Learn About Disability Insurance
Disability planning should be part of a comprehensive insurance or risk management analysis. It is important to consider the financial risks of certain unforeseen events such as a prolonged illness or a disability that could result in being unable to work. Proper insurance coverage is the foundation of a comprehensive financial plan.
Basics of Disability Insurance
Disability insurance is an insurance policy that pays a percent of your lost wages if you become ill or injured and cannot work.
It is often available in short-term and long-term plans, as well as individual and supplemental plans.
After you enroll in an individual disability insurance plan, you pay monthly premiums.
Then, if you become ill, injured or pregnant and cannot work, this insurance policy will pay percent of your wages for a given time (Benefit Period)
Depending on your plan, The benefit period can vary from several months to the remaining years of your working life.
Most disability insurance policies also have an Elimination period, or waiting period before you actually begin receiving payments from the insurance company.
The premium of an insurance policy will vary depending on
1) your income/benefit
2) the benefit period
3) the elimination period
Long Term Disability
Long-term disability insurance can pay you for years after you become unable to work.
You choose your benefit period when you purchase a policy, the length of which is usually reflected in the price of monthly premium.
Long-term disability insurance usually has an elimination period of three- to six-months.
Long term policies can offer coverage up to age 65, or up to full retirement age for people who have become totally disabled.
Totally disabled people usually apply for Social Security Disability benefits. If Social Security Disability Income (SSDI) is granted that benefit would be coordinated with payout from an existing disability policy.
24 months after the SSDI takes effect the beneficiary will automatically be enrolled in Medicare.
Short Term Disability
Short term disability insurance pays you a portion of your income immediately after an accident or serious illness prevents you from working.
The elimination period for short-term disability is usually seven to 30 days.
The short term disability (STD) policy might last for 26 weeks with long term disability (LTD) taking over after that point.
What is Disability Insurance?
What is Disability Income Insurance
Disability income insurance provides benefits in the form of periodic payments in the case a person is unable to work due to sickness or accidental injury.
How much disability insurance do I need?
At a minimum, disability insurance coverage should replace lost income when a person becomes disabled. In most cases, however, the loss of income is accompanied by increased expenses causing more of a financial hardship than premature death.
Three common methods we use analyze your disability insurance needs include:
1) Income Protection Method: Objective is to achieve protection of desired future income amount.
2) Cash Flow Method: Objective is to have sufficient cash flow to maintain positive portfolio assets for your lifetime.
3) Income Gap Percentage Method: Objective is to to protect a percentage of your lost income in the event you are disabled. Most policies protect between 60% and 80% of your income.
What are the definitions of disability?
The definition of disability outlined in the insurance contract determines whether a policy covers the loss of income.
1) Own Occupation: Most expensive. Covers if you are unable to perform any or all duties of your own occupation.
2) Modified Own Occupation: Would not continue to pay if the individual is gainfully employed in another field.
3) Any Occupation: Covers only if the individual is unable to perform duties o fnay occupation or which one is reasonably qualified by education, training, or expereince.
4) Social Security definition: Covers if the individual is unable to egagae in any substantial gainful employment due to a mental of physical impairment that has lasted for 5 months and is expected to last a total of at least 12 months or result in death.
Many hybrid policies would cover the insured under own occupation for two years and then cover under the any occupation definition.
How is disability insurance premiums and benefits taxed?
The rules for determining whether federal tax is owed on LTD or STD income depend on two things:
1. Who paid the premiums: you or your employer?
2. How were premiums paid: with pre-tax dollars or after-tax dollars?
Generally speaking, if your employer paid the premiums, then the income you get on disability is taxable.
If you paid the premiums with pre-tax dollars, then your disability income is also taxable. However, if you paid the premiums with after-tax dollars, then your disability income payments are free from federal taxes.
What are the reasons why a disability insurance claim may be denied?
1. Claimant not covered under the policy: A claim determination decision that the claimant is not insured or covered under the policy, against which a claim for benefits is made, as of the date of claimed disability onset.
2. Claimant returned to work during the elimination period: Many policies have an elimination period, defined as the time between the onset of a disability and benefit eligibility.
3. Pre-existing condition: A medical condition of the insured that existed before eligibility for coverage under a disability income policy.
4. Claimant not disabled under the policy definition of disabled: The claimant is not disabled as per policy definitions. Include in this line instances where an individual is deemed physically capable of work and instances where the decline in income or wages is insufficient to trigger coverage.
5. Lack of documentation: Instances in which a claimant fails to submit requested documentation sufficient to demonstrate disability.
6. Disability arising from diagnosis excluded under the policy: An injury or condition specifically identified in the policy as excluded from coverage. For example, some policies exclude conditions whose diagnosis relies on the insured’s subjective expressions of symptoms or for which no objective lab, imaging, or other medical test exists. Examples might include fibromyalgia or chronic fatigue syndrome. Other policies might exclude psychological conditions or substance abuse.
7. Disability due to work-related injury or condition excluded under the policy: Claims denied under an exclusion or injuries or condition arising from paid employment.
8. Disability caused by excluded condition or circumstance other than a work-related injury: A disability arising from circumstances or causes specifically excluded under the policy. Common examples might include disabilities arising from committing a felony and act of war or an excluded activity such as non-commercial aviation.
9. Misrepresentation: Claim denials due to false or incorrect information on an application for coverage or in the application for policy benefits.