Becoming disabled through an injury or sickness can mean a significant loss of income. Disability Insurance, often called Disablity Income Insurance is a form of health insurance that provides a person who becomes disabled with income to cover living expenses that continue in spite of the disability. In other words, it is a form of insurance that insures the beneficiary's earned income against the risk that disability will make working (and therefore earning) impossible. It answers the question, "How would I pay for my living expenses if I became unable to work?"
Individuals whose employers do not provide disability benefits, and self-employed individuals who desire disability coverage, may purchase their own policies on the open market. Premiums and available benefits for individual coverage vary considerably between different companies, for individuals in different occupations, and by State. In general, premiums are higher for policies that provide more monthly benefit, pay the benefit for a longer period of time, and start payments for benefits more quickly following a disability. 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.
Claims: what is covered, and for how long
The important variables regarding claims are listed below. Not every variable matters to every type of disability insurance, but most of these are generally relevant.
Was the disability unpredictable (not resulting from previously-known chronic illness)?
A potential policyholder seeking a regular individual policy on the open market must warrant that he is in good health and to the best of his own knowledge is not currently HIV-positive. A general principle of insurance is that the policyholder sells risk that, to the best of his knowledge, is not higher than the stated circumstances imply.
Was the disability incurred in the course of performing job-related duties?
Worker's compensation policies are not obligated to pay claims for disability that is not job-related. Insurance for such risks can indeed be purchased, but because the risks are more inclusive, the premiums are higher. A policyholder always needs to understand what he or she is or isn't buying with her premium. And the insurer is legally obligated to specify exactly what coverage is or isn't being sold.
How long is the waiting period before claim payments start?
Since most disability events are temporary, insurance coverage for them is cheaper when the policyholder agrees to wait longer before receiving claim payments. If you break a finger, it may only be 2 months before you are able to do your job again. If you agreed to wait 60 days before receiving claim payments, then the insurer will not have to pay a claim for your event. This reduction to your risk is reflected in the lower price that you paid to purchase coverage (lower premiums).
Another important example in this category is that the standard waiting period before starting to collect Social Security's disability benefits, which is one year.
What other insurance policies will pay claims for this event?
If an auto accident makes you unable to work for 4 months, your auto insurance policy may include coverage for lost income during this period. (Often lost-income coverage is a separate rider to the auto insurance policy that you must pay extra for if you choose to have it.) In this case, you may choose to make a claim with your auto insurance company and either (1) make another, secondary claim with your Disability Insyance company, who has issued your disability income insurance, or (2) decide that the primary claim is enough and avoid making an unnecessary claim with your disability insurance company. Sometimes there is a previously established order of priority that rules that a disability insurance carrier is liable for the claim only to the extent that an auto insurance carrier's coverage is not enough.
Another important example in this category is that if your injury is someone else's fault, their liability coverage from, an auto, home, or personal umbrella policy may pay for your lost income, and therefore you will not make a claim on your own policy.
How much money will be paid per week/month/pay period?
It is rare for any policy to pay the full amount of the beneficiary's regular salary. Policies that do are expensive. Generally it will pay only some percentage, such as 80%, or it will pay only a flat amount, such as $2000/month, regardless of the normal salary amount. The idea behind this reduced benefit is that it is enough to protect you from mortgage foreclosure, or to keep you from running up huge debts, during your convalescence, even though it is not enough to live a carefree lifestyle on. In return for this trade-off, your premiums are lower. This is a good trade-off when you remember that hopefully, you will never have to make a claim anyway, so why pay higher premiums than you have to?
For how many weeks/months/pay periods will payments continue?
Most policies in the lower and middle areas of the market will have a cap, for example, 5 years. More expensive policies will pay all the way to the age when the national social insurance program takes over as the primary income source. For example, in the U.S., this is at age 65, when Social Security takes over.
What if the beneficiary is not totally disabled, but only partially?
Most policies in the lower and middle areas of the market will only pay claims if there is no job that the beneficiary can possibly do. Others, referred to as own-occpolicies, will pay the claim as long as you cannot return to your own occupation. Own-occ policies cost more to buy (higher premiums) than non-own-occ, because their claims risk is greater. For example, suppose that your normal job involves lifting heavy boxes and getting paid $4000/month. Then you get injured, and can't lift so much weight. However, you are still capable of doing light assembly work at a workbench for $2000/month. If your policy is a less-expensive model, the insurer will tell you that no claim will be paid, because you are capable of working (although not at your own occupation). But if your policy is an own-occ policy with a claim amount of 75% of your normal salary, it will pay you a claim of $3000/month. This payment will recur monthly until (a) you are able to do your normal job again; or (b) the cap is reached (for example, 5 years later); or (c) you reach age 65 (when the policy ends and you begin collecting Social Security)..
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