What you need to know about disability insurance

Mark Henricks

Most people’s biggest financial asset isn’t their home or their car – it’s their ability to work for a paycheck. Yet while the vast majority of people insure homes, vehicles and personal possessions, only a few insure against losing the ability to earn a living.

However, a solution already is available. Disability insurance is designed to replace part of your earnings if you’re unable to work because of accident or illness.

Short-term disability insurance will provide benefits for up to one year. Long-term disability insurance may pay for a set number of years, such as five years. Or it may last until you reach a certain age, like 65.

Most people with disability insurance buy it through an employer, with the employee paying the premiums through payroll deduction. The average cost to the employee of disability insurance bought this way is about $250 a year, according to Mike Fish, vice president of voluntary benefits for The Hartford.

But many workers aren’t covered. As of 2005, about 100 million Americans were not protected by private disability insurance, according to the Council for Disability Awareness, an insurance industry education group.

What you need to know about disability insurance
What you need to know about disability insurance

Disability risk

The risk of disability may be higher than you think. About 30 percent of today’s 20-year-olds will become disabled before they retire, according to the Social Security Administration.

The most common causes of disability are muscle and bone disorders, cancer, and cardiovascular or circulatory problems, according to a 2010 study by the Council for Disability Awareness.

The effects can be serious. A 25-year-old earning $50,000 a year who becomes permanently disabled could lose $3.8 million in future earnings, according to Life Happens, a nonprofit that helps consumers make insurance decisions.

And few appreciate the risk of becoming disabled. The Council for Disability Awareness study found that only 7 percent of Americans knew the chances of becoming disabled were three in 10.

Filing a claim and collecting disability benefits requires written proof that the policyholder is unable to work. The insurer may want to see the policyholder’s medical records, and it sometimes pays for a doctor to examine the policyholder.

Selecting disability insurance

Disability insurance is becoming more popular among individual buyers. The Insurance Information Institute says that from 2010 to 2011, the number of new individual disability policies purchased rose 3 percent.

The institute provides a guide highlighting key issues surrounding disability insurance:

1. Definition of disability. Carefully read how the policy describes disability. Some policies pay only if you’re unable to work at any occupation. Others will pay benefits only if you can’t perform in your normal occupation.

2. Benefit period. The policy will state how long you’ll receive monthly benefits if you’re disabled. The best choice is a policy that pays until you’re 65. After that, Social Security disability should be able to provide financial support. A typical short-term disability policy will pay benefits for three to six months.

3. Percentage of income replacement. Disability insurance “is not designed to be a full-income replacement,” says John Harmeling, senior vice president of worksite marketing at Aflac, a provider of supplemental insurance. Most coverage will replace 50 percent to 60 percent of pre-disability income, although some go as high as 70 percent or 80 percent.

Employers typically want to limit the amount to encourage employees to return to work when they are able, Harmeling says. So coverage purchased through an employer is more likely to replace 50 percent to 60 percent of an employee’s income.

4. Are both accidents and illness covered? Some policies exclude illness as a cause, and this coverage typically is less expensive than coverage that includes illness as a cause. However, illness is more likely to cause a disability than an accident. According to the Council for Disability Awareness, fewer than 10 percent of long-term claims result from injuries.

5. Waiting period. A policy won’t begin paying until the policyholder has been unable to work for a certain period. This also may be called the elimination period. A typical waiting period is 60 to 90 days, according to the Insurance Information Institute.

Also, keep in mind that you won’t receive your first disability check until 30 days after the waiting period ends. Another thing to note: Some policies will pay partial benefits if you are able to work part-time.

Disability’s future

Employer support for company-paid disability insurance has been shrinking as businesses try to manage rising health care costs.

“The recession has caused many companies to scale back the amount of coverage or to remove it altogether,” Harmeling says.

To appeal to employees who buy individual disability insurance, insurers are starting to emphasize flexibility and customization. The Hartford is rolling out a new plan for employers that lets workers choose weekly benefit amounts from $200 to $1,000. Benefits can start from eight to 30 days after a covered injury or illness that isn’t connected to work. And workers can decide to receive benefits for up to 104 weeks.

Aflac also is launching a new disability coverage for employer groups in 2013. “It will allow for more customization, higher income replacement and improved benefits,” Harmeling says.

While insurers are targeting younger workers with these new flexible plans, disability can happen to anyone. Even if workers don’t buy disability insurance, it’s something they should educate themselves about.

“Anyone who wants to safeguard their standard of living should consider the benefits of short-term disability insurance,” Harmeling says.

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