Friday, March 04, 2016

The Definitive Guide to Disability Income Insurance

Disability income insurance replaces a percentage of a person's income in the event they are sick or hurt and can't work because of it. It's a fairly common workplace benefit offering.

There are two types of disability income insurance. Those two types are:

  • Short term disability income insurance Short term disability insurance provides a weekly benefit in the event of a disability.
  • Long term disability income insurance Long term disability provides a monthly benefit in the event of a disability.

When discussing these two types of disability insurance, people refer to them as STD and LTD. Disability insurance is referred to as DI.

RESOURCE: This guide is a part of my larger guide called The Definitive Guide to Workplace Benefits. Be sure to check it out.

What Is The Purpose Of Disability Income Insurance?

If someone gets sick or hurt and they can't work because of it, they don't get paid. As a result, if they don't have any money saved up ahead of time, they could have a tough time paying their bills.

This is where disability insurance comes in. If you are sick or hurt and can't work because of it, this insurance will pay a benefit directly to you and you can use that money however you need to.

What Does Your Company Offer, Who Pay For It And What Are The Benefits?

How a disability plan is set up will vary from company to company. Some companies pay the premiums, others don't. Some pay for long term disability but not for short term. Some don't pay for either.

You as an employee can also opt to enroll in one or both types of disability plans or forgo both if you want.

Thd benefits, waiting periods. duration of benefits and the definition of disability will all have to be determined for your specific plan by reading your plan documents.

What Is The Definition of Disability

Every policy has a definition of what disability is and if you meet that definition, then payments will be made based on the rules of the policy. Definitions will vary by policy and by state.

Typically, the definition will revolve around whether you can do the job you had or any kind of job you might be able to do. The definition can also vary between the short term and the long term disability policies

Waiting Periods

A waiting period is the length of time that must pass that you meet the definition of disability before benefits can be paid.

Short term disability waiting periods are listed in this format
X days for injury/X days for sickness.

Here are some examples of short term disability waiting periods:

  • 0/7
  • 7/7
  • 0/14
  • 14/14
  • 30/30

Long term disability waiting periods are just listed in the number of days
whether the disability is for an injury or accident.

Long term disability waiting periods:

  • 90 days
  • 180 days
  • 360 days

Benefit Amounts

Benefit amounts can either be designated by a percentage or by a flat amount (up to a certain percentage). For example, you might be able to cover 65 percent of your income but not any more.

Alternatively, you can opt for certain amount of coverage as long as they don't exceed a certain percentage. You might be able to buy a weekly amount of STD in increments of $100 per week up to a certain dollar amount. And the same would apply to LTD except for the amounts would be in monthly amounts.

Benefits pay from disability income insurance are always a percentage of your full income and not the full amount. This is to give you and incentive to come back to work.

Benefit duration

Once you meet the definition of disability, if you have short term disability, you'll begin receiving payments after your waiting period is over and then until the short term disability is exhausted (if you are enrolled in it) and then the long term disability will kick in.

The benefit duration on STD is pretty cut and dried. With LTD, it's gets a little more complicated. Some sample durations might be:

  • Until age 65
  • Five years
  • Two years for your own job and a longer period of any job

Again, review your policy to see how long the duration is.

Pre-existing Condition Limitation

Many disability policies incorporate a pre-existing condition clause. As with all of the other options, you'll have to look at your plan and see what it is.

Pre-existing condition exclusions are written in the following format:
X months look back/X months pre-existing condition period.

  • 3/12
  • 6/12
  • 12/12

So, a 3/12 pre-existing condition limitation would mean that during the first 12 months of the policy, if there's a claim by the insured, the insurance company will look back 3 months before the insured took out the policy to see if a pre-existing condition led to that disability. Once 12 months have expired, then the insurance company won't look back anymore.

A good example of how this works is in the case of an employee who finds out she is pregnant in November and enrolls in a new disability amount effective January 1. In the first 12 months of the policy, she will likely submit a claim for her maternity leave. Since she was already pregnant within the three months prior to the effective date, that claim would be considered a pre-existing condition and be denied. However, if she got pregnant after January 1 or after the 12 months, this would not be considered a pre-existing condition.

On The Job or Off The Job Coverage

Just as in the case of accident insurance, disability insurance can also be set up to either include or exclude an injury that occurs on the job. In a lot of groups I've seen, it's common to have off the job coverage for STD and 24 hour coverage for LTD.

As always, read your policy!

Your policy will guide how your plans work. There are many options with regard to disability income insurance. Things like partial disability payments, own occupation definitions, whether it's portable coverage, written as a group contract or an individual contract. Check your contracts to see how they work.

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Michael is a champion of guaranteed issue for employees in the workplace. He's been an insurance agent since 1992 and has worked with thousands of employees.