Providing Comprehensive Insurance Policies

Disability Insurance

Policy FeaturesDisability income insurance is not intended to fully replace your income. Rather, the benefit should be sufficient to financially sustain you during your disability.

Short-Term

Short-term disability benefit payments are usually based on a specified percentage of pre-disability income (e.g., 60%).  The length of time benefits are paid varies from policy to policy, but the maximum benefit period is usually less than 1 year. Short-term disability coverage may be used to fill in the elimination period before long-term disability benefits begin.

Long-Term

Benefits may continue anywhere from five years to the remainder of an individual’s life, depending on what is purchased.  Long-term disability insurance is generally considered protection against a catastrophic illness or injury, but many long-term disability claims result from common medical conditions that cause an increasing level of impairment over time.  It is important when purchasing coverage to check a policy’s maximum benefit period.

The following policy provisions will impact the disability benefits you receive:

• Amount of Benefit – The insurance company will review your income history to determine the disability income benefit they will offer you.
• Definition of Total Disability – To receive benefits, you must meet the definition of total disability as defined in the policy. Each policy is different, and you should check the definition of total disability within a policy before buying it. You should determine whether the policy pays benefits for disabilities resulting from both accidental injury and illness. An accident-only policy may not be adequate to meet your needs.  Some policies would pay if work related or not, so be sure you understand the policy you are purchasing.
• Elimination or Waiting Period – The policy will specify the number of days you must be disabled before qualifying for benefits. Waiting periods may be anywhere from 0 to 730 days.
• Benefit Period – The policy will specify the length of time you will receive monthly benefits. Benefit periods may be a fixed period of time in months or years or for lifetime.

Many Disability Income Policies Offer Supplemental or Optional Benefits

• Cost of Living Adjustment (COLA) – Increases your disability benefits over time based on a flat percentage or on the increased cost of living measured by the Consumer Price Index.
• Increase in Benefit – Grants you the right to purchase additional coverage to increase the disability income benefit amount provided under the policy in the event your earnings increase.
• Return of Premium – Requires the insurance company to refund a portion of your premiums if no claims are made for a specified period of time stated in the policy.
• Partial Disability Rider – Allows you to return to work part-time and receive partial benefits if you are not ready to return to work full-time.
• Residual Disability Rider – A residual disability is one that prevents you from performing some of the duties of your occupation (as defined in your policy) or from performing your occupation on a full-time basis (same as partial disability). A residual disability can also happen when you return to work full-time but lose income because your business or practice has suffered due to your absence. A residual disability rider is a common benefit offered to self-employed people.
• Waiver of Premium Provision – Allows you to stop paying the premium for the policy if you are disabled longer than a specified period of time, usually 90 days.
• Guaranteed Renewable: The policy cannot be terminated (except for nonpayment of premium) and benefits cannot be reduced.  However, premiums may increase.
• Non-Cancellable: The policy cannot be terminated except for non-payment of premium.  Premiums cannot increase and even if your income decreases, the benefits cannot be reduced.

Some Disability Income Insurance Policies Exclude Coverage Under Certain Conditions

• Pre-Existing Conditions – If you have a severe or chronic health condition, the insurance company may exclude benefits permanently for the condition or they may refuse to sell you the policy.
• Act or Accident of War – Injuries or sicknesses that result from war.
• Alcoholism, Intoxication and Drug Addiction – Injuries or sicknesses that result from alcoholism, intoxication or drug addiction as defined and determined by the laws of the state where the loss or cause of the loss was incurred.
• Self-Inflicted or Work-Related Injuries – If your disability is self-inflicted or work-related, the disability income policy may not pay benefits.

A pre-existing condition is a health condition you already have when you buy a policy. Any condition, whether or not revealed on the application, for which symptoms existed prior to the effective date of coverage, causing an ordinarily prudent person to seek diagnosis, care or treatment, or one in which medical advice or treatment was recommended by or received from a physician may also be considered a pre-existing condition.

Make sure you understand the definition of pre-existing condition and how long such conditions will not be covered. Read the limitation and exclusion provisions of your policy very carefully.

Individuals Versus Group Disability

Group disability insurance that may be offered to you by your employer or another group is usually much less expensive than coverage you can buy directly on the individual market.  But there are differences between employer/group disability insurance and individual disability insurance that you should know about. We review some of those differences below.Also, if you are covered by a group disability income insurance policy, you should review it to see if the coverage meets your needs. You may want to consider supplementing your group coverage with individual coverage; or, if you don’t have disability income insurance through an employer or another group, you may want to consider buying an individual disability income insurance policy to make sure you have income, if you become disabled. 

1. Cancellation and Portability
   • Individual Coverage: Individual policies are typically guaranteed renewable and/or non-cancellable, which means they will continue unless you do not pay the premiums or cancel the policy yourself.
   • Group Coverage: Keep in mind that disability coverage can be cancelled by an employer. You may be able to take the coverage with you if your employment is terminated, as long as the group policy has a conversion and/or a portability provision.
2. Exclusions
   • Individual Coverage:  There will be exclusions in an individual policy, but for the most part they will only relate to any pre-existing conditions you have personally.
   • Group Coverage:  A group policy will most likely have more exclusions.
3. Benefits/Options
   • Individual Coverage: An individual disability insurance policy will offer you a wide range of choices.
   • Group Coverage:  A group policy will provide whatever the employer chooses for benefits/options. While it’s possible that your employer’s group plan offers all of the features you want, the individual plan will give you more control and typically more choices.
4. Definition of Disability
   • Individual Coverage:  Individual policies typically will offer the most beneficial definition of own occupation which will cover you under the widest range of circumstances.
   • Group Coverage: Group policies typically have two definitions of disability. The first definition of disability is referred to as “Own Occ”, which is tied to the performance of your own type of occupation found in the workforce, not the specific duties you have with your employer. After a period of time, normally 24 months, the disability definition will change to “Any Occ”, which means that in order to qualify for continued benefits, you must be unable to perform the duties of any occupation you are suited for, based on your training, education, and experience.

5. Benefit Levels and Periods

1. • Individual Coverage:
     • Benefits under an individual policy can potentially be paid for the remainder of your life.
     • An individual disability insurance policy is more likely to provide you with the fewest gaps in coverage and offer higher monthly benefit limits.
     • Riders can be purchased for cost-of-living adjustments and future benefit increases.
     • Benefits will not be reduced by other income received during the claim (e.g., Social Security).
     • Individual policies are more generous and can include various income sources to determine the highest benefit amount you can purchase.
     • If you purchase an individual policy with a set benefit amount, you do not have to document your income at time of claim.
     • Always seek advice from your tax professional.
   • Group Coverage:
     • The Maximum Benefit Period under a group policy is typically to age 65.
     • Group policies may only cover short-term disabilities up to 6 months or they may include long-term coverage but at a small percentage of your normal income.
     • Group policy benefits are reduced by other income received, such as Social Security, retirement benefits, sick leave, etc. The reduced disability benefit combined with the other income received by the claimant is intended to achieve the percentage of pre-disability income stated in the policy. The policy may include a minimum benefit.
     • Group disability coverage is tied to your W-2 income or base salary. Benefits, bonuses, commissions, retirement plan contributions and incentives are typically not included when calculating benefits.

6. Medical Exams/Underwriting

• • Individual Coverage:  Individual disability policies usually require that you have a medical exam. Whether you are granted a policy, which exclusions apply, and the cost of the policy all rely on the outcome of the exam.
  • Group Coverage:  Group disability insurance will typically be offered without any medical exam or other proof of health if the employee applies for coverage within 30 days of being hired.