Disability Insurance: The In’s and Out’s?

disability insuranceBased on facts from the Social Security Administration (SSA), nearly 60 million Americans are living with some form of disability and more than half of these individuals have a severe disability.

Furthermore, a sobering statistic from the SSA, states that more than 25 percent of today’s 20-year-olds will sustain some type of a disability before they retire.

These figures make it clear that having some form of disability insurance is essential for individuals of any age.

Understanding Disability Insurance

According to The Centers for Disease Control and Prevention (CDC), a disability is any impairment that results in activity limitations and participation restrictions. A disability persistently inhibits one of several primary functions.

A disability impacts functions, like:

  • Vision
  • Hearing
  • Thinking
  • Movement
  • Learning
  • Memory
  • Mental Health
  • Communicating
  • Social Relationships

Difference Between Total And Partial Disability

When purchasing a disability insurance policy, it is essential to understand how the insurance provider defines a partial and total disability as well as what type of support the provider offers for each.

For the majority of insurers, a partial disability is a condition that limits an individual’s ability to do his/her job but does not require that the individual stop working altogether.

When an individual has a condition that keeps him/her from working entirely, the condition is considered a total disability.

Just like other policies, disability insurance is a contract; therefore, standards vary from one provider to the next.

Public Disability Programs vs. Private Disability Insurance

The U.S. has two kinds of disability protection programs available. These are Social Security Disability Insurance (SSDI) and the Veterans Administration (VA).

SSDI Payments

SSDI payments are provided by the government.

Since SSDI is one of the deductions the government makes on each paycheck, the amount of money an individual receives after becoming disabled depends on the amount he/she invested while working.

Since the investment has already been made, SSDI does not require that the disabled individual makes a monthly payment; however, it is extremely difficult to qualify for this benefit due to the department’s strict definition of disability.

Furthermore, on average, the amount of monthly benefit provided is not large enough for most people to live on (as of 2015, approximately $1,165/month).

To qualify for SSDI an individual claiming disability must prove that he/she cannot:

  • return to work for at least 12 months;
  • work in his/her previous occupation; and
  • adjust to a new type of work.

Individuals who are temporarily or partially disabled are not qualified to receive SSDI benefits. Furthermore, when an individual does qualify for SSDI, benefits cannot be paid until he/she has been disabled for no less than five months.

The Veteran’s Administration is designed to provide military service members with disability benefits to address an injury or disease that was either aggravated or sustained while serving in the military.

Private Disability Insurance

Determining who will become disabled as well as why, when and where is impossible to predict.

While private disability insurance cannot eliminate the pain and emotional upset associated with a disability, it can relieve some of the stress related to lost wages.

When compared to SSDI, private disability insurance plans offer more expansive disability definitions; thus, it is usually much easier to attain these benefits.

Whereas SSDI requires proof of total disability, there are private disability insurance plans that will pay insurance benefits without demanding that the individual prove he/she cannot perform any type of work, whatsoever.

Types of private disability insurance coverage:

  • Own Occupation – protects individuals who become disabled and are unable to perform the duties associated with their normal occupation.
  • Own Occupation with Time Limits – designed to insure individuals when they are unable to perform the duties associated with their occupation for a limited amount of time. These policies typically include a ‘change in definition feature’ where the standard moves from ‘own occupation’ to ‘any occupation.’ This transition usually occurs after one, two or five years.
  • Any Occupation – this coverage is for an individual who is unable to perform any type of job, which makes qualifying to receive these benefits similar to those set forth by SSDI.

Another benefit of having a private disability insurance policy is that these policies usually replace a larger portion of lost income than the amount received through Social Security Disability Insurance.

Furthermore, the policyholder can collect SSDI payments at the same time he/she collects private insurance policy payments.

Long-Term Disability Insurance (LTDI) vs. Short-Term Disability Insurance (STDI)

Disability insurance options to consider when purchasing a policy include choosing either a long-term or a short-term policy.

Short-Term Policy

These disability insurance policies may have a waiting period of up to 14 days and provide the policyholder with income replacement of up to 80 percent. The maximum benefit period is usually 24 months.

Since the majority of disabilities resolve at around the 36-month mark, a short-term policy may not offer all of the protection an individual needs.

Long-Term Policy

These disability insurance policies can have a waiting period that ranges from a few weeks to several months and may provide the policyholder with a monthly income replacement of around 60 percent. Income replacement continues according to the specifics of the individual’s policy (i.e., until the maximum dollar benefit amount is reached, for a specific amount of time or indefinitely).

When cost, benefit amount and the length of time the benefit can be received are taken into consideration, long-term disability insurance is more cost-effective than its short-term counterpart.

Types of Disability Insurance

Group Policies

An employer provides group disability insurance coverage to his/her employees. Just like individual policies, group plans are designed for either long-term or short-term disabilities, with many employers offering their employees both kinds of coverage.

Forbes states that most group plans replace from 50 to 70 percent of a beneficiary’s salary (excluding bonuses and commission). To raise their compensation amounts in the event of a disability, many individuals choose to purchase their own individual disability insurance plans from private insurers as well.

Individual Policies

An individual disability insurance policy routinely requires that the beneficiary proves his/her health is good enough to attain coverage. Several variables determine how much an individual will pay for disability insurance coverage.

These variables include:

  • Gender
  • Occupation
  • Age
  • Level of coverage desired
  • Health status

In general, men not receiving disability insurance benefits from their employer spend from 2 to 2.5 percent of their yearly income on coverage; whereas, women spend from 3 to 4 percent.

Other Options (Riders)

Options that can be added to a traditional disability insurance policy include:

  • Cost of Living Adjustment (COLA) – increases the disability benefits an individual receives to meet the changes in cost-of-living expenses (as measured by the Consumer Price Index).
  • Partial Disability Rider – allows the policyholder to return to work on a part-time basis while still collecting a portion of his/her disability payment.
  • Waiver of Premium Provision – means that after being disabled for 90 days, the individual does not have to pay the premiums on his/her policy.
  • Return of Premium Provision – requires that a portion of the insurance premium be returned to the policyholder if no claims are made within a specific amount of time.

There are many more riders available; however, some of these riders add to the cost of a policy.


When customizing a disability insurance policy, one must consider how a disability may change as time passes. This factor is referred to as renewability.

There are three levels of renewability:

  • Non-cancellable
  • Guaranteed
  • Conditional

Non-Cancellable Policy

This is designed to ensure that the provider cannot alter any aspect of a policy without the policyholder’s expressed permission.

Guaranteed Policy

This is similar to a non-cancellable policy; however, it does not provide the policyholder with the same level of protection. With guaranteed coverage, it is unlikely that the provider will make significant changes to an individual’s policy; nevertheless, the provider maintains the legal right to do so.

Conditional Policy

A conditional policy provides no protection to the beneficiary; therefore, if the disability worsens, chances are there will be a considerable increase in the premium.

Choosing The Right Disability Insurance

Understanding the options as well as requirements for disability insurance is always beneficial.

However, most people find it helpful to work with a licensed insurance agent to create a cost-efficient, custom-designed disability insurance policy.

Learn more about disability insurance

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