Disability Insurance, often called DI or disability income insurance, is a form of insurance that insures the beneficiary’s earned income against the risk that a disability creates a barrier for a worker to complete the core functions of their work. For example, the worker may suffer from an inability to maintain composure in the case of psychological disorders or an injury, illness or condition that causes physical impairment or incapacity to work. It encompasses paid sick leave, short-term disability, and long-term disability benefits. Statistics show that in the US a disabling accident occurs on average once every second. In fact, nearly 18.5% of Americans are currently living with a Disability, and 1 out of every 4 persons in the US workforce will suffer a disabling injury before retirement.
Types of disability insurance
Traditional disability carriers have limitations on the monthly benefits, which limit benefits for high income earners. Benefits typically cap at $10,000-$15,000 of monthly benefits.
Individual disability insurance
Those whose employers do not provide benefits, and self-employed individuals who desire disability coverage, may purchase policies. Premiums and available benefits for individual coverage vary considerably between companies, occupations, states and countries. In general, premiums are higher for policies that provide more monthly benefits, offer benefits for longer periods of time, and start payments of benefits more quickly following a disability claim. Premiums also tend to be higher for policies that define disability in broader terms, meaning the policy would pay benefits in a wider variety of circumstances. Web-based disability insurance calculators assist in determining the disability insurance needed.
High-limit disability insurance
High-limit disability insurance is designed to keep individual disability benefits at 65% of income regardless of income level. Coverage is typically issued supplemental to standard coverage. With high-limit disability insurance, benefits can be anywhere from an additional $2,000 to $100,000 per month. Single policy issue and participation (individual or group long-term disability) coverage has gone up to $30,000 with some companies.
Key-person disability insurance
Key Person Disability Insurance provides benefits to protect a company from financial hardship that may result from the loss of a key employee due to disability. The company can use the benefits to hire a temporary employee should the disabled employee’s disability appear to be short-term. In the case of permanent disability, benefits are used to help defray costs related to hiring a replacement, including recruitment, training, startup, loss in revenue and unfunded salary continuation costs.
Business overhead expense disability insurance
Business Overhead Expense (BOE) coverage reimburses a business for overhead expenses should the owner experience a disability. Eligible benefits include: rent or mortgage payments, utilities, leasing costs, laundry/maintenance, accounting/billing and collection service fees, business insurance premiums, employee salaries, employee benefits, property tax, and other regular monthly expenses.
National social insurance programs
In most developed countries, the single most important form of disability insurance is that provided by the national government for all citizens. For example, the UK’s version is part of National Insurance; the U.S.’s version is Social Security (SS)—specifically, several parts of SS including Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI). These programs provide a floor beneath all other disability insurance. In other words, they are the safety net that catches everyone who was otherwise (a) uninsured or (b) underinsured. As such, they are large programs with many beneficiaries. The general theory of the benefit formula is that the benefit is enough to prevent abject poverty.
In addition to federally funded programs, there are five states which currently offer state funded Disability Insurance programs. These programs are designed for short term disabilities only. The coverage amount is determined by the applicant’s level of income over the previous 12 months. The states which currently fund disability insurance programs are California, New York, New Jersey, Rhode Island, and Hawaii.
Employer-supplied disability insurance
One of the most common reasons for disability is on-the-job injury, which explains why the second largest form of disability insurance is that provided by employers to cover their employees. There are several subtypes that may or may not be separate parts of the benefits package: workers’ compensation and more general disability insurance policies.
Workers’ compensation (also known by variations of that name, e.g., workman’s comp, workmen’s comp, worker’s comp, compo) offers payments to employees who are (usually temporarily, rarely permanently) unable to work because of a job-related injury. However, workers’ compensation is in fact more than just income insurance, because it compensates for economic loss (past and future), reimbursement or payment of medical and life expenses (functioning in this case as a form of health insurance), and benefits payable to the dependents of workers killed during employment (offering a form of life insurance). Workers compensation provides no coverage to those not working. Statistics have shown that the majority of disabilities occur while the injured person is not working and therefore is not covered by workers’ compensation.
Newsweek magazine’s cover story for March 5, 2007 discussed the problems that American veterans of Afghanistan and Iraq wars have faced in receiving VA benefits. The article describes one veteran who waited 17 months to start receiving payments. Another article, in the New York Times, points out that besides long waits, there is also variation based on the veteran’s state of residence and whether he/she is a veteran of the Army, National Guard, or Reserves. The Newsweek article says that it can be difficult for a veteran to get his or her claim approved; Newsweek described the benefits thusly:
“A veteran with a disability rating of 100 percent gets about $2,400 a month—more if he or she has children. A 50 percent rating brings in around $700 a month. But for many returning servicemen burdened with wounds, it is, initially at least, their sole income.”
The 2007 figures cited above correspond in 2012 to $2,673 a month (more with children) and, for the 50% rating, $797 a month for a single veteran.
According to a sidebar in the same Newsweek article, the Americans injured in these wars, for all the obstacles to proper care, will probably receive much better compensation and health care than equally injured Afghan or Iraqi soldiers.
What should you look for in a disability insurance policy?
- Look for an “own occupation” policy.This means that if you can’t do your current job, the coverage will protect you. If you have an “any occupation” policy, then as long as you do any job including sweeping floors in a warehouse, flipping hamburgers or making telesales calls, then the policy will not pay out. One quote I received had “own occupation” for the first two years of disability and then sneakily changed to “any occupation” after that.
- Look for coverage to age 65 when your retirement benefits will kick in.Amazingly, I only asked for quotes for coverage to age 65, but time and again companies came back with policy quotes for five years and ten years. The policies are cheaper so can be more attractive to people but they don’t make sense to me. It still leaves our family at risk in the event of a long term disability.
- Figure out how long you can last before the disability benefits start.Once again, the benefits of an emergency fund come to the fore. If you have a healthy emergency fund and can last for six months (or longer, particularly if your employer has a short-term plan in place), you can save significantly on premiums. Get quotes for 90 days, and 180 days or more so you can consider what works best for your financial situation. Interestingly, LIFE says that 70 percent of working Americans only have enough money to be off work for one month before everyday expenses would force them to go back to work. If they can’t work, then the only option is debt.
- Decide how much you want in benefits.Many policies will offer a benefit equal to about 60% of your gross income. If you are paying your own premiums, you will not be taxed on the benefits, so factor that into your calculations. My husband and I decided to ask for less to save money on the premiums. We worked out how much we would need each month to cover our mortgage, with a little bit extra to help towards other costs. The plan is that I will increase my earnings (I only work part-time now) to cover the gap. It’s a little risky as it doesn’t allow for me to stay home and look after my husband if that’s necessary, but we are balancing that risk against what we can afford in insurance premiums while still saving for the future.
- Insurers rank you according to your occupational class.A general contractor, like my husband, is in a higher risk category. At first, I thought this was only because he was in what could be considered a high-risk profession. I’ve subsequently learned that insurers are also wary of underwriting someone whose income is harder to verify. This includes home-based people like freelance graphic designers, writers, consultants and accountants. However, the longer you have been running your business, and the more records you have to prove your income (generally, they look for three years’ worth), the lower your risk to the insurance company. Interestingly, rates are higher for women than for men of the same age, because the risk of a woman suffering a long-term disability is higher.
- Make sure that your policy is guaranteed renewable.This means that your coverage is guaranteed renewable to the termination date (in our case, to age 65) as long as the premium is paid on time. The insurer cannot change any feature of the policy, except for the premium, until the termination date. The premium can only be changed if the change is made for all policies with the similar benefits insuring the same risk class.