Disability Insurance 101
Disability insurance covers a portion of your gross (pre-tax) income if you can no longer work due to a long-term illness, a debilitating injury, or cognitive challenges.
Once coverage is triggered by a health event, you’ll receive a specific amount of money every month, just like a paycheck (except tax-free), allowing your life to continue with as little financial disruption as possible.
Types of disability insurance
Disability insurance comes in a range of forms, but the following are among the most common:
Short term disability insurance protects a percentage of your income for a short period — anywhere from one week to one year — depending on your policy.
Long-term individual disability insurance covers a proportion of your income for a long period — until you are no longer disabled or you reach the term of the policy.
Long-term group disability insurance is where one contract is issued to cover multiple people; most commonly offered by an employer. These policies are often inferior to individual policies in regards to taxation, ownership, and language.
Each form of disability insurance comes with pros and cons, depending on your situation, so it’s important to choose one that meets your needs.
Cost of disability insurance
The average cost of disability insurance for men is between 1 to 3 percent of gross annual income; this average increases to 2 – 6 percent for women. Other factors that affect the cost of your policy are age and health history; if you’re young and healthy with no pre-existing conditions, you’ll likely have lower premiums. If you work in a high-risk industry such as construction or air transport, you’re likely to have higher premiums than an office manager.
Key Disability Insurance Terms & Riders
Benefit Adjustment Opportunities
Each carrier offers options for you to adjust your benefit depending on life circumstances. This is an especially important option if you’re just starting out in your career, and expect your income to grow by leaps and bounds as it progresses. You want to ensure that your payout matches your current lifestyle, and not the one you had 20 years ago.
Benefit Period
The benefit period is the length of time that your claim would be paid. Carriers typically offer options that will pay out until the insured turns 65 – 70 years of age. Some options limit the payout to a set amount of years, such as 5 or 10-year benefits periods.
Catastrophic Injury Rider
This rider, also known as the CAT rider, offers extra protection — in addition to a standard monthly benefit — from the financial impact of a more serious injury or illness. The definition of a catastrophic injury varies from carrier to carrier. For most individual policies, if you are unable to perform two or more of your activities of daily living or are severely cognitively impaired, you would qualify for an additional benefit.
Cost of Living Adjustment
This rider, also known as the COLA rider, helps offset the risk of inflation. On the anniversary of your claim, the carrier would increase your monthly benefit based on the language in your policy. The COLA can have simple or compounded interest moving forward. Benefits range from up to 3% to 6% of the monthly benefit.
Elimination Period
Sometimes known as a waiting period, most disability insurance policies require that a person be disabled for a certain period of time before they begin receiving disability benefits. This waiting period is called the “elimination period” and the length depends on your policy. The period can range from 1 month to 1 year, depending on the carrier and your choice.
Non-Cancellable, Guaranteed Renewable
This means that the insurance carrier can’t cancel, increase the premiums, or add restrictions to the policy. Even if they stop offering the type of policy you own, so long as you continue to pay your premiums, you’ll receive the same coverage.
Residual or Partial Disability
This benefit provides for circumstances that cause you to work part-time because of injury or illness. When you have lost a certain percentage of your income or time (depending on policy), a benefit will be triggered. Annually, more partial disability claims are filed and paid than total disability claims.
Speciality Specific
The most important element of your disability policy is its ability to cover what you do and how you do it. This rider allows you to be considered totally disabled if you can not do the job you were trained to perform regardless of whether you are employed in another occupation. You don’t need to worry about losing part or all of your benefits if you can transition to a new profession.