We have covered Life Insurance and Critical Illness Insurance in our insurance series so far. However, I have not touched much on Disability Insurance because it’s one of the most difficult policies to understand. It is also the most expensive one and one where decline rates are highest. I received several questions about Disability insurance, so thought I should cover it. This post covers the basics of disability insurance (DI), if you need specific answer regarding your policy I suggest you contact your Insurance representative.
Two Types of Disability Insurance
There are two main types of disability insurance policies, Short Term Disability (STD) and Long Term Disability (LTD). As you can tell from the names Short Term Disability covers short term disabilities and Long Term Disability covers longer disabilities.
Short Term Disability
Some of the following points will vary across different policies, however these are the most common characteristics of short term disability.
- Covers short disabilities (duh!)
- has waiting period (usually 2 weeks)
- benefit periods are usually between 13-26 weeks
- depending on employer up to 100% of salary replacement
For short term disability premiums are usually paid by the employer and benefits are taxable at employee’s hand.
Long Term Disability
Long term disability is more complicated and varies much more from policy to policy, a few general characteristics are:
- Has longer waiting periods 30-180 days most common is 90 days
- longer pay out periods most common 5 years, but you can have up to age 65
- generally pays up to 70% of your pre-tax income, benefits are tax free (if premiums paid by you)
- Premiums paid by employee (otherwise benefits will be taxable)
There are three types of definitions for long term disability plans: Own Occupation Definition, Regular Occupation and Any Occupation each of these define the type of disability that will qualify you to receive disability payments.
Own Occupation Definition
Own Occupation definition is the least restrictive definition, it defines disability as follows:
The inability to perform the material and substantial duties of your regular occupation, the insurance company will consider your occupation to be the occupation you are engaged in at the time you become disabled, they will pay the claim even if you are working in some other capacity.
So if you are unable to perform your current occupation you will qualify for disability payment even if you have a different job. For example if a dentist has an accident and losses a finger which will prevent him completing his duties as a dentist he will qualify for disability payments even if he becomes a professor at a University.
As one can imagine this is the most expensive type of disability policies and is usually only purchased by professionals, certain jobs do not qualify for this type of coverage.
Regular Occupation Definition
This type of coverage is more restrictive than the own occupation coverage
The “Regular Occupation” definition considers a person disabled if they are:
unable to perform the essential duties of their “regular occupation”, that is the occupation in which they were engaged at the time of disability, under the care of a physician and not otherwise gainfully employed.
This means that you cannot be forced to take up another occupation. If you can not perform your occupation you will be paid total disability benefits and can choose not to take up another occupation. If you choose to work in another occupation, a loss of income will normally result in a partial disability benefit being paid.
This is usually the most common type of definition when purchasing disability insurance.
Any Occupation Definition
This is the most restrictive definition, an “any occupation” policy defines disability as:
the inability to perform the duties of any occupation.
This definition of disability is strict. To receive benefits according to this definition, you have to be unable to work in any occupation, not just your own. So if you are capable of performing any job you will not be entitled to disability benefits, usually it will take into account education and past work experience.
Most disability plans are set up as Regular Occupation Definition for the first five years and then become Any Occupation Definition.
Group Disability Plans vs. Individual Disability Plans
Because of the high claim rates on disability plans they are the most expensive insurance products to purchase. Fortunately for most part disability plans are offered by employers; however there are some differences between group and individual plans.
- No Medical Examinations
- Company is the policy owner
- More Flexibility
- You are Owner
- Can make changes as you wish
- More expensive
Owning an individual plan comes with some benefits, but often the cost difference is so big that it’s not worth it.