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What is disability insurance?

Do you prefer to learn by watching? We answer this question in a video below. Click here to jump ahead.

Individual disability insurance is simply income protection. You can’t predict what your health will be in the future. You may stay active and eat healthily, but most disabilities are actually caused by unexpected illnesses, such as cancer, and accidents.

A long-term disability can have more severe consequences on a family’s expenses than the death of a provider. With the death of a provider expenses decrease because there is one less family member. If the provider is disabled, expenses increase due to the cost of providing care for the disabled person.

The purpose of disability insurance is to replace the income of the person who is now unable to work due to sickness or an accident.

» Get quotes: Disability insurance quotes

What are the chances of becoming disabled?

The risk of having a disabling injury or illness during your working years may be greater than you think. Here are some statistics to consider from the Council for Disability Awareness:

  • Just over 1 in 4 of today’s 20-year-olds will become disabled before they retire.
  • Over 61 million Americans are classified as disabled. More than 50% of these Americans are in their working years (aged 18-64).
  • The average healthy 35-year-old female has a 24% chance of becoming disabled for 3 months or longer during her working career; a 38% chance that the disability would last 5 years or longer.
  • The average disability for a healthy 35-year-old female lasts 82 months (over 6 ½ years).
  • The average healthy 35-year-old male has very similar statistics as his female counterpart with the only difference being a 21% chance instead of 24% in regards to being disables 3 months or longer.

In reference to the statistic examples above, it’s not a stretch to think that many 35-year-old persons have families. If you suddenly became disabled, whether short or long-term, could your family maintain their standards of living? What about the goals you’ve been working so hard toward?

Think about your current lifestyle needs and future goals. When the paychecks stop, what gets sacrificed first?

Short-term needs:

  • Mortgage/rent
  • Utilities/phones
  • Home maintenance
  • Child-related expenses
  • Transportation
  • Loans/debt
  • Insurance premiums

Long-term needs:

  • College tuition
  • Weddings
  • Retirement
  • Travel/leisure

Your income is your most valuable asset. It supports the lifestyle you and your family enjoy now and the financial goals you work hard to achieve.

» Calculate: Life insurance needs calculator

“I don’t need disability insurance because…”

“I can use my savings to replace lost income.”

Are you actually saving just in case you become disabled, or are you saving for a new house? Retirement? Child’s college? If you use your savings to replace income, what happens to those other goals? Even if you save 10 percent of your salary, a one-year disability could eliminate many years of savings.

“I have enough disability coverage though my employer.”

Group long-term disability insurance is a great start, however, it typically only covers 60 percent of your gross income and the benefits are often taxable. After taxes, you’re left with approximately half of your gross income. Is that enough for you and your family to live on?

“I could borrow money from family and friends.”

The amount of money needed may be quite substantial and required for a long period of time.

“I could borrow money from the bank.”

As someone who is unable to work, how will you afford the loan repayments?

“Social Security or Workers’ Compensation will take care of me.”

The Social Security Administration denies about 65 percent of all claims and pays benefits for total and permanent disabilities only. Workers’ Compensation benefits are limited to only occupational diseases or injuries that occur during course of employment.

Even if you were to be granted benefits from either, it’s likely these sources may not be enough to maintain your lifestyle.

If a medical condition prevents you from being able to work, disability insurance is there to provide funds so you can focus on taking care of yourself instead of having to worry about how the bills are going to be paid.

Want to see what you’d pay for life insurance?

Compare the best prices from the names you know and trust, all in one place with no commitments.

How does disability insurance work?

There are specific provisions to be aware of in your disability insurance policy.

Disability Insurance Policy’s Waiting Period

If you become disabled, you will begin to receive the benefits laid out in your policy. There is often a waiting period before payments begin, however.

Common waiting periods are 30, 60, 90, 180, and 365 days. A few policies are available with a 0-day waiting period but this is only for disabilities that occur from an accident.

Disability insurance policies with a shorter waiting period have higher premiums. If you have the means to pay for typical living expenses for a few months in the event of a disability, you can save money by purchasing a disability policy with a longer waiting period.

For example, the annual premium for a policy with a 180-day waiting period can be less than half the cost of a policy with a 30-day waiting period.

Disability Insurance Policy’s Benefit Period

Just as disability insurance policies have different waiting periods, they also have different benefit periods. A benefit period is the duration of time in which an insurance company will provide funds to an individual once he or she becomes disabled.

Benefit periods can include one year, 2 years, 3 years, 5 years, 10 years, to age 65 or age 67, or even the insured’s lifetime. Not all insurance companies offer all of these options.

Disability benefits will continue as long as you are disabled according to the policy’s provisions. The insurance company will most likely require proof of continued disability if the duration is long-term. The benefits from a disability policy cease once you are no longer considered disabled.

The longer your benefit period, the higher the premium. For example, the premiums for a policy with a 2-year benefit period may be 40-50% less expensive than a policy with a benefit period that goes until age 67.

Disability Insurance Underwriting Basics

As you probably know, here at Quotacy our world revolves mainly around life insurance. However, life insurance and disability insurance are similar in the way that they both are made to protect income.

» Compare: Term life insurance quotes

Life insurance protects your loved ones from financial difficulties in the event of your death and disability insurance protects you, and in turn your loved ones, from financial difficulties in the event of a disability that prevents you from working. They are not underwritten the same though.

Life insurance underwriting involves mortality risk, basically the assessment of medical impairments and how they can attribute to premature death. Disability insurance underwriting involves morbidity risk, basically the assessment of medical impairments that can result in prolonged disability. As an example, a painful back isn’t going to cause a person’s death, yet back problems are a major cause of disability.

There are three levels of disability insurance underwriting:

  1. Occupation
  2. Medical
  3. Financial

Occupation

For disability insurance, classifying an applicant in the correct occupation class is critical in determining the proper benefit amount and premium rate. When determining occupation classification there are five major factors:

  1. Job duties
  2. Environment
  3. Income
  4. Stability
  5. Dual occupations

Common questions asked when applying for disability insurance include:

  • What is your typical day like?
  • If you work any manual duties, what are they and what percentage of time do they represent?
  • Do you have ownership? If so, how many employees?
  • Do you work multiple jobs?
  • How many hours do you work?

The table below shows occupation class examples. Higher occupation classes typically perform less manual duties.

A Shipping and receiving clerk, press worker
2A Building inspector, medical assistant
3A Administrative assistant, bookkeeper, graphic designer
4A Landscape architect, paralegal
5A Pharmacist, small animal veterinarian, computer engineer
6A Attorney, CPA, engineer

Your job title doesn’t necessarily automatically put you into a certain classification. Two people can have the same job title, but different occupation classes. Consider the table below.

Who would have the higher classification?

Jamie – President of Johnson Construction Kelly – President of ABC Construction
  • 75 employees
  • $100,000 annual income

Duties:

  • 70% office planning, managing, other admin
  • 25% meeting with clients/prospects
  • 5% visiting job sites
  • 6 employees
  • $30,000 annual income

Duties:

  • 80% supervision at job sites
  • 20% office planning, managing, other admin

Jamie’s everyday duties include little to no manual labor, so Jamie would be in a higher occupation class because Jamie is at less risk of developing a disabling impairment such as a sprained back.

Medical

An applicant’s medical history is crucial to underwriting disability insurance. Common medical conditions such as back disorders, stress/ anxiety, or high blood pressure are unlikely to cause an application to be declined, but you may have higher premiums or a reduced benefit amount. Certain medical conditions, however, may result in a decline of coverage. If you have been diagnosed with any of the following medical conditions, be aware that you may not be able to obtain coverage.

  • Bipolar disorder
  • Cancer
  • Cirrhosis
  • Chronic fatigue
  • Emphysema
  • Fibromyalgia
  • Juvenile diabetes
  • Kidney disease
  • Heart attack
  • Hepatitis C
  • Multiple sclerosis
  • Pancreatitis
  • Rheumatoid arthritis
  • Stroke
  • Systemic lupus

Not all disability insurance carriers underwrite the same, so it doesn’t hurt to apply. The severity, treatment, and amount of time since you have been diagnosed are all factors the underwriters will consider when evaluating an application.

Sometimes instead of declining an application altogether based off the history of a specific medical condition, an underwriter will offer to approve the application with an exclusion rider that states no coverage will be provided for a disability resulting from the specified condition.

Financial

Disability insurance helps to replace lost income, so it deems necessary to document the financials of an applicant to determine a benefit amount. Disability insurance will only cover earned income. For example, income from sources other than active work efforts, such as dividends or rental properties, is considered unearned income and is likely to continue accruing even in the event of a disability. So, it may be necessary to prove to the insurance company what your earned income is by providing copies of current and prior years tax returns.

Advantages of disability income insurance:

  • While life insurance protects the family should you die, disability insurance protects the family should you lose the ability to work.
  • Disability insurance helps provide security. It pays a monthly income to help protect the family home, savings accounts, retirement funds and other assets should you become disabled.
  • Monthly benefits are received tax-free.
  • You own the policy and it will stay in place throughout your working years as long as the premiums are paid.

Consider the effects a disability could have on you and your family’s lives, your standard of living, and savings. In addition to helping individuals obtain life insurance coverage, we work every day with people needing disability insurance as well.

Head over to our disability insurance page if you are interested in obtaining a quote. We just need a few pieces of information and then our team will shop the market and provide you with personalized disability insurance quotes with the best options available.

» Learn more: Common Financial Challenges – Belief Versus Reality

Image credit to: stevepb

Source used:
Lynch, Kevin M. and Glenn E. Stevick Jr. Fundamentals of Insurance Planning, 2015.

Watch the Disability Insurance Video

Video Transcript

Welcome to Quotacy’s Q&A Friday where we answer your life insurance questions.

Quotacy is an online life insurance broker where you can get life insurance on your terms.

I’m Jeanna

And I’m Natasha

As you can see, Natasha and I are filming remotely. Due to the pandemic, we aren’t sure when we’re returning to the office, so, we had to figure out something new.

Jeanna and I will now be filming Q&A Friday videos from our homes. They’ll still be released on Fridays, just not EVERY Friday. So, that being said, let’s get to the reason you’re tuning in.

Today’s question is: what is disability insurance?

Disability insurance! That’s not life insurance. Why are we covering this? Well, life and disability insurance have similar goals and people do get confused as to when they need them and when they can use them.

You buy life insurance to replace your income if you die so your family can keep paying bills. You buy disability insurance to replace your income if you are unable to work due to illness or injury, so your family can keep paying bills.

Disability insurance can be offered through your employer or you can purchase it independently.

Group disability insurance through your employer is usually part of a benefits package. If you can’t work for a specific period of time due to a non-work-related illness or injury, the policy pays out a portion of your income.

Group disability insurance benefits are not transferable. This means if you leave your current employer, the coverage doesn’t follow you.

Individual disability insurance is a policy you own completely separate from your employer benefits.

You can have a group disability policy through your employer and also buy an individual policy for more secure income protection because even if you leave your job, your individual policy goes with you.

If you become disabled and receive benefits, income from your group disability plan is taxed because your employer pays the premiums and deducts the expense.

However, income paid from an individual disability plan is received tax-free because you are paying your own premiums with money that you pay taxes on.

With both group and individual disability insurance, specific requirements need to be met before the policy will begin paying benefits. You need to meet the definition of disability as stated in your policy. You need to submit a claim and the waiting period stated in your policy needs to pass.

Once these requirements are met, the insurance company will begin paying the funds. These funds will be paid monthly during your benefit period as long as you are disabled according to the policy’s provisions.

You are way more likely to incur a disabling injury than suffer a fatal injury. This is why having disability insurance is important, especially if you have a family relying on your paycheck.

Consider the effects a disability could have on you and your family’s lives, your standard of living, and savings.

A disability can impact a family’s expenses even more severely than the death of an income provider. With the death of an income provider, expenses decrease because there’s one less family member. If the income provider is disabled, expenses increase due to health care costs.

A family provider should consider owning both a life insurance and disability policy.

Here at Quotacy, in addition to life insurance, we can help you purchase disability insurance as well.

About the writer

Headshot of Natasha Cornelius, a life insurance writer, for Quotacy, Inc.

Natasha Cornelius

Marketing Content Manager

Natasha is a writer and content editor at Quotacy. She is also co-host of Quotacy’s YouTube series. She can't get enough of life insurance and outside of work is also working toward her Chartered Life Underwriter designation. Connect with her on LinkedIn.