What’s the right type of disability insurance for you?
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Disability insurance doesn't really insure injuries and illness – it's insurance for your income. That's why many industry experts call it disability income insurance.
Your ability to work and earn income is likely your most valuable asset. When serious injury or illness keeps you from working, your income and lifestyle are at risk – and that risk is more substantial than most people think: 1 in 4 workers will become disabled during their working years.1 And while people commonly associate disability with injuries caused by accidents, most disability is actually caused by illness. In fact, almost 44% of long-term disabilities are caused by diseases or conditions such as cancer, musculoskeletal conditions (non-back), circulatory or heat disease or back related issues.2
The right coverage is a powerful defense against disruption to your way of life. But the process of getting a disability policy can seem daunting. After all, it's not something you do every day, and there's a lot to think about.
This article will help simplify things by telling you about:
The different types of disability coverage and policies, and how they work
There are two basic types of disability insurance: Short-term and long-term. Both provide a benefit that replaces a portion of your lost income, up to 60%.3 That money can be used for living expenses, repaying loans, or even put into savings. Despite those similarities, the two kinds of policies are bought differently and work somewhat differently, in large part because short-term needs differ from long-term needs. Disability insurance does NOT provide basic hospital, basic medical or major medical insurance.
Most disability is temporary, keeping a person out of the workplace for under a year. Short term disability insurance (STD for short) is designed to replace income for these shorter periods of recuperation from injury or illness. STD is typically obtained as part of a group insurance plan through the workplace, either as a mandatory (employer-paid) or voluntary (employee-paid) benefit. These plans usually pay a benefit for three to six months and often include rehabilitation features to help employees get back to work sooner.
Other types of disabilities are more severe, longer-lasting, and even permanent. Long term disability insurance (LTD for short) is for these situations, with a benefit designed to last for many years – even through retirement if needed. While long term disability insurance can be available through an employer, LTD is also purchased as an individual policy, especially by business owners, physicians and higher-income professionals. People in these professions are often concerned about what might happen to their family's lifestyle if they were no longer able to practice their profession.
For that reason, individual LTD policies typically have a more detailed definition of disability, which differentiates between own-occupation disability and any-occupation disability. Any-occupation policies only pay a benefit if you can't perform any work at all – even a simple job completely outside of your profession. Own-occupation policies pay a benefit if you lose the ability to perform your profession or specialty. Some carriers offer variations on this to give more flexibility to policyholders.
The five basic features of a disability policy
A disability insurance policy is a binding contract with an insurance company to pay a specific monthly benefit while you are disabled. Every disability contract defines these five things:
Premium: The amount you (or your employer) pay for coverage.
Disability Insurance Benefit: The amount you get each month when you are unable to work. In an individual LTD policy, the benefit usually isn't taxed (unless paid for with pre-tax dollars); for a group STD plan paid for by your employer, the benefit will be taxable.
Benefit period: The maximum length of time you can receive benefits.
Waiting period: Also called an elimination period, it's the amount of time after you are disabled until you can start receiving benefits. It's often two weeks for STD and varies for LTD based on what you select, or carrier offers
Definition of disability: Every disability policy has a specific definition of what it means to be disabled to qualify for benefits. In addition to “own-occupation” and “any-occupation,” different levels of disability may also be defined (e.g., “partial disability”), which can qualify you for a percentage of your total benefit amount.
Features and options to tailor a policy to your individual needs
All of the above items vary from policy to policy, so make sure to ask specific questions to understand what benefit you will get, when you will get it, and under which circumstances. If you're getting an STD policy through work, there probably won't be a lot of options to tailor your coverage; but check to see if the policy is portable (most aren't). That's means you're able to take the policy with you if you leave your employer – as long as you pay the premiums, you'll continue to have coverage.
A long term disability policy purchased as an individual is another matter altogether. Insurance companies will have one or more base contracts with a standard set of features and provisions. Your contract will be tailored to the benefit amount, period, and definition of disability you choose along with the riders (optional provisions) you select to personalize your coverage further. Some of the provisions, features, and riders you'll want to consider include:
Non-cancelable provision: This states that the insurer cannot raise your premiums as long as you keep paying them. Typically goes with a guaranteed renewability provision.
Guaranteed renewability: A provision which states that the insurance company will not cancel your policy or change the terms and features as long as you continue paying your premiums – but they can raise your premiums (unless the policy is also non-cancelable).
Waiver of premium: This means that premiums are waived while you are disabled and receiving benefits. Guardian goes a step further by offering a plan that waives premiums an extra six months after you recover and benefits end.
Basic or enhanced partial disability benefit rider: These options protect you by paying a partial benefit if you suffer an injury or illness that limits your ability to work but doesn't cause total disability.
Cost-of-living adjustment (COLA)4: A rider that states the insurance company will increase your benefit to account for inflation.
Student loan protection rider5: This optional benefit provides extra money to make student loan payments during the benefit period. It is particularly useful for early-career professionals such as doctors and lawyers who have invested heavily in their education.
Future purchase option6: This lets you increase coverage in the future as your income rises, without having to undergo a medical exam or provide proof of medical insurability.
Lump-sum disability benefit7: Provides a “bonus” benefit at age 60, equal to 35% of all the total disability and partial disability benefits paid until that age to make up for lost savings during a period of disability earlier in your career. This rider is only available through Guardian.
Retirement protection8: A rider that protects retirement savings by replacing the contributions you would have made to your defined contribution plan while totally disabled.
Catastrophic disability benefits: Provides extra funds – up to 100% income replacement – if due to injury or sickness you are unable to perform two or more activities of daily living, are cognitively impaired or irrecoverably disabled.
Most of the above features are available in some form from a variety of disability providers. Major carriers will allow you to personalize your policy in other ways as well.
How to purchase the disability policy that's best for you
If you can get disability coverage as part of your employee benefits package (especially for STD), start there. You'll enjoy lower group coverage rates, and your employer may pay for a portion of the premiums (or even cover STD premiums 100%). If your employer does offer LTD, the features and benefits may be limited compared to an individual policy.
Once you know how much coverage (if any) is available through work, it's time to get an online quote and then speak with a financial professional or broker to get the comprehensive disability policy you need. Make sure that professional is familiar with the specifics of buying an individual disability policy – if you don't know one, a Guardian financial professional can help you. Tell your financial professional as much as you can about your financial situation and concerns so that they can start looking into the plans and options that best meet your needs.
Discuss different coverage scenarios: What happens if you have an illness that takes you out of the workforce for a few years? What if you have a physical impairment that limits your productivity? The more you explore, the more you'll realize the value of an own-occupation definition of disability. And make sure to ask your financial professional to look for a policy that is non-cancelable with guaranteed renewability, so that your terms and premiums stay fixed.
Look for insurers with exemplary financial strength ratings
Make sure the companies your advisor gets quotes from are financially strong: You want to be sure the insurance company will be around to pay a benefit years or even decades down the road.
There are reliable, independent sources for financial strength ratings (FSRs), which you can find online, including Moody's, A.M. Best, Standard and Poor, Fitch Ratings. For an example of the kinds of ratings to look for, Guardian FSR's as assigned by Moody’s, A.M. Best, Standard & Poor’s, and Comdex were Aa1 High Quality, AA+ Superior, AA+ Very Strong, and 99 out of 100 respectively.9
What about cost?
Expect to pay anywhere from 1% to 3% of your annual income for a comprehensive individual disability coverage policy.10The actual premiums you pay will depend on the benefit amount, period, and plan provisions and features discussed above. In addition, there will be an underwriting process in which the company assesses your age, lifestyle, and health. In essence, you'll be asked to take a medical exam.
Don't put it off – the younger and healthier you are, the lower your disability premiums. There are other ways to lower costs as well, for example, by opting for a longer waiting period. You should also explore level and graded premium options to make payment easier. And don't get overwhelmed: It may seem like a lot to think about, but working together, you and your financial professional will be able to come up with the best disability insurance plan: a policy that is uniquely tailored to your protection needs.