Disability insurance

Disability Insurance, often called DI or disability income insurance, is a form of insurance that insures the beneficiary's earned income against the risk that a disability will make working (and therefore earning) impossible. It includes paid sick leave, short-term disability benefits, and long-term disability benefits.^[1] Statistics show in the US a disabling accident occurs every second^[2].

Types of disability insurance

Individual disability insurance

Those whose employers do not provide benefits, and self-employed individuals who desire disability coverage, may purchase their own policies on the open market. Premiums and available benefits for individual coverage vary considerably between different companies, for individuals in different occupations, and by state and country. In general, premiums are higher for policies that provide more monthly benefits, pay the benefits for a longer period of time, and start payments for benefits more quickly following a disability. Premiums also tend to be higher for policies that define disability in broader terms, meaning the policy would pay benefits in a wider variety of circumstances. There are many web-based disability insurance calculators to determine the disability insurance needed.^[3]

High-limit disability insurance

Traditional disability carriers have limitations on the monthly benefits that can be purchased, which limit the benefits for high income earners. Benefits will normally cap at $20,000-$25,000 of monthly benefits except in the high-limit disability market. High-limit disability insurance is designed to keep individual disability benefits at 65% of income regardless of the income level. Coverage is typically issued on top of coverage that is already in force. With high-limit disability insurance, benefits can be anywhere from an additional $2,000 to $100,000 per month. Issue (one policy) and participation (other individual disability insurance or group long-term disability) coverage has gone up to $30,000 with some companies.

Key-person disability insurance

Key Person Disability Insurance provides crucial benefits for any functioning business to protect the company from financial hardship that may result from the loss of a key employee due to disability. Key Person coverage provides cash flow to help a company move forward and maintain a profit in the event a key employee becomes disabled. The company could use the disability benefits to hire a temporary employee should the disabled employee's prognosis appear to be a short-term disability. In the unfortunate circumstance of a permanent disability, benefits would then be used to help defray the costs related to hiring a replacement employee, such as recruitment, training, startup, loss in revenue and unfunded salary continuation costs.

Business overhead expense disability insurance

Business Overhead Expense (BOE) coverage is designed to reimburse a business for overhead expenses should the owner experience a disability. Eligible benefits include: Rent or mortgage payments, utilities, leasing costs, laundry/maintenance, accounting/billing and collection service fees, business insurance premiums, employee salaries, employee benefits, property tax, and other regular monthly expenses.

National social insurance programs

In most developed countries, the single most important form of disability insurance is that provided by the national government for all citizens. For example, the UK's version is part of the National Insurance; the U.S.'s version is Social Security (SS)—specifically, several parts of SS including Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI). These programs provide a floor beneath all the other piecemeal forms of disability insurance. In other words, they are the safety net that catches everyone who was either (a) otherwise uninsured or (b) otherwise underinsured. As such, they are very large, very important programs, with many beneficiaries. The general theory of the benefit formula is that the benefit is not large but is enough to prevent abject poverty.

Employer-supplied disability insurance

Since one of the top reasons for becoming disabled is getting hurt on the job, it is not surprising that the second-most important form of disability insurance is that provided by employers to cover their employees. There are several subtypes that may or may not be separate parts of the benefits package: workers' compensation and more general (but very basic) disability insurance policies.

Workers' compensation

Main article: Workers' compensation

Workers' compensation (also known by variations of that name, e.g., workman's comp, workmen's comp, worker's comp, compo) offers payments to employees who are (usually temporarily, rarely permanently) unable to work because of a job-related injury. However, workers' compensation is in fact more than just income insurance, because it may pay compensation for economic loss (past and future), reimbursement or payment of medical and like expenses (functioning in this case as a form of health insurance), general damages for pain and suffering, and benefits payable to the dependents of workers killed during employment (functioning in this case as a form of life insurance). Workers compensation is a good benefit for on-the-job accidents but the weakness is the lack of coverage while not working. Statistics have shown that the majority of disabilities occur while the injured person is not working and therefore is not covered under workers' compensation^[4].

Other

These policies offer payments to employees who are (usually temporarily, rarely permanently) unable to work because of any injury or illness, even if it is not job-related. Unlike workers' compensation, this coverage may not involve any aspect of health insurance, life insurance, or payments for pain and suffering. Similarly to most employer-supplied health insurance, these plans are essentially just open-market plans with the advantage of a negotiated group rate. That is, they are similar to what an individual would buy, but they are purchased with a volume discount. Another general fact about them is that they tend to offer rather basic, low-end coverage, essentially because most people balk at paying for anything more. Sometimes each employee has the option to buy upgraded coverage if they are willing to pay for it.

Veterans' benefits

The various kinds of compensation and insurance that are provided to military veterans by organizations such as the U.S. Department of Veterans Affairs (VA) are very much analogous to workers' compensation, with soldiers, sailors, and marines being the analogues of the worker. In both cases, the overall compensation system involves more than just one type of insurance, but rather encompasses health insurance, disability income insurance, life insurance, and even mortgage insurance on VA mortgages. The scope of each of these is limited. For example, the life insurance aspect is limited only to paying (rather small) survivors' benefits to survivors of veterans killed in the course of their service; it is not a general term life policy.

Newsweek magazine's cover story for the issue of March 5, 2007 discusses the problems that American veterans of the wars in Afghanistan and Iraq are currently facing in receiving their VA benefits. The article tells the story of one veteran who waited 17 months to start receiving payments from the disability income insurance aspect of his VA coverage. Another article, in the New York Times, points out that besides the long waits, there are also inequalities based on which state a vet is from and whether he or she is a veteran of the regular Army, the National Guard, or the Reserves.^[5] The Newsweek article says that even when a veteran manages to get his or her claim approved (which can be burdensome),

"The compensation is not huge. A veteran with a disability rating of 100 percent gets about $2,400 a month—more if he or she has children. A 50 percent rating brings in around $700 a month. But for many returning servicemen burdened with wounds, it is, initially at least, their sole income."^[6]

According to a sidebar in the same Newsweek article^[7], the Americans injured in these wars, for all the obstacles to proper care, will still probably receive much better compensation and health care in years to come than injured Afghani or Iraqi soldiers. And of the two groups (U.S. disabled vets and Middle-Eastern disabled vets), the latter group is larger.

Claims: what is covered, and for how long

The important variables regarding claims are listed below. Not every variable matters to every type of disability insurance, but most of these are generally relevant.

• Was the disability unpredictable (not resulting from previously-known chronic illness)?
• Was the disability incurred in the course of performing job-related duties?
• How long is the waiting period before claim payments start?
• What other insurance policies will pay claims for this event?
• How much money will be paid per week/month/pay period?
• For how many weeks/months/pay periods will payments continue?
• What if the beneficiary is not totally disabled, but only partially?

Examples of how each variable may be important

Was the disability unpredictable (not resulting from previously-known chronic illness)?

For example, a potential policyholder seeking a regular individual policy on the open market must warrant that he is in good health and to the best of his own knowledge is not currently HIV-positive. A general principle of insurance is that the policyholder sells risk that, to the best of his knowledge, is not higher than the stated circumstances imply. Withholding relevant circumstances or hiding them is selling something that is not what it is represented to be. Analogies are insider trading using material non-public information and making fraudulent (incomplete or false) seller disclosure in a real estate transaction.

Was the disability incurred in the course of performing job-related duties?

For example, workers' compensation policies are not obligated to pay claims for disability that is not job-related. Insurance for such risks can indeed be purchased, but because the risks are more inclusive, the premiums are higher. A policyholder always needs to understand what she is or isn't buying with her premium. And the insurer is legally obligated to specify exactly what coverage is or isn't being sold.

How long is the waiting period before claim payments start?

Because most disability events are temporary, insurance coverage for them is cheaper when the policyholder agrees to wait longer before receiving claim payments. For example, if a policy-holder breaks a finger, it may only be 2 months before he or she is able to do his or her job again. If the policy-holder agreed to wait 60 days before receiving claim payments, then the insurer will not have to pay a claim for the event. This reduction to the insurer's risk is reflected in the lower price that was paid to purchase coverage (lower premiums).

Another important example in this category is that the standard waiting period before starting to collect Social Security's disability benefits is one year. Disability insurance claim approval from the insurance companies can often be delayed for a similar length of time.

It is common for a claimant to receive Social Security disability benefits but be denied benefits from an insurance company because it uses a different definition of qualifying disability.

What other insurance policies will pay claims for this event?

For example, if an auto accident renders a policy-holder unable to work for 5 months, the person's auto insurance policy with Company A may include coverage for lost income during this period. (Often lost-income coverage is a separate rider to the auto insurance policy that one must pay extra for if one chooses to have it.) In this case, the policy-holder may choose to make a claim with Company A and either (1) make another, secondary claim with Company B, which issues the policy-holder's disability income insurance, or (2) decide that the primary claim is enough and avoid making an unnecessary claim with Company B. Sometimes there is a previously established order of priority that rules that Company B is liable for the claim only to the extent that Company A's coverage is not enough.

Another important example in this category is that if the injury is someone else's fault, their liability coverage from, say, an auto, home, or personal umbrella policy may pay for the injured person's lost income, and therefore that person will not make a claim on his or her own policy.

How much money will be paid per week/month/pay period?

For example, it is rare for any policy to pay the full amount of the beneficiary's regular salary. (Policies that do are expensive, "high-end-of-the-market"-type policies.) Generally it will pay only some percentage, such as 80%, or it will pay only a flat amount, such as $1500/month, regardless of the normal salary amount. The idea behind this reduced benefit is that it is enough to protect the beneficiary from mortgage foreclosure, or to keep the beneficiary from running up huge debts during convalescence, even though it is not enough to live a carefree lifestyle on. In return for this restriction on the benefits, the premiums are lower.

For how many weeks/months/pay periods will payments continue?

Most policies in the lower and middle areas of the market will have a cap, for example, 5 years. More expensive policies will pay all the way to the age when the national social insurance program takes over as the primary income source. For example, in the U.S., this is usually at the individual's Social Security full retirement age; for most individuals, age 66. Also, in the U.S. most long term disability insurance policies require those receiving benefits to apply for Social Security disability benefits.

What if the beneficiary is not totally disabled, but only partially?

Most policies in the lower and middle areas of the market will only pay claims if there is no job that the beneficiary can possibly do. Others, referred to as own-occ policies, will pay the claim as long as the beneficiary cannot return to his or her own occupation. Own-occ policies cost more to buy (higher premiums) than non-own-occ, because their claims risk is greater. For example, suppose that a person's normal job involves lifting heavy boxes and getting paid $4000/month, and suppose this person gets injured, and can't lift so much weight. However, suppose further that the person is still capable of doing light assembly work at a workbench for $2000/month. If the policy is a less-expensive model, the insurer will decide that no claim will be paid, because the policy-holder is capable of working (although not at your his or her original occupation). But if the policy is an own-occ policy with a claim amount of 75% of normal salary, it will pay a claim of $3000/month. This payment will recur monthly until (a) the beneficiary is able to do his or her normal job again; or (b) the cap is reached (for example, 5 years later); or (c) the beneficiary reaches age 65 (when the policy ends and the beneficiary begins collecting Social Security).

See also

• Business overhead expense disability insurance
• Health insurance in the United States
• State Disability Insurance (California)
• State disability benefits
• Social Security Disability Insurance

References

1. ^ "BLS Information". Glossary. U.S. Bureau of Labor Statistics Division of Information Services. February 28, 2008. http://www.bls.gov/bls/glossary.htm. Retrieved 2009-05-05. 
2. ^ "Disability Statistics" (PDF). National Treasury Employees Union - Chapter 78. March 12, 2009. http://nteu-chapter78.org/documents/member_benefits/Disability%20Statistics.pdf. 
3. ^ "LIFE Foundation | Disability Insurance Needs Calculator". Lifehappens.org. http://www.lifehappens.org/disability-insurance/disability-calculator. Retrieved 2011-08-14. 
4. ^ "Common Causes of Disability; Cancer, Heart Disease, Diabetes, Arthritis and Lifestyle Choices". Disabilitycanhappen.org. http://www.disabilitycanhappen.org/chances_disability/causes.asp. Retrieved 2011-08-14. 
5. ^ Urbina, Ian; Ron Nixon (2007-03-09). "Veterans Face Vast Inequities Over Disability". New York Times. http://www.nytimes.com/2007/03/09/washington/09veterans.html. Retrieved 2007-03-09. 
6. ^ Ephron, D; Childress, S (March 05). "Forgotten Heroes". Newsweek 149 (10): 28–37. ISSN 0028-9604. PMID 17380811. http://www.msnbc.msn.com/id/17316437/site/newsweek/ 
7. ^ Dehghanpisheh, B (March 05). "Untreated Wounds". Newsweek 149 (10): 34. ISSN 0028-9604. PMID 17380812. http://www.msnbc.msn.com/id/17316435/site/newsweek/ 

External links

• Life: A Nonprofit Life and Health Foundation for Education
• Council for Disability Awareness
• Disability Statistics
• "Disability Insurance: A Missing Piece in the Financial Security Puzzle," a chart book prepared by America’s Health Insurance Plans and the Society of Actuaries' Disability Chart Book Task Force and funded by the Actuarial Foundation, October 2004
• America's Disability Counter