Wednesday, July 22, 2009

Explanation of Disability Insurance

Disability insurance pays while you recover from a serious injury

Perhaps one of the most overlooked and undersold types of insurance is disability insurance. Most people do not realize that their likelihood of sustaining a substantial injury is high. The average length of time an adult is unable to work due to a disability is 3 to 5 months.

Unfortunately, the number of Americans living paycheck to paycheck is growing at an ever-increasing rate, and these people are most susceptible to the severe negative impact of an injury.

This issue is even more relevant in the case of injuries that occur outside the workplace (due to the absence of worker’s compensation coverage).

Function


The main purpose of disability insurance is to provide you with a regular and predictable monthly monetary distribution for the duration of a disability, or until the benefits of the policy have been exhausted.

Because the policy will only pay the monthly benefit in the event of a disability that prevents the insured person from performing the functions of his regular occupation, the payments act as a replacement for wages and income that would otherwise be lost during the recovery period.

Features


Disability insurance policies are completely customizable to fit within the confines of your specific needs, budget, and risk profile. Each policy is comprised of three main components: the elimination period, the benefit period, and the benefit amount.

The elimination period is the length of time that must pass after a disabling event before the policy benefits actually begin. This period is chosen by the policy owner and can typically range from 30 days to several months.

The benefit period is the total number of months that benefits will be paid consecutively before the policy is exhausted. This time period is also chosen by the policy owner and typically starts at a duration of 2 years up to several decades.

The benefit amount is the actual dollar value of the monthly benefit paid to the insured while he is recovering from an injury. Although the policy owner chooses this amount, there are state-mandated restrictions placed on exactly how high this can be, and that amount is different for each person and is based on his current income level.

Considerations


When applying for a disability insurance policy, insurance company underwriters will determine the level of financial risk based on your lifestyle, and will choose an appropriate premium for the coverage.

The company evaluates factors such as occupation, health status, driving history, and a myriad of other issues essential for properly analyzing the potential for a financial outlay. Applicants with physically hazardous jobs will pay a higher monthly premium than their peers with nonhazardous occupations.

Applicants with significant health issues or previous disabling injuries are often more prone to future disabilities than their healthier counterparts, and will therefore pay higher premiums. A motor vehicle history with offenses such as reckless driving and driving while intoxicated are also clear indicators of potential disability claims in the future, and insurance companies will increase policy costs appropriately.

In addition to evaluating your potential for disability in the future, the insurance company will also base the policy premium on the features requested by the applicant. Policies with a shorter elimination period, a longer benefit period or a higher benefit amount will cost more per month than a policy with a longer elimination period, shorter benefit period or lower benefit amount.

Potential


Owning private individual disability insurance provides the insured person with one of the most powerful forms of income protection available. Most people are unaware of the statistical possibility of a debilitating injury or simply choose to dismiss or ignore such notions. Because disability insurance is not a legal requirement, most people fail to purchase a policy.

There are typically two outlets for those people who do choose to protect themselves and their families with disability insurance. The first outlet is an insurance broker or disability insurance carrier. Interested applicants contact an agent who will obtain their specific vital information and generate a policy quote, then assist the applicant throughout the underwriting process.

The second outlet is a group -sponsored, or voluntary, program available through one’s employer. In this case, an insurance company will offer a disability insurance policy with a lower premium as a benefit to members of the group. The benefits are usually similar, with only minor limitations or restrictions, to those of a policy obtained directly from the insurance company as an individual customer.

Warning


Not all disability insurance policies are created equal. Because an insurance policy is a legal binding contract between the insured person and the insurance carrier, it is essential that the policy owner completely understand the contents of the coverage.

Some policies have limitations on how and when benefits will be paid and under circumstances that may not be plainly obvious. For this reason, it is always highly recommended that an applicant thoroughly review an insurance contract before authorizing the agreement.

Every insurance company has its own unique definition of exactly what qualifies as a disability, and this definition will directly affect whether or not benefits are paid to an insured person after an injury.

Some companies only pay benefits to an insured who is totally disabled, meaning that the person is incapable of completing any activity that could result in gainful employment. Other companies are much more lenient and will begin payment of monthly benefits if an insured person is injured and unable to perform the main duties of her own current occupation.

Determining which method is used by each insurance carrier is essential to properly evaluating different policies from competing carriers.

References


U.S. Census Bureau: Disability
Bureau of U.S. Labor Statistics: June 2009

Resources (Further Reading)


Consumer Guide to Disability Insurance
Guide to Disability Income Insurance




This article is a Twisted Nonsense Exclusive! (07/22/2009)