By Cathy Pareto

Aside from health insurance, disability is a very critical type of insurance individuals should consider having. When it comes to your personal finances, long-term disability can have a devastating effect if you are not prepared. Think about this: the probability of becoming at least temporarily disabled during your working years is higher than the probability of dying during your working years. (For related reading, see The Disability Insurance Policy: Now In English.)


Disability insurance can replace a portion of the salary you were making before you became disabled and unable to work after a serious injury or illness. But before you seek coverage, you should first understand the different types of disability definitions used by insurers.


Definitions of Disability
Different policies offer many characteristics and definitions for disability including:

Any Occupation: This is the strictest definition in which the insured is considered disabled only if he or she is unable to perform any duties pertaining to any occupation.

Modified Any Occupation: Disability applies only if you are unable to perform any duties pertaining to any occupation for which you have been trained, received education or have work experience.

Own Occupation: This is the most flexible definition for liability. You are deemed to be disabled if you are unable to engage in the principal duties of your own occupation. Most insurance carriers are doing away with this definition.

Split Definition: This definition can be within one's own occupation for a specific time period or with any occupation after the maximum benefit period has passed.

Loss of Income: This definition avoids the problem of having to determine partial or total disability. A policy with this definition pays the insured in the event of loss of income due to illness or injury.

The Impact of Disability Definitions
How your disability policy defines disability will influence many things including:
  • When you are eligible to receive benefits
  • How much the policy will cost - the stricter the definition, the higher the cost
  • How long the benefits will last
Obtaining Coverage
You can obtain disability coverage on your own or through your employer. Disability polices tend to be cheaper and have simpler underwriting (if any) than individual policies. Many of these policies have dual definitions of disability and others have restrictive provisions. Most group policies offered through work usually end after you leave your employer, or may only pay benefits for a specific amount of time or have caps on the amount of monthly benefits you can receive (ie. max of $5,000 per month). If the employer pays the premium, the benefits are taxable income to the employee. If the employee pays the premium, then the benefits are tax free.

Disability insurance providers rate their premiums based on your job and the level of risk involved in doing that job. Moreover, certain risky careers - skydiving or deep-sea diving instructors, roofers, etc. - may not even qualify for coverage.

Other factors to consider when obtaining coverage include:

Elimination Periods: This is the amount of time you have to wait before benefits are paid after your disability begins - the longer the elimination period, the lower the premiums. The most popular elimination period ranges from 30 days to 90 days, but can be longer. This waiting period acts as a deductible, forcing the insured to bear part of the loss. Also important to remember is that payments normally begin 30 days after your elimination period has ended.

Probation Period: This is the time period a policy must be in force before it covers the insured for specific perils such as undisclosed pre-existing conditions. This protects the insurance company from selling a policy to someone who is ill or recovering from an illness or other condition.

Disability Insurance Riders: As with any type of insurance you can add additional features to your coverage for an additional premium. These may include:

    • Guaranteed Insurability:
This rider guarantees your right to purchase additional disability insurance on specific dates or occurrences without having to show that you are in good health, but only that your income is sufficient to meet the underwriting requirements.

  • Cost of Living adjustments (COLA): This rider increases policy benefits by a certain amount annually to match inflation, usually equal to the percentage increase in the Consumer Price Index, subject to a maximum specified in the contract (ie. 5%). The cost of living adjustment increases usually happen after your disability begins and generally start after the disability has continued for a year. It is highly recommended that anyone owning or considering a disability policy purchase a COLA rider in order to help protect the value of the policy's real benefits each year. (For related reading, see All About Inflation.)
  • Duration of Benefits
    When talking about disability insurance there are two types of duration:

    Short Term: This type of coverage provides coverage for disabilities of up to two years, but most policies pay up to six months on average.

    Long Term: This type of coverage protects for a longer time period (on average more than six months), often until age 65 or for life.

    Certain exclusions may apply to disability policies that are worth identifying, and these may vary from policy to policy.

    • Two-year maximum benefit period for mental or nervous disorders
    One-year maximum benefit period for alcohol or drug abuse related claims
  • Exclusion for payment of disability claims if injury or disability occurred during the commitment of a crime
  • Exclusion for disability claims resulting from an act of war. This is not very common, but may exist in certain contracts.



  • Next: Intro To Insurance: Long-Term Care Insurance »



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