What is Disability Insurance?

Disability insurance pays workers in regular intervals as they recover from illness or injury. It does not pay all of the income that a worker would normally receive while working a normal job. Disability is a factor that everyone considers during their career. But it is not something that most expect to happen.

When it does, a working person often wonders how they will be able to cover all of their bills and expenses while being unable to work. Disability insurance pays out a percentage of the previous income earned ranging from 45 percent to 65 percent. However, the payments are tax-free.

It is essential to plan for the possibility that an illness or accident may keep an individual from working. This is particularly true of individuals that are working and supporting a family. Unlike home insurance, disability insurance is considered optional.

Workers sometimes assume that their employer provides sufficient disability coverage. Disability coverage through an employer may or may not be available. If it is, the payments offered through it will not equal the full income received during full-time work.

An insurance agent answers questions about disability insurance and guides individuals through different plans. An agent also an understanding of this type of insurance and offers advice that is not available when researching plans separately, including the income sources necessary during a disability or illness.

Types of Insurance

The Federal Insurance Contribution (FICA) is a tax that employees pay through the withholding for each paycheck that they received. The tax is part of the Federal Insurance Contributions Act. The act requires employees to pay the tax as a contribution in order to fund Social Security and Medicare. After a period of time has passed, an employee is eligible to receive Social Security disability insurance.

The Disability Insurance Program is managed through the Social Security Administration. It protects the income of a worker if they are unable to work for a long period of time.

Employees who have paid the Federal Insurance Contributions Act (FICA) tax for a certain amount of time are eligible to receive the Social Security disability income insurance. Individuals can receive this insurance after 6 months of being disabled.

Social Security Disability Insurance (SSDI) pays an amount each month to an individual who can't work because of a serious illness or disability that lasts for a minimum of one year or leads to death in that year. SSDI also pays the majority of retired worker benefits.

SSDI benefits are calculated using the earnings that the worker has earned prior to becoming disabled. The money is paid to the individual and any dependents that they may have.

The only requirement for SSDI besides having a disability or illness is working in a job that is covered by social security. Close to 10 million people receive SSDI each year. One downside to SSDI is that it has a maximum payment amount. The maximum is reached at a certain age.

About SSDI

The Social Security Trust Fund has an account that is specifically dedicated to individuals who are ill or disabled and no longer able to work. FICA funds the Disability Trust fund. Most of the funds are more than are needed for daily operations. So the funds that are not needed for expenses are invested in securities that produce interest.

The Disability Insurance Trust Fund was created in 1956 as a part of the Social Security Act Amendments of 1956. The Disability Insurance Trust Fund's board of trustees consists of six members, two of which are appointed by the President, and the remaining four are automatically selected due to their positions in the federal government; These four positions are: Secretary of the Treasury, Secretary of Labor, Secretary of Health and Human Services and the Commissioner of Social Security.

Waiver of Premium for Disability

A waiver of premium for disability is a provision in an insurance policy that states that the insurance company will not require the insured to pay the usual recurring fee to maintain the health insurance policy if the person responsible for paying the premiums is seriously injured.

Insurance companies can vary in their definition of a disability, and policies can vary on when and for how long they will waive a premium in the event of a disability. Additionally, insurance companies may charge a higher premium to include this waiver in the policy.

A disability insurance waiver allows the policy holder to stop paying the premium for the policy. Waiving the premium comes when the policy holder is disabled and cannot work or is otherwise unable to keep it up.

A waiver of premium an important feature of an insurance program. Without the insurance waiver, many disabled people who are without a steady income from working would not be able to keep their policy current and receive benefits too.

Advantages and Disadvantages of Disability Insurance

Employees may receive disability insurance benefits through their employer. A disadvantage to this type of insurance is that it is limited and frequently does not provide the coverage expected by the employee.

Private disability insurance fills the gaps of employer insurance. It covers approximately 70 percent of the individual's previous salary. No age limit exists like it does in SSDI. Private insurance protects earnings and provides for a family in the event that injury or illness occurs.

Private insurance is offered in two different formats. One is short term disability insurance. Short-term disability insurance (STD) provides coverage for illness or disability for up to six months. The maximum benefit period is two years. The waiting period for STD insurance is zero to fourteen days.

In contrast, long term disability insurance policies (LTD) have longer waiting periods. They can range from several weeks to several months. The maximum period for benefits ranges from several years to the rest of the individual's life.

In addition to the regular benefits provided, additional protections and options are available. Examples include:

  • A refund of premiums if the worker doesn't meet the timeframe for becoming disabled.
  • Cost of living adjustments
  • Promise of renewal

Disability insurance has a no-cancel feature available. Under it, the insurance company cannot cancel it unless the premiums are not paid. It also entitles the policy holder to renew the insurance at the same premium rate without losing any benefits. A disability policy has a guaranteed renewal feature which means the policy can be renewed. If it is renewed the insurance company cannot cancel the policy. The downside to the guarantee is the insurance company can raise the premiums of your policy so long as it is done for every member of the insurance class. 

Options for Disability Insurance

In addition to the traditional disability policies, there are several options you should consider when purchasing a policy.

  • An additional purchase option allows policy holders to buy additional insurance at a later date. The coordination of benefits option allows the holder to receive other benefits due to their disability. However, the amount paid by private insurance is dependent upon the amount of the other benefits. It usually pays for the difference that the other policies will not pay.
  • A cost of living adjustment option gives the policy holder an increase in benefits over time due to the rising cost of living. The cost is measured the Consumer Price Index. Choosing this option does mean that the premium goes up.
  • For individuals who are able to return to work or collect a portion of salary a residual or part time, a disability rider is an option. It still pays out disability benefits while allowing income from another source if partial disability still exists.
  • If a return of premium option is selected, it makes the insurance company refund a part of the premium if no claims are made in a specified amount of time.
  • Choosing the waiver of premium provision allows the policy holder to stop paying premiums after 90 days of disability.

Cost of Insurance

Disability policies are different and should fit the needs of the individual that has it rather than what fits the budget at the time. Insurance is not cheap, but its cost will vary depending on several different factors such as:

  • Individual health
  • Lifestyle habits including smoking or drinking
  • The amount the individual wants to receive
  • Policy options chosen.

Disability insurance costs upwards of several thousand dollars per year unlike life or auto insurance. Those who have an increased likelihood of illness or injury like those with dangerous jobs or pre-existing conditions will pay more. Despite the higher costs, paying for private disability insurance may keep a home from being lost or providing for a family due to an extended illness.

Insurance Brokers

In order to purchase disability insurance, people usually buy policies with the help of an insurance broker. Other types of insurance such as homeowners or life insurance are typically purchased this way too. Since many factors do influence the cost of disability insurance, a broker has the expertise necessary to explain the different policies and options that are available, as well as why the costs may be higher.

In order to receive an accurate quote for a disability insurance, you will have to provide your insurance broker with information about your occupation, your income, your age, any existing health conditions you currently have, and any dependents you support with your wages. Based on the personal information you will provide, the broker will assess the likelihood that you might become disabled and determine a monthly or annual premium you would pay to receive benefit payments you desire.

Types of Insurance Programs

There are different types of insurance programs. Each type is intended to meet specific income needs as they are related to disability. This section goes over the earnings-replacement program.

An earnings-replacement program gives income to people that are not able to work because of their disability. The funds paid out replaces some of the income earned from working. Eligibility is determined using a definition of disability. It pays for common daily living expenses such as:

  • Food
  • Utilities
  • Housing costs

Earnings-replacement does not cover the cost of other expenses incurred as a result of the disability. Examples of incurred expenses include personal assistance like a caregiver or rehabilitation.

Definitions of Disability

Social Security maintains very strict work disability requirements. Without these requirements, people with partial disabilities would be able to receive benefits. The cost of these benefits would then rise.

The Social Security Advisory Board took up the question of defining disability. In this discussion, the idea of changing the definition of disability came up. The National Academy of Social Insurance (NASI) decided to investigate the subject through its disability policy panel. The panel concluded that programs for disabled individuals should define disability and use it as a way to determine if the person qualifies for the program and if that program is appropriate for the individual.

Disability cannot be confined to a singular definition. The term disability encompasses many types of conditions with different needs. Having a singular definition for disability makes it difficult for programs to determine the eligibility of the applicant. Examples of this include:

  • Vocational rehab- what need does the individual have and would the service benefit them.
  • Personal or long-term care- Is the individual capable of completing daily tasks at home?

U.S. Spending on Disability

Data from the Organization for Economic Cooperation and Development show that when the United States is compared to other countries, it's spending on disability benefits is lower than others.

Spending on public disability benefits as a share of the total economy, or gross domestic product, in 2011 was 1.2 percent in the United States compared to 0.9 percent in Germany, 1.8 percent in the United Kingdom, 1.5 percent in Sweden, and 2.0 percent in the Netherlands. These figures include public social insurance systems and means-tested disability benefits.

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