Disability Insurance

Disability Insurance

Disability Insurance

Disability insurance is used to protect future earnings – disability insurance is supposed to replace your income in the event that you become physically unable to work. Most people have health insurance to cover medical costs due to a severe injury or sickness, however, without disability insurance, not many individuals are prepared for the loss of wages that follow a tragedy.

There are two types of disability insurance:

  • Short-term disability – This coverage will replace a portion of your salary in the event you miss up to six months of work. This type of coverage typically kicks in after all sick leave is exhausted, and replaces close to 100% of wages. The length of coverage and payment percentages may vary from plan to plan, but these numbers are typical.
  • Long-term disability – Most experts maintain that this disability insurance is the most important insurance you can purchase because some diseases and injuries are disabling rather than fatal, meaning that the incapacitation can be lengthy.

As a rule, disability insurance that has a longer length can be purchased to replace somewhere between 50 and 70% of your salary. Some employers allow their employees to purchase extra insurance from the same company, sometimes raising that coverage to 80%. Some have particular rules, which can be found in the respective plan.

Extended disability policies vary in the length of payout. Some policies will only pay out for 5 or 10 years, whereas some will pay out until age 65. Policies can also vary in the definition of disability (some contentious categories include mental illness and back injuries) and exclusionary criteria (pre-existing medical conditions, injuries from dangerous activities, etc.).

A lengthier disability policy can be designated as an “own-occupation” policy. Most policies are “any-occupation,” which means the policy owner must work when he or she is capable, even if it is not in the same capacity as before. An “own-occupation” policy will allow the owner to collect benefits until he or she can resume their previous occupation. Typically, these policies are more beneficial to policy owners with high-skill or high-paying jobs.

There are two distinct types of disability insurance coverage:  (1) Individual Disability Insurance (Private Disability) and (2) Group Insurance (ERISA).