Understanding Disability Insurance – And Why You Need Coverage

If a disabling illness or injury were to prevent you from working for weeks, months or even years, how would you support yourself and your family?

If disability strikes, you may discover that your most valuable asset isn’t your home or your savings – it’s your ability to earn a living.

Group disability insurance can help protect you. When offered through your employer, disability insurance is an affordable solution to your need for income protection.

But the coverage your employer may offer often falls short of what you may need to maintain your standard of living should you become disabled. Plus, it’s often not portable – that is, you can’t necessarily take it with you when you change jobs.

And that’s why, as part of our financial planning process, we review our clients’ insurance needs and recommend coverage that fills in any gaps that may exist from group benefit programs.

What is group disability insurance?
Like other types of disability insurance, group disability insurance pays you a benefit that replaces part of your earned income when you’re sick or injured and can no longer work.

There are two major types of group disability coverage: short-term and long-term.

Short-term disability insurance plans generally pay benefits for several months, or occasionally as long as two years. In the case of employer-sponsored coverage, benefits often start once you exhaust your sick leave.

Long-term disability insurance plans may pay benefits for several years, or until age 65, and may be coordinated with benefits from a short-term plan so that your disability coverage is continuous.

Ideally, you’ll want to have both types of coverage. While it’s true that short-term disabilities are more common, long-term disabilities can be even more financially devastating.

Group disability coverage: What to look for
Understanding your disability coverage is important. Here are four major points to consider when reviewing a group disability plan:

Benefit period
How long will you receive benefits once you become disabled? Typical benefit periods for long-term plans are 2 years, 5 years, or up to age 65, while typical benefit periods for short-term plans are 13 weeks or 26 weeks (some plans may offer benefits for up to 2 years). Policies may further limit the amount of time you can receive benefits due to alcoholism, drug addiction, or a mental, nervous, or emotional disorder.

Elimination period
How long will you have to wait once you become disabled before you begin receiving benefits? Elimination periods (sometimes called “waiting periods”) for long-term disability plans range from 30 to 180 days, while elimination periods for short-term disability plans generally range from one to 14 days.

Level of coverage
What percentage of your income will the disability policy cover? Disability policies typically pay a benefit equal to 50 to 70 percent of your gross monthly base salary. A monthly maximum benefit may apply.

Definition of disability
How does the plan define disability? To receive benefits, you generally must be under the care of a doctor because of illness or accidental injury that impairs your ability to work either in “your own occupation” (your regular job) or in “any occupation” for which you might be qualified, based on education, experience, training, and past earnings. Some group disability plans incorporate the two definitions, paying benefits for an initial period (generally 2 years) based on the “own occupation” definition, then continuing to pay benefits if you meet the “any occupation” definition of disability. Some plans may cover partial disabilities, while others will require that you be totally disabled to receive benefits.

Disability Myths
Many people believe they already have adequate disability coverage through workers’ compensation or Social Security, but that’s not always the case. Here are the facts:

Workers’ compensation pays benefits only to workers who are disabled on the job; if you suffer an accident or illness that is non-work related, you will not receive disability benefits under this program.
Social Security disability insurance provides long-term disability benefits, but eligibility rules are strict. To qualify, you must be unable to work at any job (not just your own job) and your disability must be expected to last for at least 12 months or end in death.