Disability Insurance

Protects your most valuable asset: your ability to earn an income.

Each year 12% of the adult population suffer a long term disability.
1 out of every 7 workers will suffer a five-year or longer disability before reaching age 65.
At age 32 your chances of suffering a three-month or longer disability is 6 times more likely than death.
At age 35 your chances of suffering a three-month or longer disability is 50%.
At age 45 your chances of suffering a three-month or longer disability is 44%.
On average 7 out of 10 claims for Social Security disability benefits are refused the first time requested.

(Above statistics were obtained from Commissioner's Disability Tables and the Senate Finance Committee.)

Disability insurance pays cash benefits to the policyholder in the event the insured is unable to work due to sickness or injury. That cash benefit ranges from 50% to 70% of income. The insurance company will not pay more than 70% of income because there must be an incentive to return to work.

If you pay the premium, the benefits are normally received free from income tax. If the premiums are paid by an employer, the benefits are taxable as ordinary income.

A disability policy is composed of various elements:

Elimination Period
It is the period of time the insured must wait after becoming disabled to receive benefits. Typical waiting periods are 30, 60, 90,120,180, and 360 days. The longer the elimination period the less expensive the policy.
Benefit Period
It is the period of time the benefits will be paid following the elimination period. The benefit period could be from 2 years to age 65 to lifetime. The longer the benefit period the more expensive the policy.
The Amount of Benefit
The larger the amount paid out, the more expensive the policy. The benefit will not normally exceed 70% of income.
Residual Benefit
Percentage of benefit paid if you return to work and are still partially disabled and cannot return to work full time or cannot earn your full income.
Own-Occupation
Pays a benefit if you are unable to return to your present occupation but can work doing something else. For example, a doctor who is a surgeon, cannot return to surgery but can teach. This is the most expensive type of disability policy.
Reasonable or Any Occupation
Pays a benefit while disabled, but stops when you are able to return to work at a job that matches your education and experience. This policy is less expensive than an Own-Occupation policy.
Occupation
Occupation is a factor used in determining rates. For example, a doctor's rate would be much higher than a blue-collar worker.
Guaranteed Renewable
Guaranteed Renewable policies cannot be cancelled by the insurance company even if a change in the insured's circumstances would make him or her a greater risk. Plus, the insurance company cannot make any changes to the provisions of the policy, or add restrictions. When purchasing an individual disability policy it should be Guaranteed Renewable.
Non-Cancelable
Guarantees future premiums will not be increased. When purchasing an individual policy it should be Non-Cancelable.
Presumptive Disability
Presumptive disability means that you are considered totally disabled and eligible for benefits for the loss of sight in both eyes or the loss of two limbs. The better contracts also presume total disability for the loss of hearing in both ears, loss of the power of speech, or the loss of the use of two limbs.

Other Benefits that can be added to an individual disability policy, but could also increase the cost:

Protection Against Inflation
A benefit that can be added that offers a cost-of-living adjustment for inflation during a long-term claim.
Automatic Increase Rider
Automatically increases monthly benefits for a specified period of time. A typical increase is 5% compounded.
Future Increase Options
Allows the insured to purchase additional benefit amounts without proof of insurability.
Capital Sum Benefit
Pays the insured a lump sum benefit up to 12 times the monthly benefit if the insured loses the sight of one eye with no possibility of recovery or has a hand or foot severed. This benefit is paid in addition to the other benefits.
Rehabilitation Benefit
To help a disabled insured return to work, this benefit will pay some of the expenses incurred when the insured enrolls in an approved rehabilitation center. This benefit is paid in addition to the other benefits.
Transplant and Cosmetic Surgery Benefit
Under this benefit, any disability arising from donating a transplant organ, improving your appearance or correcting a disfigurement will be covered by the policy.

Types of Coverage

Social Security

Social Security provides not just for retirement income but disability income as well. However, more than 70% of the applicants who apply fail to get coverage the first time they apply. You can get an estimate of what your benefit might be by going to the Social Security web site.
In 1992, the average monthly payment for a disabled worker was $642; the average monthly payment for a family of a disabled worker was $1093.
Eligibility is based on being unable to perform any gainful employment.
You are eligible for benefits after you have been disabled for 5 months and if the disability is expected to last 12 months.
85% of Social Security disability payments are subject to federal income tax if your income exceeds $34,000 individually or $44,000 jointly.

Workers Compensation

Most employers are required to provide this coverage. The amount and duration varies by state. Workers Compensation only pays if the disability occurs on the job. It usually lasts for only a few years and the payments are low.