Understanding Disability Insurance
What is disability insurance?
If you have an accident, illness, or injury that prevents you from working, having disability insurance can be helpful. Disability insurance can protect income just like other insurances protect a person's car or home. This insurance can help replace a portion of income when you are out of work.
What does disability insurance cover?
Disability insurance benefits can be used to help pay for everyday living expenses such as rent, utilities, or groceries. It does not cover the costs associated with rehabilitation following an injury or illness.
What types of policies are available?
There are 2 types of disability insurance: short term and long term.
Short-term disability insurance
With short-term disability insurance, a person generally must wait up to 14 days after becoming disabled before receiving benefits, depending on the policy. Short-term disability insurance can help replace a portion of income for up to 2 years.
Long-term disability insurance
With long-term disability insurance, a person generally must wait several weeks to several months after becoming disabled before receiving benefits. Long-term disability insurance can help replace a portion of income from a few years to a lifetime.
Features of disability insurance
It is important to know about 2 different protection features when purchasing disability insurance: noncancellable and guaranteed renewable.
Noncancellable means that the policy cannot be cancelled by the insurance company for any reason other than missed payments.
Guaranteed renewable means that the policyholder can renew the policy with the same benefits, though premiums may increase. If an increase in premiums does occur, it must occur for similar policyholders as well.
Other options to consider
In addition to the basic disability insurance policy, there are several other options to consider. These include:
||What it means
|Additional purchase options
||The insurance company gives the policyholder the right to purchase additional insurance at a later time.
|Coordination of benefits
||The amount of benefits received from the insurance company depends on other benefits received because of the disability. The policy specifies the total amount received from all policies combined. It makes up the difference not paid for by other policies.
|Cost of living adjustment (COLA)
||COLA increases disability benefits over time to reflect the cost of living. This often comes with a higher premium.
|Residual or partial disability rider
||This allows the policyholder to return to work part-time, collect part of his or her salary, and receive a partial disability payment.
|Return of premium
||Requires the insurance company to refund part of the premium if no claims were made during the time frame specified in the policy.
|Waiver of premium provision
||The policyholder does not have to pay premiums on the policy after being disabled for 90 days.
How to purchase disability insurance
Some people receive group disability insurance through their employer. Others may need to purchase disability insurance through a private insurance agent. Social Security also may provide disability benefits, based on salary and number of years worked. For more information, visit ssa.gov/disability/.
How much does disability insurance cost?
When it comes to cost, no 2 policies are the same. Some offer premiums that stay the same for the term of the policy, while others have rates that increase with a person's age. That's why it's important to carefully weigh a plan's features and benefits when selecting a policy.
Important things to know
All policies define "disability" differently. It's a good idea to make sure that your disability insurance covers the things you need. Also make sure that the policy cannot be cancelled and that renewals are guaranteed as long as premiums are paid on time and in full. If the policy cannot meet these conditions, you may want to shop around for a plan that better suits your needs.