When evaluating a disability insurance policy, here are some terms you should be familiar with.
Disability policies usually pay up to 40% to 65% of your pre-disability earnings at the time of purchase, for a specified period of time. That period may run from one to five years, until age 65, or in some cases, for life.
Since disability benefits are designed to replace the income you would otherwise earn by working, most people do not need benefits extending beyond the working years. Electing shorter benefit periods can save premium dollars. But bear in mind that a lengthy disability threatens your financial security more than a short-term disability.
Some policies pay if you’re unable to perform the duties of your own occupation; others may pay only if you can’t work at any occupation for which you’re reasonably qualified; and still others pay only for disabilities arising from an accident. However, illness is the most common cause of disability (about 90 percent), and is more likely as you grow older.
There usually is a waiting period, known as an elimination period, before benefits kick in. It’s typically 30 days, 90 days or six months after a disability occurs. You can select the waiting period when you buy your policy. Opting for a longer waiting period will save you money.
Some policies pay only if you are totally disabled. Others cover partial disability for a limited time, but only when it follows a period of total disability for the same cause.
One of two major types of disability policies, it means your policy can’t be cancelled as long as the premiums are paid. Premiums can be raised for an entire class of policyholders, but not for reasons related to your individual circumstances.
The other major type of disability policy, these can never be cancelled as long as premiums are paid, and premiums are guaranteed not to increase.
You can add a cost-of-living adjustment to a policy that increases by a specified percentage after each year of disability. Though expensive, this option can be vital to maintaining your standard of living if you’re out of work for a long period of time.
Portability refers to whether or not you can take coverage with you. One of the biggest advantages of owning an individual disability policy—or purchasing disability coverage through your employer on a voluntary basis—is that it’s portable. You own it and it follows you even if you change jobs. By contrast, traditional employer-sponsored group coverage is almost never portable.
Even if you can still perform some or all of your regular job responsibilities, you are presumed fully disabled and are entitled to full benefits under specified conditions including loss of sight, speech, hearing or use of limbs.
If you’re unable to perform some aspects of your job, residual benefits allow partial disability payments based on your loss of income.