

For individual policies, the applicant needs to qualify and go through an underwriting process, similar to the process required for life insurance. The applicant could be subject to a higher premium or even be declined based on his or her occupation, medical history, or lifestyle. Individual policies are usually purchased by high income professionals because of the cost.

Group Policies

Also called “group long-term disability insurance,” some states require employers to carry this type of insurance anywhere from 26 to 52 weeks.

Workers’ Compensation

Most employers are required to provide this coverage. The amount and duration varies by state. Workers Compensation only pays if the disability occurs on the job, and usually lasts for only a few years. The payments are low.

Disability and Income Taxes

If policy holders pay the premiums for disability insurance, disability benefits are free from income tax. If an employer pays the premiums and employees receive benefits, employees must pay income tax on benefits received as they would on normal income. 85% of Social Security disability payments are subject to federal income tax if income exceeds $34,000 individually or $44,000 jointly.

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