For most working Americans under about 50, their most valuable asset isn’t a house or a retirement plan. It’s the ability to continue working and earning a living. In fact, the younger you are, the more critical it is to protect this vital engine of wealth.
That’s what disability insurance is for.
In a nutshell, disability insurance replaces your income in the event you should become sick or injured and unable to earn a living.
Many Americans get disability insurance as an employee benefit. The employer pays the premiums, and deducts the premiums against earnings as an employee benefit expense. Other Americans get disability insurance on their own, by going through an agent.
Disability policies are generally designed to replace about 60% of a workers’ income.
Benefits kick in after an “exclusion” period, which can be anywhere from two weeks to a year. Some employers offer both short-term and long-term disability insurance plans, to ensure that workers and their families are not devastated even by the exclusion period. However, the longer the exclusionary period, the lower the premiums, all else being equal.
Definitions matter
One of the most important elements of a disability policy are its definitions. The precise language of the contract itself — and particularly the contractual definition of disability and when benefits will be payable — is paramount. It could mean the difference of the insurer paying your claim or rejecting it.
Types of policies
Policies will typically pay when the policyholder is unable to work. But what kind of work is the key. There are two types of policies:
Own occupation policy — This pays a benefit if the disability prevents the insured from returning to work in their own occupation previous to the onset of the illness or injury that caused the disability.
Any occupation policy — This policy pays a benefit only if the insured cannot work in any occupation to which the individual is suited by virtue of education and experience.
Own occupation policies are more expensive, though, than any occupation policies, all things being equal.
Most insurance professionals recommend an own occupation policy to those who can afford it, though those with employer-paid plans may not have a choice in the matter.
Available riders
Depending on your age, budget and overall situation, you might want to consider one or more of the following available riders, or endorsements. These are optional features, generally available for additional premium.
Cost of living benefit — This rider pegs benefits to the inflation rate, increasing final benefits as the cost of living rises.
Future increase benefits — This rider secures your right to buy additional disability insurance in the future, even if you are deemed uninsurable at that time. The new coverage you buy when you exercise your option under this rider is priced at your age at the time of purchase.
Waiver of premium — If you do become disabled, the waiver of premium rider allows you to skip paying premiums on the policy.
Lifetime extension — This rider guarantees that benefits will continue beyond age 65. Many policies cease paying benefits when the recipient is eligible for Social Security. With the lifetime extension rider, benefits for disabilities incurred before a certain age will remain payable beyond that point.
Automatic benefits increase — With this rider, the income benefits will increase automatically with any pay raises, regardless of the insured’s medical condition at the time of the promotion or pay raise.
Accidental death and dismemberment — This option pays a specified cash benefit if you lose one or more limbs, or if you lose your eyesight. It may also pay an additional cash benefit if you are killed in an accident, rather than by illness.
Return of premium. This rider returns any premiums you don’t use back to you when you reach a specific age — typically age 65. If you use some benefits, the insurance company will deduct the benefits paid to you while disabled from the premium refund.
