An Overview of Disability Income Insurance and its Importance

by | Published on Jan 13, 2020 | Healthcare /Disability Insurance

Disability income (DI) insurance is something that most people tend to ignore even though they may purchase other types of insurance such as life insurance and auto insurance. However, the fact is that even young people should consider purchasing disability income insurance, going by the statistics provided by the SSA (Social Security Administration). To quote the SSA, “The sobering fact for 20-year-olds is that more than 1-in-4 of them becomes disabled before reaching retirement age.” Medical record review is an important step in the disability claims processing procedure. Therefore, proper medical evidence should be available in the claimant’s medical records to substantiate the claim.

Disability income insurance may replace 45% to 65% of the insured person’s gross income. It pays benefits if an illness or injury prevents the policy holder from working and earning his/her regular wages. The benefits are tax-free because the insured person has paid premiums using after-tax dollars. Employers may offer DI insurance plans and workers’ compensation to provide financial support during a disability, but it may not be enough to meet the disability related expenses. Workers’ compensation covers only injuries sustained at the workplace or on the job. Importantly, small business owners and self-employed individuals must have DI insurance coverage because even if an injury or illness is work-related, they may not claim workers’ compensation for themselves.

Definition of Disability

There are differences regarding the definition of disability.

  • Some plans pay out only if the disabled person cannot work any job for which he or she is qualified.
  • Some policies cover partial disability. That is, they pay a portion of the benefit if the insured person can work part time.
  • Some policies provide coverage if you can’t perform a job in your occupation.
  • Some policies pay only if the insured person cannot work at all.

2 Types of Disability Insurance

Disability insurance may be for the short-term or long-term, the former generally provides a portion of the insured person’s income for 9 to 52 weeks based on the plan. Short-term disability benefits start after a waiting or elimination period that is usually set from 7 to 14 days. Under certain circumstances, there may not be a waiting period. These details can be found in the relevant plan document. Short-term disability insurance does not provide coverage for work-related accidents/injuries because these are covered under workers’ compensation insurance.

  • Short-term DI plans may have certain requirements regarding the insured person’s eligibility to receive benefits.
  • They may specify a minimum service requirement or the minimum length of time that an employee must have been employed for.
  • They may require that the employee works full-time, or has worked consecutively for a certain period of time.
  • Some employer-sponsored plans require employees to use all their sick days before they become eligible.
  • A doctor’s note may be required to establish an employee’s health condition or other non-work-related injuries. Medical review services may be utilized to verify the injury/illness.

Long-term disability insurance typically replaces 40% to 60% of the insured person’s income. Typically, long-term DI insurance starts when short-term disability insurance benefits end. These benefits are paid out for the number of years indicated in the plan document. The benefits end when the disability ends, and if the disability continues, the benefits would end after a certain number of years or at retirement age. There are long-term disability plans that pay out partial wage replacement benefits until a certain age, such as 65 years. There may be a waiting period of 90 days after disability before the benefits kick in. Just as short-term DI insurance, long-term disability insurance also does not cover work-related accidents or injuries that are covered by workers’ compensation insurance.

Some organizations offer both short-term and long-term DI plans while with some others, people have to buy plans as an individual.

The cost of disability income insurance depends on various factors such as age, gender, and occupation. You can expect to pay between 1.5% and 3% of your annual income. Applicants have to be at least 18 years old, and the maximum age is usually 60.  Typically, insurance providers categorize applicants into career and income classifications. The classification with the lowest risk will pay less. People with pre-existing health conditions may have to pay more to get covered.

Disability Insurance Coverage Is Crucial

Research shows that around one-third of employed Americans will become disabled for at least 90 days at some point in their career. However, lack of disability insurance has been highlighted as a major concern. Disability insurance is very important for self-employed people. Ideally, they could purchase a policy to replace about 2/3rds of their monthly income. The plan should be non-cancellable or guaranteed renewable and pay residual benefits to compensate for lost income when one cannot work at full capacity.

It is crucial to note that disabled individuals who initially qualify for disability benefits may find their benefits terminated. Insurers conduct periodic medical chart review to find any change that shows that a worker is no longer disabled. They may contact the insured person’s treating doctor for any additional information. They may also request additional information from the claimant and if the claimant fails to submit the required details, it could result in denied or discontinued benefits. Medical records, the treating physician’s ongoing evaluation and diagnosis of the objective medical evidence are very significant at each stage of the process. Reliable legal counsel can help an applicant get the benefits that he/she rightly deserves.

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