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Employer-paid
disability insurance
This is required in most states. Most employers
provide some short-term sick leave. Many larger
employers provide long-term disability coverage
as well, typically with benefits of up to 60 percent
of salary lasting from five years to age 65, and
in some cases extended for life. |
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Social Security
disability benefits
This can be paid to workers whose disability is
expected to last at least 12 months and is so severe
that no gainful employment can be performed. |
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Individual
disability income insurance policies
Other limited replacement income is available for
workers under some circumstances from workers compensation
(if the injury or illness is job-related), auto
insurance (if disability results from an auto accident)
and the Department of Veterans Affairs.
For most workers, even those with some employer-paid
coverage, an individual disability income policy
is the best way to ensure adequate income in the
event of disability. When you buy a private disability
income policy, you can expect to replace from 50%
to 70% of income. Insurers won’t replace all
your income because they want you to have an incentive
to return to work. However, when you pay the premiums
yourself, disability benefits are not taxed. (Benefits
from employer-paid policies are subject to income
tax.) |
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What
are the types of disability insurance?
There are two types of disability policies: Short-Term
Disability (STD) and Long-Term Disability (LTD):
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Short-Term
Disability policies (STD) have a waiting
period of 0 to 14 days with a maximum benefit period
of no longer than two years. |
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Long-Term
Disability policies (LTD) have a waiting
period of several weeks to several months with a
maximum benefit period ranging from a few years
to the rest of your life.
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two different protection features that are important
to understand. |
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Noncancelable
means the policy cannot be canceled by the insurance
company, except for nonpayment of premiums. This
gives you the right to renew the policy every year
without an increase in the premium or a reduction
in benefits. |
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Guaranteed
renewable gives you the right to renew the
policy with the same benefits and not have the policy
canceled by the company. However, your insurer has
the right to increase your premiums as long as it
does so for all other policyholders in the same
rating class as you. |
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In addition to the traditional
disability policies, there are several options you
should consider when purchasing a policy:
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Additional
purchase options
Your insurance company gives you the right to buy
additional insurance at a later time. |
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Coordination
of benefits
The amount of benefits you receive from your insurance
company is dependent on other benefits you receive
because of your disability. Your policy specifies
a target amount you will receive from all the policies
combined, so this policy will make up the difference
not paid by other policies. |
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Cost of living
adjustment (COLA)
The COLA increases your disability benefits over
time based on the increased cost of living measured
by the Consumer Price Index. You will pay a higher
premium if you select the COLA. |
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Residual or
partial disability rider
This provision allows you to return to work part-time,
collect part of your salary and receive a partial
disability payment if you are still partially disabled.
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Return of
premium
This provision requires the insurance company to
refund part of your premium if no claims are made
for a specific period of time declared in the policy. |
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Waiver of
premium provision
This clause means that you do not have to pay premiums
on the policy after you’re disabled for 90
days. |
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How
can I purchase disability insurance?
Talk to the agent who sells you your life, health,
auto or business insurance—he or she may either
sell disability coverage or will be able to refer
you to an agent who does.
Your state's
insurance department will also have names of
agents and companies writing policies in your state.
Make sure that you understand what you are buying
and don’t be afraid to ask your agent to explain
exactly what is in the policy.
Key
things to look for when you shop around
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The definition
of disability
Some policies pay benefits if you are unable to
perform the customary duties of your own occupation.
Others pay only if you are unable to perform any
job suitable for your education and experience.
Some policies define disability in terms of your
own occupation for an initial period of two or three
years and then continue to pay benefits only if
you are unable to perform any occupation. "Own
occupation" policies are more desirable, but
more expensive. |
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Benefit period
The benefit period is the amount of time you will
receive monthly benefits during your life. Experts
usually recommend that the policy you buy pay you
benefits until at least age 65, at which point Social
Security disability will take over. If you are young,
you may consider buying a policy offering lifetime
benefits because it will still be relatively inexpensive. |
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A policy that
will replace from 60 percent to 70 percent of your
total taxable earnings
A higher replacement percentage, if available, is
more expensive. Evaluate your other sources of income
before deciding how much disability coverage you
need. |
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Coverage for
disability resulting from either accidental injury
or illness
An accident-only policy is less expensive but does
not provide adequate protection. Ideally, both accident
and illness coverage should be purchased. |
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A cost-of-living
increase in benefits
You are buying a policy today that may not pay benefits
for a decade or more. Should you need those benefits,
you will want them to have kept pace with increases
in the cost of living. (Some companies also offer
"indexed" benefits, keeping pace with
inflation after benefit payments begin.) |
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A policy paying
"residual" or partial benefits
This type of policy is available so that you can
work part-time and still receive a benefit making
up for lost income. A standard feature in some policies,
and added by a rider to others, a residual benefits
policy pays partial benefits based on loss of income
without an initial period of total disability. |
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Transition
benefits
Offered by some companies, it can offset financial
loss during a post-disability period of rebuilding
a business or professional practice. |
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Ongoing coverage
A non-cancelable policy which will continue in force
as long as the premiums are paid; neither the benefit
nor the premium can change. A guaranteed renewable
policy keeps the same benefits but may cost more
over time since the insurer can increase the premium
if it is increased for an entire class of policyholders.
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Financial
stability
Check the financial ratings of an insurer. Your
insurance agent or company representative should
provide this information or check with the following
companies, which rate insurance company strength:
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A.M. Best Company, Inc.
Ambest Rd.
Oldwick, NJ 08858
908-439-2200
http://www.ambest.com
Fitch Ratings
1 State Street Plaza
New York, NY 10004
1-800-75-FITCH
http://www.fitchibca.com
Moody’s Investor Services
99 Church Street
New York, NY 10007
212-553-0300
http://www.moodys.com
Standard & Poor’s Insurance Ratings Services
55 Water Street
New York, NY 10004
212-438-2000
http://www.standardandpoor.com
Weiss Research
15430 Endeavor Drive
Jupiter, FL 33478
800-289-9222
http://www.weissratings.com |
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Waiting period
Every disability policy imposes a waiting period,
also known as the elimination period. This is the
number of days you must be disabled before receiving
benefits. If you are disabled during the elimination
period, you will not receive any benefits, even
though you are not able to work. If the elimination
period is short, such as 30 or 60 days, the premium
will be higher. A longer elimination period may
strain your finances more when you need it, but
you will be charged a lower premium. Most experts
recommend that you select an elimination period
of 60 to 90 days. The first check is usually paid
30 days after the waiting period. |
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How
are disability premiums determined?
Disability premiums are based on your age, sex,
occupation and the amount of potential lost income
you are trying to protect. In general, the lower
the chance that your occupation puts you in harm’s
way, the lower the premium. The higher the chance
of injury, the bigger the premium. So, for instance,
an accountant working in an office would have much
lower disability premiums than a construction worker. |
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How
can I save money?
There are two ways to keep the cost of disability
insurance down:
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Electing a
longer waiting period before benefits begin
If you have enough resources to cover expenses during
the first three months of disability, your premiums
will be lower than with coverage that starts after
30 days. |
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Electing a
shorter benefit period
In this case, benefits are payable to age 65—the
age at which you would normally retire—instead
of for a lifetime. However, choosing a benefit period
of two-to-five years, ending before normal retirement
age, could be penny-wise and pound-foolish. You
might save money on premiums, but you could be without
coverage when you need it most. Disability of long
duration poses the greatest financial hardship. |
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Will my employer
provide disability coverage?
Most employers offer some kind of disability insurance,
but you should find out exactly what your employer
offers before you have to file a claim. Most allow
some short-term sick leave, which might last from
a few days to as much as six months. In some states,
such as Hawaii, New Jersey, New York and Rhode Island,
state law requires employers to provide disability
benefits for up to 26 weeks.
Check with your benefits department to see if you
are covered and if so, how long you must wait before
benefits begin and how long payments will last while
you are still disabled. Also, ask if your employer’s
disability plan takes other disability programs,
such as Social Security, into account when calculating
your disability pay.
No laws require employers to offer long-term disability
(LTD) coverage, but about half of large and mid-sized
employers offer it to their workers. Typical group
long-term disability benefits replace about 60 percent
of the worker’s usual salary. These benefits
usually start when short-term benefits are exhausted
and continue from five years to life. Usually, group
long-term disability insurance is fully paid for
by employers, with no contribution expected from
employees. When you receive employer-paid disability
income, you must pay federal and state income tax
on the benefits, unless your company pays it for
you. |
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Where
can I get more information?
For more information on disability insurance, you
can contact:
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America’s Health Insurance
Plans
601 Pennsylvania Avenue, NW
South Building
Suite 500
Washington, DC 20004
http://www.ahip.org
Department of Veteran Affairs
245 West Houston Steet
New York, NY 10014
800-827-1000
http://www.va.gov/
Social Security Administration
Office of Public Inquiries
6401 Security Blvd.
Room 4-C-5 Annex
Baltimore, MD 21235-6401
800-772-1213
http://www.ssa.gov/
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