Imagine for a moment that you, or your spouse, suffered an injury or became sick and were unable to work for an extended period. It might be a matter of months — or years. Would you be able to pay the bills? No one likes to think about this situation — it’s scary. But what’s even scarier is not having a plan if it happens.
According to the Council for Disability Awareness (CDA), over 25% of today’s 20-year-olds can expect to be unable to work for at least a year due to a disabling condition before reaching normal retirement age.
What Is Disability Income Insurance?
Disability income insurance helps you make a plan for this scenario. You choose a policy and pay a premium. If disability strikes, disability income insurance will provide a certain level of monthly income for a specific period to help you pay the bills.
What Types of Disability Policies Are Available in Central PA?
One of the first things to be aware of when you’re searching for a disability insurance policy is that there are different types. Each of these different types of policies comes with its own set of restrictions and guarantees, so it’s important to understand these types of policies up front, so you know which one you prefer:
1. Guaranteed Renewable
In this type of disability insurance policy, the insuring company cannot make any changes to the policy once it’s been issued. That means, given that the premiums are paid on time, the policy will be renewed and unchanged throughout the benefit period — that is the period the policy was purchased to cover.
As the insured individual, you are the only person with the power to terminate the policy. Rates on these policies may increase unless a specific rate is guaranteed, but this only happens if a rate increase applied to all similar policies within your state of residence — in other words, your premium can’t be singled out for an increase.
The terms of this type of disability insurance policy are very similar to the guaranteed renewable. The insuring company cannot make any changes to the policy, and it will remain unchanged and renewed each year throughout the benefit period.
The difference is in the cost — premiums also cannot be changed throughout the entire benefit period. With that peace of mind for a consistent cost comes a higher price tag — premiums for this type of policy will be more expensive than guaranteed renewable policies.
3. Group Long- and Short-Term Disability Plans
These types of disability plans are most common in a business environment as an employee benefit — they’re often partially or wholly paid by the employer. Short-term plans usually have a benefit period of 13 or 26 weeks with a shorter elimination period — or the amount of time you have to wait before the insurance company will pay benefits.
In this case, that’s somewhere between 7-30 days. Long-term plans have a wide range of benefit periods, from two years all the way up to “to age 65.” These plans can also be voluntarily offered by an employer, in which case the employee will usually pay the majority, if not all, of the premium.
4. Voluntary Job-Site Disability Plan
This type of disability insurance policy is usually offered by the employer but at the expense of the employee. There is often a presentation onsite where employees can enroll in a policy. These policies usually come with a shorter benefit period, although longer benefit periods are possible.
You’ll find the premiums to be very affordable, but that’s usually because benefit amounts are less than those offered through individual policies. However, these plans can be a great choice for hourly workers, and others who are searching for a more affordable alternative to individual plans.
Short-Term Disability Insurance vs. Long-Term Disability Insurance
In addition to having different types of policies available, there are also two main types of disability insurance — short-term disability insurance and long-term disability insurance. The main difference between these two is in the benefit period and the elimination period.
As you may be able to guess, short-term disability insurance comes with a shorter timeline for both benefit period and elimination period. The majority of these policies will cover you for three to six months, but some may extend all the way up to two years. The elimination period is up to two weeks — meaning you would need to wait up to 14 days before your insurance benefit would kick in.
Coverage amounts vary. Usually, individuals rely on short-term disability insurance to cover somewhere between 50 and 70 percent of your income until you return to work, or your coverage period ends. If you don’t have an emergency fund saved up to cover three to six months of your salary, in case of a disability, short-term disability insurance can be a great solution to provide financial protection.
A long-term disability insurance policy is meant to cover you for an extended period — several years. In fact, many benefit periods are set at “up to age 65,” meaning that if you suffer a disability, you can receive benefits from long-term disability insurance until you turn 65 years old or normal Social Security Retirement age — at which point you would begin receiving full Social Security benefits and be covered financially from that.
The elimination period is also longer in a long-term disability policy, often somewhere in the three to six-month range. You would need to wait up to six months before you can start collecting the insurance benefit. Coverage amounts vary, just like short-term disability insurance. You have the opportunity to choose how much of your income you want the benefit to cover.
Short-term disability insurance is a great asset for those who want to be sure they are covered until they have an emergency fund saved and for those looking for a maternity leave solution. However, many choose to invest in long-term disability insurance, as replacing income for several years due to a disability brings a significant potential benefit.
Factors Impacting the Cost of Disability Insurance
All of this sounds like a great way to financially secure your future — but what’s the cost? Premiums are likely to be somewhere between one and a half and three percent of your gross income — but the short-term disability insurance policy and long-term disability insurance policy costs greatly vary depending on several factors. Age, sex, tobacco use, occupation and policy details are all used in determining the cost of your policy.
Here are some of the ways these factors can affect your disability insurance policy:
- Older age means more expensive premiums.
- Females are more expensive to cover than males.
- Smokers may pay up to 25 percent more than the same policy for a non-smoker.
- Blue-collar occupations can expect to pay more than white-collar occupations. An occupational class system is used that has historical data on claims made from each of these job categories.
- If you select a longer elimination — or waiting — period, you can expect a more affordable price.
- Longer benefit periods — the amount of time you are covered — come with a higher cost.
- Higher benefit amounts translate to higher premium payments.
- Additional benefit features may be available by your insurer for an additional cost. These features could also be included in your policy up front, with the ability to remove them to make your policy premium more affordable.
Important Questions to Ask When Shopping for Disability Insurance
If you’re educating yourself on short-term and long-term disability insurance policies, it’s important to know what questions to ask as you’re shopping for a policy that fits your needs. Here are some of the questions you should be sure to ask when you’re shopping for disability insurance.
What’s My Monthly Benefit?
Your monthly benefit is the amount of money you would get paid by the insurance company each month if you had a disability. Not sure how much you need? Here are a few tips:
To determine the amount you need, begin by adding up all of your monthly expenses. You can subtract in areas you may be able to cut back in, but remember, you may have additional medical bills if you suffered a disability.
Make a list of the other income sources you have to cover these expenses — a savings account, spouse’s income, perhaps financial support from your family. What amount is left after considering this? That’s the amount you need to have available to spend each month.
Make sure you know whether or not the benefit would be taxable. Employer-supported policies usually are, and individual policies usually aren’t. Make sure you know for sure, as this will have an impact on how much of the benefit amount you would have available to spend.
How Do They Define “Disability?”
There is no one set definition of “disability,” so it’s important to understand how your disability insurance policy defines it. Usually, you’ll find these definitions fit into one of three main categories:
- The inability to complete any job, no matter what it is or how much it pays. This is the definition that makes it hardest to qualify for benefits.
- The inability to do a job that you are reasonably qualified for based on your education, training, and experience. That is you will collect benefits until you are working in a job that matches your level of experience and expertise.
- The inability to accomplish the main duties of your current job. This is the definition that makes it easiest to qualify for benefits.
How Long Is the Elimination Period?
The elimination period is also known as the waiting period — or how long you must be disabled before you can collect benefits. On a short-term disability insurance policy, this could be as minimal as 14 days. On a long-term disability insurance policy, you may have the ability to choose a period of up to six months. The key to choosing the best elimination period for you is determining how much your emergency fund and saving could cover. In some cases, you may want to invest in both short- and long-term disability policies to provide the best financial security.
How Long Is the Benefit Period?
The benefit period is the amount of time you can collect your financial benefits — as long as you are meeting the policy’s definition of disability. Short-term disability insurance policies are likely to have a benefit period of a few months up to a couple of years. Long-term disability insurance policies, on the other hand, may pay benefits for five years or “up to age 65” or normal Social Security Retirement age— to coordinate with the standard Social Security retirement age.
Longer benefit periods come at a higher cost — so when you’re deciding on your ideal benefit period, consider whether or not you would be able to gain income in other ways — like getting a different job.
What Isn’t Covered?
Equally as important to knowing what disabilities are covered is knowing what isn’t covered. Many policies will exclude certain conditions — mental health conditions are often among them. In some cases, these exclusions will be for a certain duration — and in others, they are excluded for the life of the policy. While you can’t predict what disability you may encounter, you can educate yourself on your family health history and make sure you’re covered with disabilities you may be more likely to have.
What’s the Premium Guarantee?
A premium guarantee promises that you will pay the same, fixed premium until your coverage period ends. If your policy is “non-cancelable,” then you are guaranteed a fixed premium until your coverage period ends. If you have a “guaranteed renewable” policy, then you may see an increase in your premium, but only if all policies within a certain location or that meet a certain criteria increases.
If your policy is neither non-cancelable nor guaranteed renewable, then your premium cost could increase every year — leaving you at the mercy of the insurance company.
What Is My Residual Benefit?
Your policy may include a residual benefit feature, which means you would be able to receive partial benefits if you return to work, making a reduced salary. In the event you do have a disability, this feature can make transitioning back to a full workload easier.
Does It Offer a Cost of Living Adjustment (COLA)?
Some policies come with a cost of living adjustment — meaning that your benefit will increase each year based on the rate of inflation to ensure you can pay your bills despite the increase in cost over time. This feature may come with restrictions — like a maximum annual increase and/or a limited amount of time they are applied. Perhaps a policy would cap the annual increase at three percent, and only give that increase for a certain number of years.
Is There a Future Purchase Option?
A future purchase option is particularly beneficial for long-term disability insurance because it guarantees you will have the opportunity to increase your coverage in the future if your income increases, without any medical underwriting. It ensures that aging or a decline in health will not interfere with you getting additional coverage when you need it.
What’s the Insurer’s Financial Rating?
You want to be sure you’re working with an insurer that is in good financial standing so that if you need to collect disability, there are no concerns about the company being unable to pay your benefit. Insurer ratings can be found by looking them up on A.M. Best, Fitch Ratings, Moody’s and Standard & Poor’s.
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