14 May The Two Types of Disability Insurance

What are the Two Types of Disability Insurance?

If someone in your life has ever experienced a debilitating health issue, you understand the financial hardships that may result. Often, serious health complications can leave someone unable to work for weeks, months, even years. No one can deny that it’s difficult to watch anyone struggle to make ends meet. Imagine the difficulty in watching a loved one face this crisis, or even experiencing it yourself. 

What does losing a source of income look like to you? At the very least, one would expect to feel stressed, frustrated, even a little scared. Luckily, a financial safety net is available in the form of disability insurance. When you find yourself unable to work due to sickness or accident, long-term and short-term disability insurance covers your paycheck – and by default, your family.

Short-term vs Long-Term Disability Insurance

In general, when someone experiences an illness or injury that renders them unable to work, disability insurance can provide a source of income.  

Disability insurance is classified into two groups. For a limited period, short-term disability insurance (STDI) covers part of your wages. Consider a period of three to six months. Many individuals get STDI from their employer. Individual policies are available from certain private insurers, although they are typically more costly than they are worth. 

Long-term disability insurance (LTD) offers compensation if you are unable to work for an extended period. Think years, if not decades. Even if an employer offers LTD, the benefit is less agreeable, and coverage is often insufficient. For these reasons, many individuals buy supplementary LTD policies. If your employer does not have this service, you can buy an individual long-term disability policy. Policies fall within two categories.

Own occupation disability insurance:

This coverage describes a disability as the inability to work your normal job, even if you are capable to work in another job. For instance, a surgeon unable to perform the duties of his profession due to hand tremors may be eligible for benefits under an own occupation policy if he decides to take a job as a medical school lecturer. There are three types of own occupation disability insurance.

True Own Occupation:

If you are unable to work in your own profession due to an accident or sickness, you are entitled to benefits, even if you move occupations.

Transitional Own Occupation:

If you are unable to work in your own occupation due to an accident or illness and must take a new job, you are entitled to benefits to offset the difference between the new (lower) and old (higher) wages.

Own Occupation, Not Engaged:

If you are unable to work in your own profession and have not begun a new career, you are entitled to benefits. You stop earning benefits once you start a new career, regardless of profession. 

Any occupation disability insurance:

Any occupation disability insurance only pays out if an individual is unable to operate/perform in any profession for which they are reasonably suited for due to sickness or injury. With this policy, it is more difficult to prove and obtain benefits. However, it is typically less costly than the other forms of own occupation disability insurance policies. 

You should get “own occupation” policy if you can afford it. It is also recommended to choose a policy that is non-cancelable and guaranteed renewable. If the premiums are paid, a non-cancelable policy means the insurer cannot adjust the terms of the policy – including the premium rate. A “guaranteed renewable” policy ensures your insurance will not be cancelled if the premiums are paid. 

It’s best to have both LTD and STDI policies in place at the same time as long-term disability insurance does not kick in right away. You will have to wait out an elimination period – ideally before the short-term disability insurance runs out. An elimination period typically lasts between 30 to 365 days. 

Short-term Disability Insurance 

Short-term disability insurance can cover your wages if you are unable to function for a short period of time due to a disability, such as an accident or illness. Your insurance policy will define the exact definition of the disability. The benefit term of short-term disability insurance is normally between 3 to 6 months and often provided as a benefit to workers through their employer. 

The most common way to receive short-term disability benefits is through an employer-sponsored group plan. Employer-sponsored insurance plans are “guaranteed approval.” You aren’t required to have a medical examination or go through the extensive underwriting associated with an LTD policy. However, if you apply for STDI through a private insurer, you’ll likely be required to undergo a medical examination. 

The terms of the policy differ depending on the employer. Others will pay the premiums in full, while others charge you a small fee to join. It’s also normal for coverage to begin only after a certain amount of time has passed or if you work a minimum of 40 hours per week. Short-term disability payments usually substitute a portion of your salary for 30 to 120 days, with a 52-week maximum payout period. There are also periods when the monthly payment amount if capped. 

When you’re unable to work, short-term disability insurance replaces up to 80% of your annual salary. There is an elimination period after you make a claim. This is the amount of time before you start earning benefits. Short-term disability insurance plans typically have a 14-day elimination period. Your insurance policy may have exclusions, which are items they do not cover.

You will receive coverage for the duration of the benefits period if you fulfill the definition of disabled set by your policy. Conditions such as back injuries, cancer, heart disease, and off-the-job injuries are all examples of disabilities. Injuries sustained at work are not covered by disability insurance – this falls under workers’ compensation. The benefit is taxable if you or your employer pay insurance premiums with pre-taxed money. The benefit is not taxable if premiums are paid with post-tax money. 

You must file a claim with the insurer to receive your payment, whether you deal with them directly or through your employer. Check your coverage with a human resource representative or broker to discover how exactly your short-term disability program policies work. 

Long-term Disability Insurance 

Long-term disability insurance is the most accessible and comprehensive form of disability insurance available. It can also be obtained whether you work for an employer or for yourself. 

Long-term disability insurance is a form of coverage that provides monthly payments if you become unable to work due to sickness, injury, and/or disability. The benefit period could last two, five, or ten years, or even retirement. Generally, up to 60% of your gross monthly income is the paid benefit amount. The annual expense is normally between 1-3% of your annual salary. 

To begin the process, start with the application process. This generally takes four to six weeks from start to finish. 

Make a cost comparison

Every insurance provider has their own system of evaluating applicants. As each person’s health and occupation are different, it’s likely you’ll receive difference rates from different providers. After you pile together your quotes and compare policies, choose the one that offers the best coverage at the best price. 

Completing the paperwork

You will fill out a standard application that includes basic information and work descriptions. Prepare to provide evidence of income, such as your most recent tax return or if you’re moving jobs, provide an employment offer note. You will still need to sign consent papers so that your medical records can be submitted to your future insurer(s). 

Medical Examination

A paramedical test may be scheduled by your broker or the insurer directly. The medical test will be performed by a technician, either at your home or workplace, and will take approximately 30-45 minutes. They will take your height weight, pulse, blood pressure, and a blood/urine sample. The results are then forwarded to the underwriters of the insurance firm. Mention pre-existing conditions during the exam because this could affect coverage. 

Conduct a Phone Interview

An insurance representative will call to inquire about your medical history and lifestyle – such as whether you travel frequently, what your hobbies are, etc. The interview typically lasts anywhere between 20 to 25 minutes. In most cases, the insurance provider will let you know which questions to expect. Have your primary physician’s name, phone number, and address on hand as the representative will likely ask for those details. 

Underwriting and Approval

The first two to four weeks of the application process are devoted to underwriting. In general, the more complicated your medical background, the longer it takes. Your broker or insurer will deliver your policy to you when it’s complete.

Purchasing Your Disability Insurance Policy

To activate your policy, you will need to sign a delivery receipt and authorize a method of payment. Long-term disability insurance is expected to cost between 1-3% of your annual earnings. 

You will begin paying your annual premiums until you’ve selected the correct long-term disability insurance policy. Here’s what you need to do in the case you are either too sick to work or injured: 

Filing Your Disability Claim

To file an LTD claim, you’ll need to include details about your work and your conditions – usually statements and document from your physician. The insurance provider will evaluate the claim and determine whether to accept it, request more details, or reject it. You must be able to demonstrate your inability to work. 

Waiting Through the Elimination Period

All LTD plans require an applicant to be disabled for a certain amount of time between the beginning of the injury and the start of insurance payments. In all situations, short-term disability insurance applies. The most common waiting periods are 30, 60, and 90 days, however, periods of 180 and 365 are available as well. 

Receive Benefits

.When your disability application is accepted and the elimination period has expired, you will be paid a monthly benefit for as long as your disability lasts up to the “benefit period.” Companies provide benefit terms ranging from two years to right up to retirement age. At this point, Social Security benefits kick in. The higher the premium, the longer the benefit term. 

Returning to Work

Where you’re ready, you can go back to work. Payments will end when you are ready to return to your normal job. You may continue to receive benefits if you return to work in a limited capacity or in a different occupation. This depends on the policy you purchased. 

Cost of Disability Insurance Policies

Premiums for long-term disability insurance vary depending on your age, gender, occupation, and other factors. That said, you should expect to pay between 1% and 3% of your annual salary for a policy. Know that the insurance sum should be adequate to protect you if you are out of work for an extended period. The good news is that when you purchase an LTD policy – rather than signing up for one offered by your employer – the benefits are tax-free. As a result, a policy that pays out 60% of your gross income essentially replaces the bulk of your take-home pay. 

Keep in mind, the cost of coverage may increase if you have a pre-existing condition. Depending on the insurer and policy, the cost of short-term disability varies. Consequently, short term disability benefits provided through an employer is recommended. Private insurers costs are generally too high, so it may be more feasible to self-insure for a short period until purchasing a long-term policy.  

Takeaway 

Short- and long-term disability insurance plans work together to provide coverage. Short-term disability insurance covers your immediate income needs. Long-term disability insurance is available if you need coverage for a longer period. Before long-term disability insurance kicks in, you generally must exhaust your other disability insurance options. This means there is minimal overlap between the two. 

The payout period is the main difference between short-term disability and long-term disability insurance. Short-term disability insurance covers you for less than a year, while long-term disability insurance is designed to cover you for several years. As a result, the overall benefit for short-term disability insurance is smaller. Regardless of coverage length, both disability insurance plans will cost the same amount – 1-3% of your annual income.