What is Disability Insurance?

According to a 2012 survey by the Consumer Federation of America, more than half of workers say they know little or nothing about disability insurance. Disability insurance pays a percentage of your income if you become injured or ill, and are unable to work.

Determining the definition of disability is critical, as each policy and provider has a distinct interpretation. It is important to learn what this definition is because it tells you what your policy covers.

Why do I need it?

Money isn’t everything, but the ability to make a living is important to everyone. A 2015 study by The Pew Charitable Trusts discovered that 55% of U.S. households could replace less than a month of their income through liquid savings.

This statistic highlights why your ability to make a living is vital; most households simply do not have enough liquid savings, money that is readily available, to support themselves for an extended period.

Also, more than one in four 20-year-olds will experience a disability at some point before they retire, according to the Council for Disability Awareness [i]. These two facts highlight the need for some sort disability coverage, to protect yourself and your family.

Doesn’t the government protect disabilities?

Yes, the government does protect those with disabilities, but not in the same way disability insurance does. The Americans with Disabilities Act (ADA) prohibits employers of 15 or more from discrimination in recruitment, hiring, promotions, training, pay, social activities, and other privileges of employment.

This act also requires employers to make reasonable accommodations for disabled individuals. It does not force an employer to grant any paid leave. The Family Medical Leave Act (FMLA) provides unpaid, job-protected leave for family and medical reasons, which can help if you suffer a disability; however, it must be emphasized that this is unpaid.

Social Security does offer some disability insurance (SSDI), but it only covers long-term disability (it excludes short-term and partial disability) and pays out less than private plans do. The average SSDI benefit amount in 2016 is only $1,166 [ii].

Short-term vs. Long-term Coverage

There are several fundamental differences between short and long-term disability insurance. The first difference being the length of time that the policies provide income. A short-term policy usually provides benefits for between nine and 52 weeks.

A long-term policy can provide benefits for a certain number of years (For example two or five years) until the disability ends, or until the policyholder reaches a certain age. The second difference is the difference in the length of the elimination period.

The elimination period is the number of days an insurer must wait after becoming eligible for disability before their coverage begins. In other words, this is the deductible period for your policy. For short-term plans, this time usually spans 1-14 days. For long-term plans, it usually takes 30 to 720 days (This is the extreme end of the spectrum), with 90 days being the standard [iii].

Another important factor to consider, when determining what type of disability insurance to purchase, is whether or not your employer offers any form of coverage. Many employers provide some short-term disability insurance as a part of their benefits package, so it is important that you check with your benefits consultant or HR representative before purchasing any yourself.

Additionally, if your company doesn’t offer any paid coverage, it may offer disability insurance as a voluntary benefit, and allow you to purchase coverage through the employer’s insurance broker at a group rate. Finally, if your employer doesn’t offer any disability insurance, or you are self-employed, you may be able to purchase coverage at a group rate through the professional group that you belong.

 Individual vs. Group Plans [iv]

  Individual Disability Insurance VS. Group Disability Insurance
Relationship The relationship is between you, the individual, and the insurance company.   The relationship is between your employer and the insurance company, who have reached an agreement to insure employees of the employer.
Plan Options You, as the sole owner of the policy, decide what type of coverage best suits your needs, and can make changes to your plan as needed.   Your employer decides the definition of disability and the benefits received through the coverage. They also choose whether coverage will be employer paid, employee paid, or a combination of the two.
Taxability of Your Disability Income Because you are paying for the coverage yourself, any benefits received are non-taxable.   If your employer pays for the coverage any benefits received are taxable. If you pay all, or a portion of the coverage your benefits received may or may not be taxable. This all depends on whether or not you pay for the coverage with pre or post tax dollars. If you paid the premium with pre-tax dollars, the correlating portion of the benefits is taxable.
Coverage A majority of policies are non-cancelable or guaranteed renewable, as long as you maintain payment of the premium, which means that your coverage remains intact even if you change your job or occupation.   As an employee, your eligibility for coverage is usually dependent on you continuing under the employ of the employer who purchased or sponsored the coverage.Your insurers may provide coverage continuation or conversion upon termination, but are not required to do so.

 

References

 [i] https://www.nerdwallet.com/blog/insurance/disability-insurance-explained/
[ii] https://www.dol.gov/whd/fmla/fmla-faqs.html
[iii] http://www.nolo.com/legal-encyclopedia/how-much-social-security-disability-ssdi-benefits-can-you-get.html
[iv] http://www.insurancecompact.org/documents/140826_psc_grp_di_v_ind_di.pdf