In part I of Your Biggest Financial Asset is Not Your Home we learned that your biggest asset is your paycheck and Disability Insurance was one way to protect that paycheck if you become unable to work due to an injury or illness. In Part II we will look at some common defintions, how Disability Insurance is priced and what qualifies you to start collecting benefits.
Primary Disability Pricing Factors
Occupation – Even though nearly 90% of disabling accidents and illnesses are not work related, what you do as an occupation does have a large impact on disability insurance rates. Occupations that are more hazardous and physically demanding will have higher rates than someone who works primarily in an office.
Health – Similar to life insurance, disability insurance will review your medical history, including build and tobacco use. For larger disability policies they may also require a paramedic exam (blood & urine).
Benefit Amount – This is the portion of your salary covered by the disability insurance. Generally, you can replace between 45%-75% of your salary, and benefits are normally paid on a monthly basis. Disability policies normally do not replace a 100% of your income because most individual policy benefits are paid tax-free.
Benefit Length – This is the length of time you will receive payments from your disability policy. Generally, you can choose from: six months, one-, two-, five- and 10 years, or to age 65. A general rule of thumb is any policy less than 2 years is “Short Term Disability” and over 2 years is “Long Term Disability”.
Waiting Period – Most insurance policies have a deductible that requires you to pay a specific amount out of pocket before the insurance will start paying any benefits. The waiting period for disability insurance is the same thing as a normal insurance deductible except it is based on time instead of dollars. Generally, you can choose to wait 30, 60, 90 or 180 days before you start receiving disability benefits. The longer the waiting period, the lower the price for the insurance.
What Qualifies as being Disabled?
When shopping disability insurance, it is critical to understand what qualifies as being “disabled,” because this definition will determine if and when you will receive benefits from your policy. Most policies will define “disabled” as either when you cannot perform your own occupation (Own Occ) or when you cannot perform any occupation (Any Occ).
A policy with an “Own Occ” disability definition has much broader coverage than a policy with an “Any Occ” definition. It is important to know the definition of “disabled” when shopping disability insurance and not focus solely on the price. Otherwise, you could be paying for a policy that might not replace your paycheck when you need it.
Overall, Disability Insurance is one of the most important but one of the least talked about insurance coverages. Most people either believe the odds of becoming disabled are negligible or a program like Social Security Disability will replace their entire income if they are unable to work. However, just like so many things in life, education is key. As we finish up Disability Awareness Month, please consider sharing this article or the official Disability Insurance Awarness website with a friend or family member that needs to protect their paycheck.