Disability insurance

Disability Insurance, often called DI or disability income insurance, or income protection, is a form of insurance that insures the beneficiary’s earned income against the risk that a disability creates a barrier for a worker to complete the core functions of their work. For example, the worker may suffer from an inability to maintain composure in the case of psychological disorders or an injury, illness or condition that causes physical impairment or incapacity to work. It encompasses paid sick leave, short-term disability benefits (STD), and long-term disability benefits (LTD). Statistics show that in the US a disabling accident occurs, on average, once every second. In fact, nearly 18.5% of Americans are currently living with a disability,[citation needed] and 1 out of every 4 persons in the US workforce will suffer a disabling injury before retirement.

1848 in England to insure against the rising number of fatalities on the nascent railway system. It was registered as the Universal Casualty Compensation Company to:

…grant assurances on the lives of persons travelling by railway and to grant, in cases, of accident not having a fatal termination, compensation to the assured for injuries received under certain conditions.

The company was able to reach an agreement with the railway companies, whereby basic accident insurance would be sold as a package deal along with travel tickets to customers. The company charged higher premiums for second and third class travel due to the higher risk of injury in the roofless carriages.

Individual disability insurance

Those whose employers do not provide benefits, and self-employed individuals who desire disability coverage, may purchase policies. Premiums and available benefits for individual coverage vary considerably between companies, occupations, states and countries. In general, premiums are higher for policies that provide more monthly benefits, offer benefits for longer periods of time, and start payments of benefits more quickly following a disability claim. 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 thus covering more insurances that the individual was going to purchase. Web-based disability insurance calculators assist in determining the disability insurance needed.

High-limit disability insurance

High-limit disability insurance is designed to keep individual disability benefits at 65% of income regardless of income level. Coverage is typically issued supplemental to standard coverage. With high-limit disability insurance, benefits can be anywhere from an additional $2,000 to $100,000 per month. Single policy issue and participation (individual or group long-term disability) coverage has gone up to $30,000 with some hospitals.

Business overhead expense disability insurance

Business Overhead Expense (BOE) coverage reimburses a business for overhead expenses should the owner experience a disability. Eligible benefits include: rent or mortgage payments, utilities, leasing costs, laundry/maintenance, accounting/billing and collection service fees, business insurance premiums, employee salaries, employee benefits, property tax, and other regular monthly expenses.

National social insurance programs

In most developed countries, the single most important form of disability insurance is that provided by the national government for all citizens. For example, the UK’s version is part of National Insurance; the U.S.’s version is Social Security (SS)—specifically, several parts of SS including Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI). These programs provide a floor beneath all other disability insurance. In other words, they are the safety net that catches everyone who was otherwise (a) uninsured or (b) underinsured. As such, they are large programs with many beneficiaries. The general theory of the benefit formula is that the benefit is enough to prevent abject poverty.

In addition to federally funded programs, there are five states which currently offer state funded Disability Insurance programs. These programs are designed for short term disabilities only. The coverage amount is determined by the applicant’s level of income over the previous 12 months. The states which currently fund disability insurance programs are California, New York, New Jersey, Rhode Island, and Hawaii.

Employer-supplied disability insurance

One of the most common reasons for disability is on-the-job injury, which explains why the second largest form of disability insurance is that provided by employers to cover their employees. There are several subtypes that may or may not be separate parts of the benefits package: workers’ compensation and more general disability insurance policies.

Workers’ compensation

Main article: Workers’ compensation

Workers’ compensation (also known by variations of that name, e.g., workman’s comp, workmen’s comp, worker’s comp, compo) offers payments to employees who are (usually temporarily, rarely permanently) unable to work because of a job-related injury. However, workers’ compensation is in fact more than just income insurance, because it compensates for economic loss (past and future), reimbursement or payment of medical and life expenses (functioning in this case as a form of health insurance), and benefits payable to the dependents of workers killed during employment (offering a form of life insurance). Workers compensation provides no coverage to those not working. Statistics have shown that the majority of disabilities occur while the injured person is not working and therefore is not covered by workers’ compensation.

Newsweek magazine’s cover story for March 5, 2007 discussed the problems that American veterans of Afghanistan and Iraq wars have faced in receiving VA benefits. The article describes one veteran who waited 17 months to start receiving payments. Another article, in The New York Times, points out that besides long waits, there is also variation based on the veteran’s state of residence and whether he/she is a veteran of the Army, National Guard, or Reserves.The Newsweek article says that it can be difficult for a veteran to get his or her claim approved; Newsweek described the benefits thus:

«A veteran with a disability rating of 100 percent gets about $2,400 a month—more if he or she has children. A 50 percent rating brings in around $700 a month. But for many returning servicemen burdened with wounds, it is, initially at least, their sole income.»

The 2007 figures cited above correspond in 2012 to $2,673 a month (more with children) and, for the 50% rating, $797 a month for a single veteran.

According to a sidebar in the same Newsweek article, the Americans injured in these wars, for all the obstacles to proper care, will probably receive much better compensation and health care than equally injured Afghan or Iraqi soldiers.

Your most valuable asset isn’t your house, car or retirement account. It’s the ability to make a living.

Disability insurance pays a portion of your income if you can’t work for an extended period because of an illness or injury.

“Everybody who relies on a paycheck should have this coverage,” says Keith Hoffman, the vice president of disability insurance at NFP Corp., an insurance brokerage and consultancy headquartered in New York.

Here’s what you need to know:

Why you need disability insurance

Types of disability insurance

How to get disability insurance

Buying your own disability policy

Who offers disability insurance

4 questions to ask yourself

Features of employer-sponsored and individual disability insurance

Other ways to find disability protection

Why you need disability insurance

The chance of missing months or years of work because of an injury or illness may seem remote, especially if you’re young and healthy and you work at a desk.

But more than one in four 20-year-olds will experience a disability for 90 days or more before they reach 67, according to the Social Security Administration.

“You never think it’s going to be you,” says Carol Harnett, president of the Council for Disability Awareness, an insurance industry group.

More than one in four 20-year-olds will experience a disability for 90 days or more before they reach 67.

One reason people shrug off the risk is they think about worst-case scenarios, such as spinal cord injuries leading to quadriplegia or horrific accidents that result in amputation, Harnett says. But back injuries, cancer, heart attacks, diabetes and other illnesses lead to most disability claims.

“The questions people have to ask are, ‘What would you do if you couldn’t work? How far could you go without a paycheck?’ ” Harnett says.

Types of disability insurance

There are two main types of disability insurance — short-term and long-term coverage. Both replace a portion of your monthly base salary up to a cap, such as $10,000, during disability. Some long-term policies pay for additional services, such as training to return to the workforce.

SHORT TERM VS. LONG-TERM

Short-term disability insurance          Long-term disability insurance

Typically replaces 60% to 70% of base salary          Typically replaces 40% to 60% of base salary

Pays out for a few months to one year, depending on the policy    Benefits end when the disability ends. If the disability continues, benefits end after a certain number of years or at retirement age.

May have a short waiting period, such as two weeks, after you become disabled and before benefits are paid   A common waiting period is 90 days after disability before benefits are paid

Disability policies vary in how they define “disabled.” Some policies pay out only if you can’t work any job for which you’re qualified. Others pay out if you can’t perform a job in your occupation. Some policies cover partial disability, which means they pay a portion of the benefit if you can work part time. Others pay only if you can’t work at all.

How to get disability insurance

Here are ways to get coverage:

Sign up for employer-sponsored coverage at work. Most employers that offer disability insurance pay some or all of the cost of premiums. Five states provide or require employers to provide short-term disability benefits, according to the Society for Human Resource Management: California, Hawaii, New Jersey, New York and Rhode Island.

Buy disability insurance through the workplace. Some employers don’t pay for disability coverage but offer it as a voluntary benefit. This lets employees buy coverage through the employer’s insurance broker at a group rate.

Buy disability insurance through a professional association. Many professional groups offer members coverage at group rates.

Buy an individual disability insurance plan. You can get it from an insurance broker or directly from an insurance company. Big sellers of individual disability insurance include Guardian, MassMutual, Northwestern Mutual and Principal. Most individual disability policies sold are for long-term coverage, although some companies also offer short-term policies.

Buying your own disability policy

Consider buying a policy if you don’t have any or enough disability coverage at work or are self-employed. Employer-sponsored disability insurance usually pays only a portion of your base salary, up to a cap. It’s a good idea to supplement that coverage if your salary far exceeds the cap or you depend on bonuses or commissions.

An insurer will consider other sources of disability insurance to determine how much coverage you can buy. Generally, you can’t replace more than 75% of your income from all the coverage combined, Hoffman says.

Buying your own policy lets you:

Customize the coverage with extra features, such as annual cost-of-living adjustments

Choose the insurance company with the best offerings

Keep the coverage when you change jobs. Employer-paid coverage ends when you leave the company. (You might be able to take the coverage if you pay the full premium for disability insurance offered through the workplace.)

Control the disability insurance. The coverage stays intact as long as you pay for it. But employer-sponsored coverage will end if the employer decides to stop providing disability benefits.

Collect benefits tax-free if you become disabled. If the employer pays for the coverage, you must pay taxes on the benefits.

The annual price for a long-term disability insurance policy generally ranges from 1% to 3% of your annual income, according to the Council for Disability Awareness. A variety of factors affect the cost.

Your age and health: You’ll pay more the older you are and the more health problems you have

Your gender: Women usually pay more because they tend to file more claims

Whether you smoke: You pay less if you don’t smoke

Your occupation: You’ll pay more if you work in a job with a high risk of injuries

The definition of disability: The broader the definition of disability, the higher the premium. A policy that covers you if you can’t work in your own occupation but could earn income in a lower-paying job will cost more than a policy that covers you only if you can’t work at all.

Length of waiting period: This is known as the elimination period. You can reduce the premium by increasing the waiting period before benefits kick in.

Your income: The more income you have to protect, the more you’ll pay for coverage

Length of benefits: The longer the period that the policy promises to pay out if you become disabled, the more you’ll pay in premiums

Extra features: Additional features, such as cost-of-living adjustments to protect against inflation, will increase the premium