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The possibility of becoming disabled seems so remote to most Americans, that few of us have enough saved to cover three month’s worth of living expenses in the event of a major accident or illness; according to the Council for Disability Awareness (CDA), most adults in this situation are likely to rely on other income sources, such as paid vacation or sick time, or spouse or partner earnings. But sobering statistics from the Social Security Administration (SSA) reveal our chances of becoming disabled are much higher than we think. The SSA reports that a quarter of today’s 20-year-olds will experience a disability before they retire.
For the people affected by disability during their careers, disability insurance is an enormous help. Disability insurance protects a policyholder’s earned income against the risk that an injury or disease prevents them from performing the core functions of their job.
There are several classifications of disabilities, both permanent and temporary, that can prevent someone from working. The Centers for Disease Control and Prevention (CDC) considers a disability to be any condition that chronically inhibits one or more of the following functions:
- Mental health
- Social Relationships
As The Cornell University Law School explains, not all conditions considered disabilities by the CDC are protected under employee protection laws or are eligible for coverage by disability insurance. For example, alcoholism is not protected by workplace discrimination laws set forth in the Americans with Disabilities Act of 1990 (ADA); however, as CDA President Barry E. Lundquist noted, alcoholism is “typically covered as a disability under private disability plans.”
Public Disability Programs
There are two types of disability protection in the United States—public, government sponsored programs and employer or individually purchased private insurance. According to Lundquist, public disability insurance programs provide a critical safety net for nearly 11 million Americans living with disabilities, as well as their spouses and children. Every year, the government provides nearly $130 billion in Social Security Disability Benefits (SSDI) to persons who are permanently or temporarily disabled.
In addition, The Veteran’s Administration (VA) provides disability benefits for military service members who are disabled “as a result of disease or injury incurred or aggravated during military service.” The VA provides its benefits on a tax free basis. Claims can be filed directly through the Veterans Administration.
Private Disability Plans
Private disability insurance has its own subset of coverage types, which include group disability, individual disability, high limit disability, key person disability and business overhead expense disability—worker’s compensation programs are also a form of disability insurance.
Individual Disability Insurance
Individual disability insurance policies normally require that the beneficiary is healthy enough to be approved for coverage. Most individuals purchase these policies one-on-one, but discounted coverage may also be offered through the beneficiary’s employer.
There are two major categories of individual disability insurance: short and long term plans. Short term disability insurance is intended to provide coverage for a limited period of time. These policies typically pay out rapidly, usually within 14 days of an income disruption. Depending on the policy, payments for short term disability plans typically last between one month and one year depending on the policy.
Long term disability policies on the other hand have a longer waiting period before they begin paying benefits; waiting periods range from 30 to 720 days, with 90 days being the most common waiting period. Long term disability policies pay their benefits out until a maximum dollar benefit is reached or a specified period is reached—be that period a few years or, in some cases, a lifetime.
According to a recent article from Bloomberg Businessweek, the cost of individual disability coverage varies by several variables, such as age, gender, occupation, health status, and level of coverage. Generally speaking, men who do not receive disability insurance from their employer will spend between 2 and 2.5 percent of their annual income to receive coverage, while women will spend between 3 and 4 percent; this disparity is due to the higher frequency of disability claims filed by women.
Group Disability Insurance
Lundquist says group coverage is “by far the most popular” way to obtain disability insurance. Group coverage is provided by an employer, to whom the master policy is issued; each employee receives coverage through a certificate of insurance under this policy. The employer may pay for the group disability insurance entirely or partially. In other cases, coverage may be offered on a voluntary basis; under these circumstances, the employee may choose to purchase coverage and pay for it through payroll deduction.
Like individual disability insurance, group plans may provide coverage for either short or long term disabilities. Many employers offer both types of coverage; in this case, short term disability payments stop when the long-term plan kicks in. According to the Bloomberg Businessweek article, most group plans effectively compensate beneficiaries 40 to 60 percent of their salary; this typically equates to a monthly cap of $5,000 or an annual maximum of $60,000. In order to raise the amount of compensation to 80 percent of their salary, many beneficiaries opt for additional policies from private insurers.
High Limit Disability Insurance
This form of disability insurance is designed to pay a percentage (60% for example) of the covered individual’s income should they become disabled. This type of coverage is usually a supplement to other disability coverage and is often, but not always, part of a group plan.
Key Person Disability Insurance
This type of disability insurance is not paid to the disabled person but to their employer. Key person disability protects companies against the loss of a key employee due to disability. The insurance pays its benefit directly to the company so they can then use it to help defer a portion of the cost to paying for the key person’s replacement.
Business Overhead Expense Disability Insurance
This type of disability insurance works on the same principal as key person except that it covers overhead expenses in the event that a business owner becomes disabled. Benefits vary and can include expenses relating to office mortgages or rent, maintenance, utilities, leasing or other expenses the policy defines as related to the organization’s overhead.
Known by a variety of names: workers’ compensation, comp or compensation, this coverage provides payments directly to individuals who become injured on the job. This is almost always an employer-sponsored disability coverage and it is required in most states.
Partial Versus Total Disability
A common misconception is that becoming disabled makes you eligible for a claim under your disability coverage. Insurance companies make a very important distinction between “partial” disabilities and “total” disabilities. It’s important for policyholders to understand how their provider defines these conditions and the kinds of support provided in the event of each.
For most insurers, a condition is considered a “partial” disability if it limits your ability to do your job, but does not stop you working entirely. A “total” disability, on the other hand, will keep you from working altogether. The areas between these two definitions are, of course, grey. Disability insurance, like any other form of insurance, is a contract. Standards will vary from provider to provider. Be sure to check with your provider to make sure that the classification of your disability is updated, otherwise you may be receiving lower benefit payments or limited coverage options.
Disability Insurance Renewability
Another important consideration to make regarding your disability insurance policy is the extent to which it will change if your disability worsens over time; this factor is known as renewability. Currently there are three levels of renewability:
- Non-cancellable: This type of policy ensures that no changes will take place with regard to your premium rate, monthly benefits, or policy benefits. Under no circumstances may your provider alter any aspect of the policy without your expressed permission; for this reason, non-cancellable and guaranteed renewability offers the highest rate of protection to beneficiaries.
- Guaranteed: Despite the name, this level of renewability does not offer the same level of protection as ‘non-cancellable and guaranteed’ policies. ‘Guaranteed’ coverage means your provider is unlikely to make any substantial changes to the policy, but they are within their legal right to do so.
- Conditional: This option offers virtually no protection to ‘beneficiaries’; if your disability worsens, then it is very likely your premium will increase substantially.
Disabilities are impossible to predict; not only in terms of when and where they occur, but also in how they affect individuals who experience them. While disability insurance will not undo the agony and mental anguish of an ongoing physical, emotional, or psychological condition, this type of coverage will relieve much of the financial stress and provide the means for disabled people to support themselves when they become unable to work.
We at The Simple Dollar would like to extend our thanks to Council for Disability Awareness President Barry Lundquist for speaking with us and sharing his insights and data about this all-important topic. You can reach President Lundquist through the CDA’s contact form.