Disability insurance helps in providing income if the policyholder is unable to work or earn their livelihood due to a disability. It provides a part of your income in the event the policyholder becomes unable to work due to injury or sickness.
In the United States, people can get disability insurance from the government with the help of the Social Security System as well as from private insurers. As per SSA estimates, one in four 20-year-olds have a chance to experience a disability for 90 days or more before they reach 67.1.
Let’s understand what disability insurance is and how it works to ensure you make an informed decision.
What is Disability Insurance?
Certain circumstances arise in lives due to which a person finds difficulty in working, so it is then that this Disability Insurance comes in handy. The policyholder earns a portion of their income.
Disability insurance protects an individual’s well-being against the financial complexities if they become incompetent to work due to a disability or illness. It can be called a safety set for those who earn hand-to-mouth. The policyholder receives a percentage of the regular income.
One of the major advantages of disability insurance benefits is that the government doesn’t charge any tax for it, or maybe the least for the non-premium policyholders. The concept of disability insurance is to ensure that individuals maintain their quality of life even when unable to work.
How Disability Insurance Works?
People can buy disability insurance from the government or private insurance companies. Various companies provide it as an employee benefit by paying the premiums on behalf of the employee.
It is advised that they thoroughly read the terms and conditions mentioned and the waiting period required to be fulfilled before receiving the coverage amount.
The foremost eligibility criterion is that the individual must not be able to pursue their previous occupation or any occupation of their qualification standards.
Every policyholder must complete the waiting period/ elimination period, which can be a couple of days or months. The policyholders usually receive 60- 70% of their previous income value during their incompetence phase. It is mentioned beforehand in the policy form.
There are two types of disability insurance:
- Short-term disability insurance (STD) offers financial assistance for a couple of months but not a year.
- Long-term disability insurance (LTD) covers extended durations, i.e., a couple of years, and there is a possibility until retirement age.
Some policyholders choose the premium option. For this, they must pay premiums to maintain high disability insurance coverage. They choose this option depending on their age, health, occupation, and the desired high-benefit amount.
In time of need, the policyholders must submit their medical records and other desired documents to prove their disability. Hence, they receive the claim for their regular benefit amount for essential expenses like medicines, groceries, and mortgages.
There is also an option of returning to work. In this provision, the policyholder can opt to return to their previous occupation in a part-time capacity or any other, depending upon the medical condition if they are partially disabled. In this, they receive partial benefits.
Disability insurance excludes/ limits benefits to those self-inflicted or disabilities caused by using illegal substances. Policyholders have the option to cancel or renew their disability insurance policies.
Real-World Example of Disability Insurance
The below-mentioned real-world example of disability insurance is a hypothetical situation:
There is a 35-year-old accountant named Peter. At the company where he worked, he took the employee benefits package for paying a long-term disability insurance policy.
He paid for it for numerous years. Unfortunately, he met with an accident. Therefore, he wasn’t able to work for some months. This is how the disability insurance would work for Peter:
Initially, Peter has to submit his official medical and accident report and the statements from healthcare providers proving his disability.
After this, it will be seen which sort of policy he opts for. The “own occupation” option states he cannot perform efficiently in his previous job. Or the one where he cannot perform any job per his qualifications.
After this, the policy will be read for its waiting/elimination period. This showcases the period for which he has to be disabled to qualify for the benefits.
Once he qualifies, he will receive a certain percentage of his previous salary to maintain his living standards and overcome essential expenses.
If he had opted for a long-term disability policy, he would keep receiving the benefits until the age of 65/ retirement.
How Long Will I Get Payments?
Before taking the specific disability policy, you must read the terms and conditions, limitations, and eliminations. It states the coverage.
You must have detailed knowledge of the waiting period before the coverage can start and the duration of receiving the payments. As per the terms, the disability caused by accident or illness also affects the duration.
What Types of Disabilities Does it Cover?
Every policyholder must have a deep insight into the policy terms and conditions. There are different kinds of policies, such as those that cover partial disabilities or the ones that keep the injured person away from the previous occupation, or there might be a possibility that the policyholder, after the unfortunate incident, can’t continue any job at all.
The two prominent categories of disabilities that the policies cover are:
- Accidental Disabilities such as accidents by vehicles or falling leading to fractures/ serious injuries, sports, or physical trauma.
- Illness-related Disabilities such as medical conditions like cancer, heart illness, diabetes, chronic diseases, mental health, back/musculoskeletal disorders and neurological disorders.
How Do You Get Disability Insurance?
To get disability insurance, the policyholder has to follow the below-mentioned steps:
- Understand the terms & conditions for the various disability types.
- Pay premiums accordingly.
- File a claim for receiving benefits amount.
- Acknowledge the waiting/ elimination period, the portion of income to be received, and the duration.
- Submit the medical reports, health assessments, accident reports, and details by the healthcare provider for the severity of the injury.
How Can I Replace my Income if I’m Disabled?
It would help if you planned your life for unfortunate incidents by taking disability insurance and an emergency fund, depending on your financial situation. If ever you become disabled, then there are various ways you can replace your income for your financial support and stability.
- Disability insurance is specially framed for such situations. After taking up this policy, paying premiums, meeting the eligibility criteria, and submitting required certificates, you will qualify to receive a portion of your salary every month. This is considered the most effective method to replace income during such circumstances.
- Emergency funds or savings can be used during this time of need.
- Choose a company that provides employee benefit packages. The employers provide these for short-term and long-term disability insurance, depending upon the premiums paid.
- In many countries like the United States, the Social Security Administration provides Social Security Disability Insurance SSDI that provides disability benefits to eligible individuals.
- If, by chance, a worker gets injured at the working site, they receive workers’ compensation from the company, including medical expenses and a specific portion of their lost wage.
- Family might support during the period of disability.
- Non-Governnment Organisations and Non-Profit Organizations provide charities and support to individuals with disabilities.
- Investment options such as stocks, bonds, real estate, etc, are assets that give a payback during crucial times.
- Government Assistance Programs provide support to people with disabilities.
- You may be able to work part-time or choose a work-from-home job, considering the level of disability.
- If you own rental properties, the income from tenants can provide financial support.
- You can sell non-essential assets, such as a second car or unused property.
How Should I Choose Between Group or Individual Long-term Disability Insurance?
|Group Long-Term Disability insurance
|Individual Long-Term Disability insurance
|Provided by the employers to the employees’
|A person takes it for themselves
|Employer handles the paperwork & premium deductions
|Policyholder has to work for everything
|Offer less flexibility over terms & conditions
|Employees lose their coverage if there is a change of job
|Can easily switch jobs without losing the coverage
|May have benefit caps & only a portion of income is given to the disabled person.
|A high benefit amount is given to policyholders
|Rigid with terms & conditions
|Policyholder possesses the feasibility to choose the benefit amount, waiting period & terms according to his/her situation
|No guaranteed renewals
|Pay premiums on time and have guaranteed secured long-term benefits
Disability insurance provides financial security to individuals in their unfortunate circumstances. It ensures that one’s income is safeguarded with stability and essential expenses are easily met.
Individuals can choose between the group disability insurance option or individual disability insurance after considering their occupation, age, health, coverage, benefits, etc.
Disability Insurance FAQs
1. Should I consider purchasing individual disability coverage?
Yes, you can purchase individual disability coverage after pondering over the below-mentioned factors:
1. Individual disability policies allow you to secure a higher benefit than group policies.
2. It offers flexibility and customization according to your needs, selecting waiting periods and benefit durations.
3. It is easier to switch jobs. It is not tied to the employer of the company.
4. As long as you pay your premiums, they are guaranteed renewable.
5. It maintains coverage over the long term.
6. If your employer offers group disability insurance, but the benefits are limited, or you want additional protection, an individual policy can supplement your coverage.
How much does individual disability insurance cost?
The premium of Individual disability insurance usually costs between 1%- 3% of the policyholder’s annual income. It depends on various factors like age, health, occupation, waiting period, benefit period, benefit amount, gender, etc.
What does individual disability insurance cover?
Individual disability insurance typically covers accidents, injuries, income replacement, illness, partial disability, occupational disability, total disability, waiting period, benefit period, and rehabilitation benefits.
Can I use my health insurance while I am on disability?
Yes, You can choose a health insurance plan while you are on disability.
Is there a risk of losing my job if I am disabled?
Various factors are considered, like the nature of your job, your disability, employers’ policies, and legal protections in your jurisdiction to rejoin and continue your previous work-life.
Is disability insurance taxable?
No, disability insurance is not taxable.
What happens if I can work but can’t perform the skills required in my previous profession?
If you can work but can’t perform the skills required in your previous profession, then you must consider the following options:
vocational rehabilitation, reevaluate your skills, meet a career counselor, discuss job accommodations with your employer, pursue retraining to enhance your skills or acquire new ones, network with professionals, take government assistance, review disability insurance since there are provisions to support for training/ retraining for a new job, and educate yourself for the legal rights.
Won’t I be protected by government disability coverage programs?
Yes, you will be protected by government disability coverage programs. These include social security disability benefits, workers’ compensation, veterans’ benefits, government assistance programs, and State/ Provincial disability programs.