What is a disability insurance?

Disability insurance (DI) is a type of insurance that provides income in the case that a worker or employee is unable to perform their required work, due to a disability - whether or not the condition is permanent - most often caused due to an illness or accident. Benefits are usually paid monthly, so the insured can maintain a comparable standard of living and pay recurring expenses. These benefits are tax-free because the policyholder used after-tax dollars to pay premiums. However, if your policy is employer-sponsored, you might have to pay tax on benefits. It is suggested to contact your employer for more details on the same. 

How does disability insurance work?

Similar to other insurance policies, you pay a monthly premium to keep your DI policy in effect. In the case that you are unable to work due to a temporary or permanent disability or illness, you file a claim with the insurance company so you can receive a monthly payment, called a benefit. The benefit period is the time for which benefits will pay out, and they depend on the type of plan you have. 

Before you can apply for benefits, you have to go through the policy’s elimination period, also referred to as the waiting period.  Policies with shorter waiting periods are typically more expensive; have higher monthly premiums and less expensive policies have longer waiting periods. 

What qualifies as a disability?  

In general, any injury or illness will qualify you for DI benefits if you are either mentally or physically unable to complete your job. You can also qualify if your disability substantially limits your ability to carry out basic life activities. Furthermore, if you have to self-isolate because of the coronavirus (COVID-19) and cannot come out for work, you could qualify for disability insurance benefits as well. 

Types of Disability Insurance

There are mainly three kinds of disability insurance: short term disability insurance (STDI), long-term disability insurance (LTDI),  and Social Security disability insurance (SSDI). Each type of DI essentially provides the same service, but there are differences in the cost of a policy, the benefit period, and where you can apply for a policy. 

Disability policies also have two different protection features that are important to understand: 

• Non-cancelable: The policy cannot be cancelled by the insurance company, except for nonpayment of premiums. This gives you the right to renew the policy every year without an increase in premium or a reduction in benefits. 
• Guaranteed renewable: This gives you the right to renew the policy with the same benefits and not have the policy canceled by the company. However, you 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. 

Disability Insurance Riders 

Disability insurance riders are optional add-ons that allow you to customize your policy to meet your specific income needs. Adding a rider may increase your monthly DI premium but allows you to increase your benefit payments in certain circumstances. The following are common types of DI riders:

• Cost of living adjustment (COLA): Adjusts the value of your monthly benefits based on the Consumer Price Index inflation. 
• Future increase option (FIO): Allows you to increase your monthly benefit in the future if your income increases. However, this will involve paying higher premiums. 
• Automatic benefit enhancement (ABE): Automatically increases your benefit each year, for a certain number of years, based on common income increases that a healthy individual can expect. 
• Partial residual disability benefits: Your policy can continue to pay partial benefits after you go back to work if you’ve lost earning power because of your disability. 

Should I get disability insurance if I have workers’ compensation?

Worker compensation from employers doesn’t offer much coverage because they’re short-term plans and free. They also don’t apply if you leave the employer. Furthermore, workers’ compensation only covers work-related injuries and illness, while disability policies cover you regardless of where and how you sustain an injury. A DI could be worth investing in considering most disabilities happen off the job. One of every four Americans becomes disabled at some point in their career. Consider things like how long you could go without a paycheck and whether your current plan or insurance provides enough coverage to maintain your lifestyle. It is a misconception that young and healthy individuals do not require a DI. Accidents are not predictable and disabilities can constitute a variety of things such as a heart attack, broken bone and brain injury. For example, pilots who suffer vision problems can heavily rely on DI benefits.

However, remember that if you sustain an injury at work and receive workers’ compensation, your private disability insurance benefits could be reduced by the amount you receive from workers’ compensation. 

Conclusion 

A private disability insurance policy is often overlooked as a requirement, but it can prove to be very useful in filling the coverage gaps left by health and life insurance plans. Even if you have short term coverage from an employer, do consider combining it with a long-term policy for more effective courage.