Disability Insurance
Disability insurance replaces your income if you are unable to work. Once the policy kicks in, you receive payments that should help to replace lost income. As noted above, the combination of medical costs and loss of income can be devastating. Remember, your health insurance pays a portion of your medical costs; it does not make your other bills go away.
Length of Disability
Most people have short-term disability insurance through their job. This coverage likely pays benefits if you are unable to work for a few weeks or months. While this is extremely important, what happens if your disability lasts longer? You should at least consider longer-term disability insurance. When a disability goes beyond a few months, it tends to last a while. Longterm disability policies pick up where short-term policies end.
Definition of Disability
What is disability? For the purposes of disability-income insurance, disability is the inability to work. Different policies go into greater detail. For example, an “own occupation” policy considers you to be disabled if you cannot perform your own occupation. Consider a brain surgeon who uses her hands in a specialized way — if she loses the ability to operate on peoples' brains, she is considered disabled under an “own occupation” policy. Therefore, the insurance company will pay her.
If the surgeon has an “any occupation” policy, she might fail the disability test. She must be unable to perform the duties of any occupation before she is considered disabled. The insurer might point out that she can still function as an excellent primary care physician or pediatrician. She could also work in insurance sales, sanitation arts, or at a convenience store. If she has an “any occupation” policy, she might have to go to work at another job.
Causes of Disability
Disability happens for a variety of reasons. Of course, accidents usually come to mind first. However, plenty of sicknesses and other conditions can lead to long-term disability. Some of the most common culprits include:
24 percent — Musculoskeletal problems (for example, back pain)
13 percent — Circulatory system issues
11 percent — Nervous system diseases
10 percent — Injuries and poisonings
10 percent — Neoplasms (growths and tumors — may be cancerous)
6 percent — Mental disorders
It can happen to you. Roughly one-third of all working Americans will suffer a disability of more than ninety days in their lifetime. The average disability will last two and one half years. (National Association of Insurance Commissioners (NAIC), Commissioner's Individual Disability Table A, 1985).
What about Social Security?
Social Security will pay benefits to a disabled person. However, you should understand how it works before you count on it. Social Security is much more restrictive than an insurance company in defining disability. They use an “any occupation” system. You have to be unable to perform the functions of any job before you qualify for benefits. In addition, your disability must be projected to last for more than one year, or result in your death.
How much will a long-term disability insurance policy pay me?
Typically, you get monthly payments of up to 60 percent of your monthly earnings before disability. Any more than that, and you might not have much reason to go back to work. The insurance company wants you to have an incentive to get better and start earning income again.
Another drawback to the Social Security system is that your payments will likely be much lower than the amount of money you need. Check your last Social Security statement or call the Social Security Administration to find out what you might expect if you become disabled. You might find that it is half of what you can expect from a private policy. If you are a high-wage earner, you will get less than half of the maximum payment from a private policy.
