“Can you define disability insurance?” and “What is disability insurance?” are both questions that I hear and see posted online. There are so many types, so the answer is difficult. The definition of disability insurance can vary widely, depending on the coverage. For some, it may be nothing more than state requirements or social security disability insurance. For others, it can be a robust plan that allows you to work in another occupation, while earning your full disability insurance benefit. What kind do you have? What kind do you want? Contact us today to get a proper insurance policy that covers EVERYTHING you need.
How Do You Define Disability Insurance? (or, “What is disability insurance?”)
To define disability insurance will ultimately depend on the policy you have. Disability insurance comes in many forms, but there are three main types: Social, short-term, and long-term. So if you ask, “What is disability insurance?” the answers can vary.
Social disability benefits
A social disability benefit is likely the coverage that most people are familiar with. They include social security disability insurance benefits, workers’ compensation, and disability insurance, and for a few states (like NY and NJ), require state disability insurance.
The coverage that social plans offer is limited in several ways. For instance, qualifying for workers’ comp requires you to become disabled while performing the normal duties of your profession. It will cover illness and accidents, but they would need to occur due to a direct result of your work.
Social security disability insurance (SSDI) is another example of a social policy. To qualify, you must have first earned enough work credits and then be able to prove you are medically disabled. Unlike most individual disability insurance policies, social security disability insurance defines disability as the inability to engage in any substantial gainful activity (SGA) by any medically determinable physical or mental impairment(s) which will result in death or will last for a continuous period of not less than 12 months.
Besides these programs, five states (New York, New Jersey, Rhode Island, Hawaii, and California) have state-funded programs for short-term disabilities. These programs are built for short-term disability and typically last 26-52 weeks. Unlike individual disability insurance policies, these plans consider your last 12 months of income in determining your benefit and have low limits.
Short-Term Disability Insurance
If you are looking to purchase short-term disability insurance, you can complete our contact form or contact us directly. Individual short-term disability insurance is a product typically designed to cover the elimination period of a long-term disability policy or when securing a long-term disability policy is not financially viable.
So, what is short-term disability insurance? The best short-term disability insurance will have many of the same features and benefits that a long-term disability insurance policy has. Essentially, these policies come in two forms: social short-term disability insurance and private short-term disability insurance.
We have outlined social coverage earlier in this article, but for most people, private (or individual) short-term disability insurance will be a much better option for two main reasons: definitions of disability and more substantial coverage.
Definitions of Disability
Social coverage is a very poor option. Proving a disability with a social policy is very difficult and often results in disappointment when a claim is made. Purchasing an individual short-term disability plan will have a much simpler claims process.
The definition of short-term disability insurance is fairly self-explanatory. Typically, if you’re unable to do your regular profession due to illness or accident for less than 1 year, a short-term disability plan can help you to offset your income loss.
Most people cannot go more than a few months without income before they have financial problems. Having a short-term disability policy can help protect you from being one of the shockingly large percentage of people who will become disabled during their working career, without having paycheck protection in the form of disability insurance.
One in four of today’s 20-year-olds will become disabled during their career (Source: Social Security Administration, Basic Facts, Feb. 7, 2003). That is very problematic, especially considering that most Americans live paycheck to paycheck.
Having coverage above what is offered by the government provides additional security.
More Substantial Coverage
Social coverage typically has low benefit amounts. If you’re a high income earner, having a benefit of only a few thousand dollars is not meaningful. Even a short-term disability insurance plan will allow for limits much higher than social coverage. Short-term disability insurance can have a shorter elimination period than a long-term plan, and it has a shorter total benefit period (normally less than 2 years).
If you have to ask: “What is disability insurance?”, you more than likely need it. Even though it isn’t ideal, having a short-term disability insurance policy is still superior to relying simply on social coverage.
Short Term Disability Insurance for Pregnancy
One thing of note, I am often approached by people looking to purchase one of these policies thinking it will cover lost wages due to pregnancy/birth. They will ask me, “Does disability insurance cover pregnancy?” and mostly, the answer is no. Short-term disability insurance for pregnancy and short-term disability insurance for maternity does not exist in the individual market.
Some group plans (and state plans) may offer disability insurance for pregnancy, but there is no best short-term disability insurance for pregnancy. Complications from pregnancy are often covered by most individual plans; however, a normal birth will not be covered by a private disability insurance policy.
Long-Term Disability Insurance
What is disability insurance and specifically, what is long term disability insurance? It is an insurance policy, offered either through your work or purchased individually that will cover a disability for an extended (typically from 2 years up to age 70) period.
For most high-income earning professionals, especially those under the age of 50, your most valuable asset is your future earnings. Almost everyone should have long-term disability insurance. As long as your monthly income exceeds whatever social coverage you’re entitled to, not having long-term disability insurance is a huge risk.
How does long-term disability insurance work? The answer: It depends. These policies vary greatly from carrier to carrier and how the policy is designed. To learn the components of a disability insurance policy and how it works, THIS ARTICLE is very helpful.
The Key Components of a Disability Insurance Policy
To save you some time, an individual disability insurance policy has 6 key components:
- The elimination period. This is your “deductible”, but instead of using money, a disability insurance policy uses time. Your elimination period is the time you’re required to be disabled before the policy will pay.
- The occupation class. Besides your health, your occupation class has a direct effect on your premiums (the better your occupation class, the lower your premiums).
- Policy definitions. These dictate what allows you to make a claim. The more specific the definitions, the easier it is to make a claim.
- Benefit amounts. This is how much your policy will pay monthly, should you qualify for a claim.
- Benefit length. This is how long your policy will pay your benefit amount. It also depends on definitions whether you can perform any other occupational duties while receiving benefits.
- Policy riders. These are add-ons to your base policy, such as residual benefits, future purchase options, and cost of living increases. Riders will increase the cost of your policy, but add benefits that can be very important.
How Do These Components Work Together?
These parts work together to form your disability insurance policy. These components all directly affect your premiums. Shorter elimination periods are more expensive than longer ones (90 days is a default period). Higher occupational classes (like office jobs) are less expensive than lower ones (like a registered nurse). The stronger your definitions, the more expensive your policy will be. Higher benefit amounts and lengths will equate to higher prices. Riders are add-ons to your policy that add benefits and subsequently increase your premiums.
Long-term disability insurance is a necessary purchase for any high income professional. If you work for a corporation, you might have group coverage. You should understand exactly what type of coverage your employer offers. Compensation, such as commissions and bonuses, may not be covered under a group plan. Also, some group plans have caps on their benefit amounts. For a high-income earner, these caps may be as low as 5-10 thousand per month. If your company has a plan like this, these limitations could leave you woefully underinsured.
There is no perfect disability insurance policy for everyone. Cost, health, and existing coverage will all come into play in selecting the right disability policy for your goals. If you need to ask: “What is disability insurance?”, then you need assistance. Thankfully, we are here to help. Start by finding out how much disability insurance you need here: http://highincomeprotection.com/disability-insurance-need/ and then fill out the quote form to your left to get a customized illustration, detailing all of the major carriers who fit your criteria. As always, please call me directly at 888-636-2310 if you have questions.