What Is Disability Insurance?
Disability Insurance, also known as income protection, is a mean of financial protection that an individual (the beneficiary) has against any form of disability or physical impairment which can prevent him from working. It covers long-term disability benefits (LTD), short-term disability benefits (STD), and possibly paid sick leave.
However, the definition of disability varies from one insurer and one contract to another. Therefore, it is crucial that you read the policy and ask questions if necessary before signing the contract.
There are some important points to search and fully understand before you sign a disability Insurance policy: Definition of disability, waiting period, duration of benefits, and premiums. These crucial points can vary greatly. Check the indication in your contract regarding all these aspects. For instance, in case of disability, will you receive benefits for a year, two years, until retirement, or the rest of your life?
Do you need disability insurance?
It is estimated that more than 18% of Americans are currently living with a form of disability. That is, 1 out of every 4 people in the US workforce experience a period of disability for 90 days or more before the age of 65. What would happen if such a situation prevents you from working? How will you support yourself and fulfill your obligations?
Clearly the answer is yes, you need disability insurance. It guarantees payment of benefits for partial or total disability, and may allow to beneficiate medical assistance if necessary. In other words, the insurance compensates for the loss of income.
Types of disability insurance
In general, there are two types of disability insurances: Short-Term Disability (STD), which has a waiting period of up to 14 days and maximum benefit period of up to two years; and Long-Term Disability (LTD) which comes with an elimination period that can take several months and maximum benefit period that can last the rest of life of the beneficiary. Usually, the longer the elimination periods, the lower the premiums will be.
The same, disability policies can be noncancelable or guaranteed renewable:
In a noncancelable income protection, the insurance company cannot cancel the service, excepting prolonged delinquency in the payment of the premiums. This policy allows the renewal of the insurance every year without any impact on the premium or the benefits.
In guaranteed renewable you can also renew the policy with the same benefits and have the same protection from cancellation by the company. But the insurer has the right to increase the premiums.
If you purchase individual disability insurance, you can customize your plan by choosing features according to your needs. Although this gives the power of choice, it may have some financial disadvantages; the more benefits you add, the more it will cost you. If you rather get a group disability insurance, you do not necessarily have a choice of coverage.
If your employer, your union or association assumes a share of the cost of the insurance, benefits will be taxable. Otherwise, they usually are not.
Important Points to Remember
Waiting period may vary from one case or insurer to another. However, if you become disabled, you will most likely have to wait several weeks before receiving benefits. During this waiting period, you can use the sick leave days paid by your employer to cover your daily expenses.