Understanding the Types of Disability Insurance

How to Protect Your Family if You Can't Work via State and Federal Disability Programs

Understanding the Types of Disability Insurance
February 14, 2014

When most people think of “disability insurance,” they think of Workers Compensation programs provided by all 50 states. That’s because Workers Comp, as it’s typically called, insures over 130 million Americans today against the risk of workplace injury through premiums paid by both workers and employers. In 2011, the last year for which complete data is available, these combined programs paid out over $60 billion in medical and wage benefits to disabled workers.

In addition to these state programs, the federal government plays a leading role in providing Americans with long-term disability protection. In Fiscal Year 2014, approximately 11 million Americans will receive Disability Insurance benefits from the Social Security Administration totaling $145 billion. In addition, the Supplemental Security Income (SSI) program, which provides financial support to aged, blind and disabled adults and children with limited incomes, will provide $59 billion in Federal and State Supplementation benefits to nearly 8.5 million individuals.

Despite the essential nature of these disability programs, the federal disability trust fund is on target to run dry by 2016, at which time new contributions will equal just 80% of expected benefit payouts. If Congress does not act to shore up long-term financing, significant cuts are on the horizon. This situation begs the question: do you have the right kind of private disability insurance; and do you have enough of it, should you find yourself unable to work?

What Disability Insurance Providers Consider

In order to determine your monthly premium, private disability insurance providers consider several factors, including age (typically individuals from age 18 to 60 are eligible) and gender. Surprisingly, rates for women tend to be higher than for men for this type of insurance. Moreover, if you are a smoker, you will pay an average of 25% more than a non-smoker. When selecting your policy, your monthly benefit amount and the amount of time you are willing to wait before the benefits are paid, also referred to as the elimination period, will be the two most important decisions to make.

In most cases, monthly benefits are available for up to 60% of your current gross monthly income. Most providers offer elimination periods of 30, 60 or 90 days, so it is up to you to determine how long you will be able to afford to wait before you begin receiving your monthly benefits. Finally, your profession will fall into an occupational class, which helps the insurance provider determine your specific level of risk. Most providers have between four and six classes, and as you might expect, white-collar occupations tend to be considered lower risk over their blue-collar counterparts.

Types of Disability Insurance

Should you become injured and unable to work, private, long-term disability policies will cover 45% to 60% of your gross monthly income, although some policies can cover as much as 70%. Private disability insurance is separate and apart from benefits available through the SSA. Having a private disability policy in place will not affect your eligibility for SSA benefits.

  • Guaranteed Renewable - This type of policy ensures that, as long as the premium payments are made, the policy will be renewed for the benefit period (often to age 65, at which time other benefits will kick in). As the consumer, you maintain control over canceling the policy if you choose. The rates may increase by class, not by being individually singled out.

  • Non-Cancelable - These policies are just like guaranteed-renewable policies, except the premiums are locked in and cannot be changed throughout the renewal period, which is usually to age 65. The premiums are higher than guaranteed renewable policies.

  • Optionally Renewable - Because the insurance company can terminate the policy, these are a dying breed of coverage because of the lack of security of the insured. As a result, they are also very low in price.

  • Group Long-Term and Short-Term Disability Plans - Your employer may offer these plans, and premiums can be paid in full by the employer, the employee, or both. Because the policies are offered to a group, you may have limited options and control over the elimination period, terms, etc.

  • Voluntary Job-Site Disability Plans - These policies are offered through employers, but the premiums come out of the employees’ pockets. Benefit periods are shorter and the premiums are extremely low-cost. However, the benefits paid are often much less than if you were to seek out a policy on your own.

Important Measures to Protect Your Family

In order to protect yourself and your family’s financial stability, first explore what coverage is available through your employer and determine if it is sufficient given your financial needs. In many cases, employers will offer group short- and long-term disability policies, which may be less expensive and are better than not having anything in place, but you may decide that you need to shop around for additional coverage. Next, assess your overall financial situation. Consider how you can eliminate debt to reduce your monthly obligations.

For an added layer of protection, build up your savings to equal three to six months of your current living expenses. This could eliminate the need for additional short-term disability coverage altogether, and could be used to cover a vast array of unexpected financial emergencies that you might encounter. Having cash in reserves will also allow you to select a policy with a longer elimination period, such as 90 days, which will significantly lower your premiums. Finally, determine what amount you would need to cover living expenses and select a policy that balances what you can afford with what you need. While you may not be able to control the circumstances that might lead to your need for disability insurance, having the right policy in place will give your family both a proper safety net and peace of mind, irrespective of what happens to the funding levels of federal disability programs.

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