Disability Insurance Basics

It’s a fact that most Americans are only a few paychecks away from financial hardship. With today’s active lifestyles, even a sprain can keep someone from going in on Monday morning. In my practice, I often hold seminars where I ask the question, “Who here has ever been disabled?” Very few, if any, hands go up. I then change the question. “Who here has ever been hurt or sick and couldn’t go to work?” Everyone raises their hand. It’s a matter of definition. Disability Income insurance is a branch of health insurance that protects your ability to receive a paycheck.

There are two types of disability insurance. A.) Short-term and B.) Long-term. Short-term disability is by far the most utilized. An average disability lasts six weeks. Very few people can go six weeks without a paycheck. A client of mine, a registered nurse, was in excellent shape, worked out and even ran her first half-marathon at age 41. She didn’t think she’d ever become disabled. During squats with her trainer, she felt something pull in her back. On the way home, she had to pull over as she was in excruciating pain. At the hospital, she found she had a bulging disc, which was pressing on her sciatic nerve causing the pain. She was out of work for exactly 6 weeks.

Disability policies really aren’t that complicated, although most people and quite a few insurance agents think they are. Generally they all have a period of time you must be disabled before the benefit kicks in and they start paying you. They also have a maximum time limit they will pay before the benefits stop. The longer the period of payment, the more expensive it is. Additionally, disability plans will only cover up to about 2/3 of your gross income. If the premium comes out of your paycheck (if offered at work), you’ll want to have your employer deduct the premium after taxes, or out of your net paycheck. This is the exact opposite of other payroll-deducted benefits like health insurance, accident insurance, etc. The reason is that if you deduct the premium before taxes are taken out, when you have a claim, your benefit will be subject to income taxes. Far better to pay a small amount of tax on the premium rather than having to pay full income taxes on the benefit when you need all the money you can get.

Of the two types of disability, short-term disability can typically only be purchased on a group basis (i.e. through your employer). The difference between the two are the time periods involved. Short-term disability typically will start immediately after an injury. For illnesses, they typically will pay after one or two weeks of being off work. The reason for the difference should be plain. Insurance companies don’t want to pay every time someone calls off with the flu and employers don’t want to encourage ‘sick’ days. Short-term disability usually can be purchased with a 3-month to 2-year benefit period.

Long-term disability on the other hand, is a little more complicated. Short-term is offered at work far more than long-term and is fairly straightforward. Long-term disability plans can be purchased with a 2, 5, 10-year or longer benefit period. Some will even last until you turn 65. Rarely you can find a disability plan that will pay for your whole life. The waiting period before benefits start can be one to six months or more. The average waiting period is 90 days. Because long-term disability plans are typically used for chronic situations that may have a limited recovery, various types and benefits (called riders) are available. Probably the most important one is what is called an “own occupation” policy. It says that if you cannot work in the job you were trained for (by schooling or experience) that you are considered disabled and eligible to receive benefits. The nurse in my example would be considered disabled had her disability been permanent because she couldn’t continue nursing. There are many other types of disability policies with various definitions of what a disability is. If you can’t get an own occupation policy, or if you don’t need that level of protection, then a “non-cancelable” policy is the next best thing. While they may state you must be unable to perform any job, they also can’t cancel you or raise your rates as long as you pay your premium.

Additionally you don’t have to be totally out of work to get benefits. Options such as partial disability and reduced earnings disability can be a part of a policy.

Other options like coordinating with social security or other governmental programs (many but not all states have disability programs) can reduce your premium, but also will reduce your potential benefit. It’s important to realize that injuries on the job are covered by worker’s compensation and are not eligible for disability benefits. A good insurance agent should be able to help you make the best choice to protect your most important asset; your ability to earn an income.

Until next time, stay healthy!