Since disability coverage offered by employers or government programs is often limited, many choose to purchase long-term disability income insurance, which can offer paycheck protection against injury or illness that has an impact on your ability to work and meet your family’s living expenses. Benefits from a disability income policy—in the form of cash payments—can help you meet monthly expenses such as mortgage and car payments or it can pay for training or other assistance you may need to return to work.
Disability income insurance policies differ greatly in how much they pay and under what conditions. One difference occurs in the definition of a disability. Some policies pay benefits if you are unable to perform the duties of any occupation for which you are reasonably qualified by training, experience, and education. Other policies pay benefits if you are unable to perform the primary duties of your own occupation. Some policies combine these features, providing “own occupation” coverage for an initial period, such as one or two years, and “any occupation” coverage after that.
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Individual policies typically cover both occupational and non-occupational accidents and sickness for a selected period of time. Workers, who are covered only by limited employer coverage, sometimes buy individual insurance to increase the amount of their coverage and to ensure portability (coverage that can be moved from employer to employer). Individual policies are sold to the self-employed, professionals and others of diverse needs. Since benefits are designed to replace earned income, most people do not purchase coverage after they stop working.
- Waiting Period: Policies have different waiting periods (elimination periods) before they begin paying benefits. You can lower the premiums you pay by waiting 90 days, six months, or even longer before receiving benefits. If you go back to work after recovering from a disability and suffer a relapse within a specific period of time, such as six months, most policies do not impose a second waiting period.
- Premiums: Disability income policies either have level premiums (constant over the life of the policy) or premiums that increase as you age. If you plan to keep your policy in force for a long time, a level premium policy would be best. If you are uncertain about how long you will need the insurance, a policy with premiums that increase with age may be preferable.
- Non concancellable/guarantee renewable options: Most individual policies are either noncancellable or guaranteed renewable. Noncancellable policies give the policyholder the right to continue coverage as long as premiums are paid on time. The insurer cannot change the premiums or benefits prior to an age stated in the policy, usually 65. Guaranteed renewable policies can be automatically renewed with the same benefits. The premium for this type of policy may be increased but only if the rate changes for the entire class of policy holders. (The policy usually defines how a class is determined—for example, all policyholders in a state who own the same type of policy might constitute one class.)
- Benefit Amount: Some policies require total disability before payment begins, while other policies cover partial disability. Some policies pay benefits if you become ill or injured and are unable to earn a specific amount, such as 80 percent or less, of your income. The amount of income you receive varies by policy. However, benefits from all sources are usually limited to 70–80 percent of your monthly salary. Policies that pay 50–60 percent of salary are most common. Most policies do not replace commission or bonus income.
- Benefit Period: The length of time that benefits can be received varies by policy. Some individual policies pay benefits for a specified period of time, such as two or five years, while others pay benefits until age 65 (or your retirement age under Social Security).
- Residual Benefits: Some policies pay “residual” benefits that make up for loss of income if you can work but are unable to perform your normal responsibilities. Under some policies, the insurer pays for job training or other assistance you may need to return to work, such as modifications to your work environment. Some policies offer cost-of-living adjustments in the amount paid to the insured as an optional benefit.
There are some federal, state, and private benefits available for people who become disabled. It is a good idea to investigate these sources carefully before purchasing disability income insurance, particularly individual coverage. Some policies will not pay benefits if benefits are available through other programs.
Benefits from an employer: Disability benefits from an employer may include workers’ compensation insurance for work-related injuries. For short-term illness, your employer may provide sick leave, short-term disability insurance, or both. For a longer illness—lasting six months or more—your employer may provide group long-term disability income insurance.
Sick leave and short-term disability coverage can range from a few days to as much as a year, depending on your company's benefits and your length of employment.
Group long-term disability coverage through an employer begins when short-term disability benefits stop and replaces part of an employee’s salary if he or she is disabled and unable to work. A typical policy replaces at least half the salary up to a maximum, such as $5,000 per month.
Benefits from group long-term disability policies generally continue until age 65 or retirement age under Social Security, or until the employee is able to return to work. In some cases, benefits may be continued for a time after the employee returns to work.
Social Security: Social Security provides long-term disability benefits based on salary, number of years worked, and total contributions to the Social Security program. It will replace only a limited portion of salary, however, and the qualifications to receive benefits are very strict.
To be eligible for disability benefits, you must have been disabled for five full calendar months with a disability that is expected to last at least 12 months (or end in death). You must also prove that you cannot be gainfully employed at any occupation, not just the occupation you had at the time of your disability.
Other resources: A variety of disability compensation programs are offered by states, fraternal organizations, or insurance companies. Such programs might include workers’ compensation for work-related injuries or illnesses (mandatory in all states). Many states offer vocational rehabilitation programs. Some states—California, New York, New Jersey, Rhode Island, Hawaii)—offer temporary disability programs.
There are also special disability programs for veterans injured in war, federal and state government workers, railroad employees, or miners who develop black lung disease. Insurance benefits may also be available for someone who suffers a disability from an auto accident.