Disability Insurance Guide

Guide to understanding and purchasing disability insurance policies.

Here is a guide I put together for my clients to help in understanding and purchasing disability insurance.  If you would like an individual quote for disability insurance using your information, please fill out and submit the short form here.

Disability Insurance is referred to as a Living Benefit policy because it is something that is paid to the owner, instead of to a beneficiary. It is there to help both you and your family in case of disability. This insurance may be the most important insurance there is. There are two reasons why it is so important.

1. Your Health is your Wealth. The most valuable asset most of us own is our ability to earn an income. Just about every asset we have or will acquire comes from paying for it out of our income. This includes homes, cars, rental properties, investment properties, savings, businesses, vacation properties and more. So does it make more sense to insure the source of all the assets, or the assets themselves? Your ability to earn an income is the goose that lays the golden eggs. Better protect the goose.

2. You are very likely to have a disability. According to the Social Security Administration, a 20-year-old in 2011 had a 30 percent chance of being disabled for at least six months before retirement. Other sites quote somewhat different but similar statistics. That is a scary thought. How long could you go without a paycheck? What if the disability is for years or is permanent? In comparison the odds of a home burning down for which we buy fire insurance is about .08 percent, or less than 1 in one thousand. Disability insurance is a fairly complicated product. That is because it is designed to cover a wide group of people that have different levels of risk in their jobs, and different needs as to what is important to them.

Disability Insurance is Issued using a Grid

Disability insurance companies realize that some workers are much more likely to get injured or sick than others. So it costs them much more to insure some workers than others. An example of an expensive to insure person would be an oil worker actively working on a rig. A less expensive person to insure would be an office worker who is not exposed to hazards like dangerous chemicals, physically working with large machinery and working at great heights. So what? Well, where you fall on the grid is important because it determines not only how expensive your coverage will be, but what benefits are available. There is a huge difference as will be explained below. Also there can be some wiggle room to bump up one place on the grid if you know what the underwriting is looking for, and present your case in the best light.

Important Aspects of a Disability Policy

These are the components of a disability policy bought from an insurance company.

Monthly Amount of Coverage

This is the maximum amount of dollars that a disability policy will pay when you have a qualifying disability. You can’t buy any amount of disability insurance you want as the insurance companies do not want people to be over insured. The maximum amount you can buy is generally about 60% of your current income. However one thing to keep in mind is that when one receives a disability benefit, it is paid tax free. You do not have to pay income tax on disability payments.

Type of Premium

Premiums can be adjustable or guaranteed not to change or increase. Adjustable premiums can change based on interest rates or the amount of claims received. Obviously it is much more valuable to have guaranteed premiums, please check what type of premiums your policy will have.

Definition of Disability

  1. The first and least desirable definition is generally referred to as “any occupation.” This definition states that you are considered disabled if because of a disability, there is no occupation you can do, taking into account your education and experience. So if you are disabled in your occupation, but the insurance company believes you would still be suitable to do another occupation, they do not have to pay you. It would not matter if that other occupation is not actually looking for employees, or not available in your area. This is the type of insurance many people have if they have group insurance at work.
  2. The next definition is referred to as “regular occupation.” This is a much better definition of disability that states that if you cannot due your regular occupation because of a disability, it is your choice whether or not you choose to work in a different occupation you might be able to do. This puts much more control into the hands of the disabled person.
  3. The third definition is better yet, but available only to experienced specialists in their field. It is “own occupation” and states that if you are disabled from your occupation, you can choose to work in any other occupation, and still receive your benefits.

Maximum Payout Period

You can purchase disability policies that pay benefits for 2, 3, 5 or 10 years, to your age 65, and sometimes even lifetime benefits. The advantage of policies that pay for shorter benefit periods is that they are cheaper. However if you have a permanent disability, the policies with shorter payouts are not going to do one much good when the benefits expire, but there is still a loss of income. Age 65 coverage is the best. Lifetime coverage is also good, but not generally available anymore, and very expensive.

Elimination Period

The elimination period is how many days one has to be disabled before the benefits start. Common periods are 30, 60, 90 and 120 days. Longer elimination periods like one or two years are also available for special circumstances. Think of the elimination period like the deductible on your house insurance policy, the larger the deductible, the cheaper the insurance. Many of my clients choose 90 days as the best option for covering the loss of disability at the most affordable premium. If you choose a 90 day wait that does not mean you receive a disability check on day 91. On day 91 you may be owed one day of disability benefits, but the cheques are sent monthly. Realistically you would be getting the first check sometime after day 120. So choose an elimination period you can live with.

Partial and Residual Benefits

Most Disabilities are partial or residual disabilities, as opposed to total disability but you are still at work, or you can do all of your duties, but not on a full time basis because of the disability. Partial disability and residual benefits cover these situations. These options may be built into the policy, or available as an additional paid benefit. Partial disability riders are the simpler of these two options. If you can show that you cannot do one or more of your regular duties, or work more than half time, you will get ½ of the monthly benefit you purchased for up to 6 months, 12 months or 24 months depending on the rider. Residual benefits are a better solution that pay what percent of income you have lost based on your disability. This benefit usually pays for the same length as the benefit period. So a policy to age 65 would be able to pay residual benefits to age 65. As an example, let’s assume one has a monthly benefit of $5,000 and a disability that causes one to lose 60% of one’s income.

Integration with other Disability Benefits One May Have

Many, but not all disability policies have integration with other types of insurance. Benefits can be reduced by insurance your receive from other sources such as workers compensation, driving insurance and group insurance. The reason for the integration is to avoid over insurance. I prefer policies that have little or no integration.

Other Important Optional Benefits 

Cost of Living

This is an option that my clients have included on just about every disability policy I have put in force. It indexes you benefit to account for inflation. If you had a permanent disability and a $5,000 per month benefit, you would receive that same payment each year regardless of inflation. With the cost of living benefit the payment will increase each year based on a formula tied to the inflation index. This means you will not be living on a fixed income.

Future Income Options

This is another very important option. It protects your future insurability by giving you the right to buy more protection in the future regardless of your future insurability. The only thing you have to show is that you have enough income to justify the increase. As an example, when I was selling disability policies over 25 years ago, some policies where as small as $1,000 per month of benefit. Today very few people would think that is a reasonable amount of coverage, but if you lost your insurability and did not have future income options, you would be stuck at that coverage amount for the rest of your working life.

There are still more definitions and options to consider such as the definition of income, presumptive disability, resumption of disability, survivor benefits, reduced elimination period if hospital confined and others. I have covered that areas that I feel are most crucial to most situations. I certainly recommend that you buy your disability insurance broker who can walk you through the many types of coverage and options available to get the right policy for your situation.

For a free no-obligation disability insurance quotation please fill out and submit the contact information here.

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