Disability Insurance, also called disability income insurance, is a type of insurance that provides a worker a portion of their salary in the event said worker is unable to perform their normal duties due to a non-work related illness or injury, or pregnancy. Disability insurance is bifurcated into two types: Short-Term Disability (ST) and Long-Term Disability (LT) Insurance. In efforts to decrease the impact of any moral hazard, disability insurance typically involves a waiting period prior to it taking effect. For ST Disability the waiting period can be as short as a week, and for LT Disability the waiting period can be from 90 to 180 days. Note that typically the longer the waiting period, the less expensive the policy. As a result, LT Disability is typically cheaper than ST.
Short Term Disability Insurance:
1. Who will shop for Short-Term Disability Insurance?
Any one who feels they are exposed to non-work related accidents/disabilities and need to continue their income during that short period of time.
2. What is Short-Term Disability Insurance?
As noted above it is mostly offered by private insurance companies to replace lost income during a short period of non-work related disability. It has a short waiting period and it can be relatively expensive.
3. Where can I buy Short-Term Disability Insurance?
While a handful of states offer STDI, private insurers are the primary providers. You can access these plans online, and through some employers, and insurance agencies.
4. How much will Short-Term Disability cost?
STDI costs from $50 per month to over $200 per month depending on the term and coverage selected. Clearly the larger your income the more it will cost.
5. Why is Short-Term Disability Insurance so expensive?
Even though it generally covers only 60%-80% of your monthly income, and does have a short waiting and coverage period, it can be very important if you have no other financial reserves to access in a short period of disability.
Things to Consider If You Need Short-Term Disability Insurance
Self Funding – Clearly it is most cost effective to create your own Disability income fund, by setting aside three to six months of your salary in a separate account to access when and if you have a short-term non-work related disability. Many people however, cannot afford to do this and therefore consider short-term disability policies.
State Plans – Some states offer short-term disability coverages to their citizens. If you live in: California, New York, New Jersey, Rhode Island and Hawaii, (check with your state), you should check out their plans before purchasing from a private insurers. Few people might be eligible for Social Security Disability benefits.
Employer Plans – Some employers offer Short-Term Disability plans, which are usually better priced than what you will find in the marketplace. Some say that this is the best way to purchase STDI.
Long-Term Disability Insurance
1. Who will shop for Long-Term Disability Insurance?
Any one who feels they are exposed to non-work related accidents/disabilities and need to continue their income during that longer period of time. When in your peak earning years, (50-60 years old), you may feel pressure to insure part of this income.
2. What is Long-Term Disability Insurance?
As noted above it is mostly offered by private insurance companies to replace lost income during a long period of non-work related disability. It has a longer waiting period of 90 to 180 days, but it also has a longer period of benefit depending on your policy. It can range from a couple of years or all the way to retirement.
3. Where can I buy Long-Term Disability Insurance?
Private insurers are the primary providers.You can access these plans online, and through some employers, and insurance agencies.
4. How much will Long-Term Disability cost?
LTDI costs from 1% -3% of your income per month depending on the term and coverage selected. Clearly the larger your income the more it will cost.
5. Why is Long-Term Disability Insurance so expensive?
Even though it generally covers only 60% of your monthly income, and does have a Longer waiting, it can be very important if you have no other financial reserves to access in a long period of disability.
Things to Consider If You Need Long-Term Disability Insurance
Employer Plans – Some employers offer Long-Term Disability plans, which are usually better priced than what you will find in the marketplace. Some say that this is the best way to purchase LTDI. Insurers are keen to insure groups of people as it spreads the risk better for the insurer.
Know these terms:
Non-cancelable:This generally means that your policy premium will not increase over the policy period and on renewal.
Guaranteed Renewal: This means that the insurance company cannot stop you from renewing the policy and it will not be cancelled.
Exclusions:These are conditions that might not be covered by the policy you are seeking. In some cases pre-existing conditions can be excluded.
Benefit Amount:This is the amount that your policy will pay per month. It is generally not more than 60% of your pre-tax income, but it is not taxable as it is paid with after-tax dollars.
Benefit Period:Make sure you understand what you are buying. Some policies cover only a few years while others cover you all the way to retirement.
Elimination Period: The term refers to how long you need to be disabled before your benefit payments begin. Most plans put a short term financial burden on you before they start paying.
Chosen Occupation: Some policies try to define what your profession is and is not, such that they will not pay if your injury allows you to work in another profession.
Portability – Another consideration is that if purchase your policy through your employer it may not be portable if you change jobs, and LTDI can get more expensive as you get older. So think about purchasing LTDI personally, so that you can carry it with you if you change jobs.
Difference Between Short-Term and Long-Term Disability Insurance
7-14 Days typically
90 -180 Days typically
$50 – 200/ month
1-3% of your salary
3 – 6 months typically
Can be many years
60 – 80% of your income
40 – 60% of your income
Some Underwriting Questions You Might be Asked as You Seek to Purchase Disability Insurance
What is your Occupation?
What is your Desired Benefit Period?
What is your age?
What is your gender?
What is your state of residence?
What is your smoking history?
What is your income to be covered?
What is your employment status?
What are your pre-existing conditions?
Age, Gender, Smoking History, State of residence, Occupation and other issues can affect your price and your ability to get coverage for potential disabilities. Many people have no financial reserves to access if they have a non-work related accident. While expensive, if your only options are to access Credit Card debt or to take out a loan in the event of an accident, you might consider Disability insurance.
Long-term disability insurance is probably a better purchase, unless you have a fear that you are exposed to enhanced risk in the short term, and need coverage now.
Disclaimer: EINSURANCE.com content is intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you in your current and future situations. Everyone is different!
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