A Quick Guide to Disability Insurance Types
Disability Insurance is a type of insurance that protects your income in the event of an injury or disability that keeps you from performing your job. Having adequate disability coverage is an essential aspect of any well-constructed financial plan as it replaces a percentage of your income in the event you can’t work for a long period of time.
Types of Disability insurance:
Public Disability insurance, also known as Social Insurance
Public disability insurance, also known as Social Security Disability Insurance (SSDI), is a type of Disability Insurance offered through the Federal Government that covers virtually all private-sector employees. This type of policy is only available to those with serious disability. Statistically, it is notoriously difficult to receive; according to Social Security Administration website (SSA.Gov) 53% of disability claims are denied.
Like SSDI, Workers Compensation is also known as a Social Insurance. It is a policy that is purchased by an employer to compensate employees for work-related injuries. It is important to understand that Workers Compensation only covers injuries or illnesses arising from and during the course of your employment. It does not cover private activity while not on the job. Workers Compensation also offers unlimited medical care, disability income, death benefits, and rehabilitation services.
Private Disability Insurance
Private Disability Insurance, like most other types of insurance, can be obtained through a purchase in the open market or within group plans offered through employment. The main difference between Private disability insurance and Workers compensation is that coverage is on the individual and not tied to the time or activities related to your employment. In other words, private plans cover occupational and nonoccupational injuries and disabilities. In the event of a severe event, you file a claim, similar to other types of insurance.
Short-term Disability Insurance
Short-term disability policies typically pay benefits for relatively short periods of time ranging from 2 weeks to 1 year. As the name implies, it is short-term protection that is adequate for disability events that may limit your ability to work, but from which you will recover. The primary difference between short-term and long-term disability is the length of coverage during an event.
Long-term Disability Insurance
Similar to short-term disability policies, long-term disability insurance pays benefits in the event of disability or illness covering durations of 2 years or more, typically up to age 65. Long-term policies are more expensive, due to the extended benefit.
Personal Financial Planning Considerations:
The Definitions of “Disability” are Important
When reviewing your personal policies, the most favorable definition of disability is “own occupation.” “Own occupation” covers you if you are unable to perform the majority of the duties that you have been trained to perform. In other words, if you are unable to perform the duties of your current occupation, it pays. The most unfavorable definition is “any occupation,” which as it implies, will not pay unless you are unable to work in any occupation.
It‘s Important to Consider “Riders”
Like most insurance, disability coverage can be purchased with certain riders. Here are some to consider:
Residual Disability benefit. This is a rider that enables the policy to continue to pay in the event of partial disability. For example, if you worked in an occupation that requires manual labor and you lost a limb in a vehicular accident, you would be unable to perform physical tasks. If the employer moved you into an office position paying a reduced salary, residual disability benefits would continue to cover your lost earning power.
Future Increase Options. In most occupations, your income is likely to grow considerably over the course of your career. It is important to consider this rider as it will provide an increased benefit without having to undergo additional medical underwriting, in most cases. Note: the increased benefit will also increase your premiums.
The Bottom Line:
The most important wealth-building tool you have is your income over time and it should be insured just like other valuable assets. According to the Social Security Administration, one in every four of today’s 20-year-olds will become disabled at some point before retirement. When purchasing disability insurance, consider your liquid assets on hand and how long those can sustain you. According to the Council for Disability Awareness, only 57% of Americans have enough savings to pay 6 months of living expenses.
Social Security Administration, “The Facts about Social Security’s Disability Program,” January 2018: https://www.ssa.gov/disabilityfacts/materials/pdf/fatsheet.pdf
Source: Council for Disability Awareness 2014 Disability Awareness Study: http://disabilitycanhappen.org/public_html/wp-content/themes/cdadev/awareness2014.pdf