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Most of us know that life insurance policies are important because they help protect our loved ones in the event of our death. Yet, many people think that disability insurance is much less necessary. The truth is disability insurance is just as important as life insurance. There are many types of disability coverage from generic policies to specialized disability insurance for doctors. Let us take a closer look at how disability insurance can be part of your financial protection strategy.
What constitutes a disability?
While definitions can change depending on insurance providers, a disability is generally defined as a medical condition that prevents you from working for some time. There is a misconception that disabilities tend to be the result of catastrophic accidents, but the fact is that many disabilities are caused by common illnesses such as cancer, diabetes, heart disease, and stroke. These illnesses often result in prolonged absences from work and in some cases may prevent you from returning to your former job. In addition, mental illnesses such as anxiety and depression may also qualify as a disability depending on the severity of your condition.
Short-term vs long-term insurance
Short-term disability insurance provides you with funds to replace a portion of your income if you become disabled for six months or less. It does not provide coverage for disabilities that last for more than six months. Short-term disabilities can cover issues such as back injuries, broken limbs, and recovery from surgery. It may also cover childbirth and maternity leave. This type of insurance is typically provided through your employer’s group insurance plan and premiums are generally paid through pre-tax payroll deductions.
Long-term disability insurance is designed to provide monthly income to individuals who cannot work due to an injury or illness that lasts longer than six months. While some long-term disability policies may provide benefits for five to ten years after you become disabled, some extended policies will cover you up to retirement age. Long-term disabilities can include conditions such as cancer, childbirth complications, partial or full paralysis, and brain injuries. You may have to purchase your own long-term disability policy and typically must pay extra for increased coverage.
Important considerations when choosing a policy
Premium – The insurance premium is the amount of money you will pay each month for the policy. The amount of coverage you select will have a major impact on the price of the premium. A higher level of coverage will generally result in a higher premium than a lower level of coverage.
Benefits – The benefit is the amount of money that you will receive per month from the insurance company if you are unable to work due to a disability. The amount you receive depends on the amount of coverage you purchased. Most of the time, the benefit will only cover a maximum of 70-80% of your pre-disability income. However, you may also be able to receive other financial benefits if your policy covers them.
Elimination Period – Also known as the waiting period, this is the time that must pass before you can begin receiving benefits under a disability policy. If you become disabled during the elimination period, you will not be eligible to receive any benefits. Your elimination period may be as short as a month to as long as a year. Shorter elimination periods typically result in higher insurance premiums.
Maximum benefit period – This is the maximum length of time that your disability benefits will continue for. Some policies may provide you with coverage for your entire working life while others only provide coverage for a specific number of years. Most people opt for a policy that will cover them until they reach retirement age but this may cost you significantly more.
Riders – Riders are coverage add-ons that allow you to customize your insurance policy to meet your needs. Common riders include cost of living adjustments (COLA), student loan riders, alternative care riders, and future purchase options. Each rider has its own terms and conditions as well as its own cost.
Level or graded premiums
Some insurers offer graded premium policies where premiums start low and become higher over the policy term. Such policies are good choices for certain people who are just starting in their careers, such as medical residents. This ensures that you get better rates because you start your coverage at a younger age. As your age and salary increase, you can then convert your policy to a level premium that keeps your coverage at a fixed rate regardless of your policy term.
Profession-specific policies
It may be prudent for people in certain professions to have disability insurance policies that are designed for their specific industries. For instance, doctors should have true own-occupation coverage that allows them to collect insurance benefits if they end up working in a different role due to their disability. Because the medical profession is a very specialized field, such policies protect doctors from loss of income when they leave the specialty that they invested a lot of time and money in.
Disability insurance is an affordable way to protect a valuable asset—your ability to earn an income. Always look for true own-occupation coverage when shopping for a disability insurance policy and be sure to explore your options thoroughly with insurance advisors before making a decision.
