If you're shopping for a disability insurance policy, there are a few basic terms you should understand to make a smart buying decision. You can always get in touch with me if you have questions, but if you're the independent type, this quick glossary can get you started. Let's take a closer look at the most common terms, conditions, and benefits included in most disability insurance contracts.
Check out this video for a quick overview of disability insurance, and then dig into the details below.
When it comes to insurance, there isn't one single definition of "disability." In fact, different policies have different definitions, according to how an illness or injury affects your ability to do your job or any other job (total disability) or how an illness or injury affects your ability to earn income (residual disability). Some policies combine both definitions.
Here are a few examples of common wording found in disability insurance contracts:
- A total disability that leaves you unable to do your own job might be defined as: "the inability to perform any and every duty of your own occupation," or "the inability to perform the material and substantial duties of your own occupation."
- A total disability that leaves you unable to do any job might be defined as: "the inability to perform the duties of any occupation."
- A residual disability that results in a loss of earnings might be defined as: "As a result of injury or sickness, you have experienced a loss of earnings equal to at least X percent of your pre-disability earnings," where X is a specific percentage of lost earnings set by your insurance provider as a threshold to qualify for disability.
- A residual disability that results in a loss of earnings and the loss of ability to work might be defined as: "As a result of injury or sickness, you are able to perform some or all of the duties of your occupation but for less than full time, and you have experienced a loss of earnings equal to at least X percent of your pre-disability earnings," where X is a specific percentage of lost earnings set by your insurance provider as a threshold to qualify for disability.
The benefit period is the length of time you'll receive benefits once you become disabled. Common benefit periods are two years, five years, or up to age 65. Some policies even offer lifetime benefits. Disability policies are classified as short term or long term, depending on the length of benefit period that they offer. Short-term policies may pay benefits for as few as 13 weeks or as long as two years. Any policy that pays benefits for longer than two years is considered long term. In general, the longer benefit period you choose, the higher the premium you pay.
If you become disabled, you'll have to wait a certain number of days before you can start receiving benefits. You do have a choice when it comes to waiting periods. A shorter waiting period will cost you more money than a longer waiting period. Most of our clients choose their waiting period based not only on cost, but also on how long they could afford to live off their savings without receiving benefits.
Monthly benefit amount
To create an incentive for you to go back to work after your recovery, disability insurance pays you only a portion of your normal earnings. In most cases, this is 50 to 70 percent of your normal income, capped by a monthly maximum. When you apply for a disability policy, the insurer will tell you how much you'd receive if you became disabled. To calculate that number, they're looking at your current earned and unearned income, other disability coverage you might have (including benefits from a group policy at work), Social Security, and other government-funded insurance. The insurer will offer you a maximum amount of coverage you can buy. It's up to you whether you opt for that amount or choose a lesser amount.
Most disability policies are guaranteed renewable. This means that your insurer guarantees they'll renew your disability contract. Some policies are referred to as "noncancelable and guaranteed renewable." This means the insurance company will renew your contract every year and they won't charge you any more than you're already paying. Other policies are called "guaranteed renewable," but they don't come with the same price guarantee. Here's the good news: if your insurer wants to raise the rates, they must do two things. They must notify you of any rate increase before the anniversary date of your policy, and they have to raise the rates for an entire underwriting (rate) class - in other words, they can't increase the rates for you and only you.
Waiver of premium
Most policies include this in their base coverage, although some offer it as a rider. This provision says that if you become disabled, the insurance company will pay your insurance premium for you, and your policy will remain in force until your disability period ends. You wouldn't resume your premium payments until that time.
Some clients worry about whether a minor misstatement on their insurance application will be used against them later to deny a claim. To keep this from happening, most states require insurance companies to include an incontestability clause in their contracts. This clause generally says that after the policy has been in force for two years during your lifetime, the insurance company can't contest any statements you made on the application.
Exclusions and limitations
Certain causes of illness or accidents may not be covered by your policy. Common exclusions are injuries caused by aircraft (except to passengers on scheduled airline flights), war or acts of war, suicide attempts, and normal pregnancy. In addition, if you have a pre-existing medical condition, your policy may exclude that condition from coverage, either forever or for a specified period of time.