Disability Insurance

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Disability insurance otherwise known as disability income insurance is a type of cover that provides you with income in the instance that you are unable to work and earn money because of a disability. There are many organizations involved in the provision of disability insurance that includes employers, insurance companies and government agencies such as Social Security. Each organization sets its own specific rules that define what a disability is and the rules on how a person might qualify for the disability benefit.

You may believe that disability insurance is for accidents and that you stand no risk because you work in an office but you could not be more wrong. According to statistics, only 10% of disabilities are caused by accidents, with 90% resulting from illness. This means that you are at risk regardless of the work you do. As long as you have an income from employment or business and have people relying on you for upkeep or obligations such as mortgage payments, then you need disability insurance.

If you did not think you needed insurance consider the following statistics?
1.About 25% of employees in the US will experience a long term disability that lasts for at least three months during their working years.
2.More than 50% of mortgages and 62% of bankruptcies are a result of injury or illness related medical issues.
3.69% of employees have not taken out a disability insurance policy.

If you do not have a disability policy, you may find yourself ruined or unable to pay for basic expenses or stay on track with your larger financial plans. A disability insurance cover is thus a critical component of your financial safety net, as it protects your ability to earn an income in the future.

What are the Main Types of Disability Insurance?
You can generally take one of two types of insurance policies – long and short term insurance.

Short Term Disability Insurance
This will provide income to beneficiaries for a short time typically no more than two years. However, the waiting/elimination period before you receive the payments may be as short as a month. Short term disability insurance can be in the form of employee benefits or in some instances may be state-run programs that any resident can sign up for. These policies can replace up to 80% of the gross income lost due to the disability.

Long Term Disability Insurance
Long term disability insurance provides a more permanent income when you are unable to work for long periods of time. These have a longer wait time given that most insurance providers require that you are disabled for at least two years before you start receiving payments. Most insurance companies will pay 60% of your gross income after tax for 5 or 10 years. The best disability insurance provider will typically provide income until you are 65.

What are the Types of Long Term Disability Insurance?
Long term disability insurance comes in three major forms:

1.Non-Cancelable Policy – Under this policy, the insurer cannot refuse to renew or cancel the policy and will also not decrease benefits, or increase rates as long as you are paying your premiums. The premiums are typically fixed over the agreed term of the insurance contract.

2.Guaranteed Renewable Policy – The insurer is bound by contract to not change the benefits as long as the premiums are paid on time. However, it may raise your premiums on a policy anniversary though this raise must apply to the whole class of policyholders.

3.Conditionally Renewable Policies – These policies have conditions and coverage may be canceled or your premiums may rise if these conditions are triggered.

What are the National Social Insurance Programs Available?
Most developed countries provide a form of disability insurance with the US having Social Security and the UK having National Insurance. Social Security provides cover through Supplementary Security Income (SSI) and Social Security Disability Insurance (SSDI).

  1. Social Security Disability Insurance (SSDI) – Governed by the Social Security Administration, it provides an average of $1,000 to eligible persons. Most people will not qualify for SSDI as over 50% of applications are denied.
  2. State Disability Insurance – Several states have their own short term disability plans that either the employee or employee can pay into. They typically provide benefits to residents for no more than a year.

These are the programs that one can use as a safety net if they were underinsured or did not have any kind of disability insurance. While they are huge programs, they only provide income enough to prevent abject poverty. As such, it is always advisable to get private short or long term policies if you are to maintain your living standards.

Workers’ Compensation
Workers compensation is typically a policy taken by an employer to cover employees who are injured on the job making them unable to work. Workers compensation is more complicated than insurance as it typically involves compensation for past and future economic loss, benefits payable to dependents if the employee got killed at work, damages for pain and suffering, and reimbursement or payment of medical expenses. While workers compensation may be good for employees, statistics show that most disabilities occur outside the workplace, which means that you will not be covered in such instances.

What are the Other Types of Disability Insurance?
1.Mortgage Disability Insurance – These policies will cover your mortgage payment if you are unable to work for an extended period. These would be great for you if you work in hazardous occupations such as construction or law enforcement or have health issues. However, you need to know that the disability insurance quote on this is typically higher.

2.Supplemental Disability Insurance – This policy will cover the difference between what you are getting from the short or long term insurance and what you really need for your monthly bills.

3.Business Overhead Expense Disability Insurance – This policy is great for the self-employed who need to have income coming in to cover business expenses in the instance of disability. The insurer may cover expenses such as payroll taxes, utilities, rent, and employee benefits and compensation.

Wrapping Up
It is impossible to predict just when a disability will strike and what effect they will have on your financial situation. With disability insurance, you can avoid the mental anguish and agony of dealing with a psychological, emotional, or physical condition. The policy will alleviate much of the financial stress from the loss of income and provide a means to support yourself and fulfill your obligations until you can work again. There are many types of disability insurance and the one most suitable will depend on your circumstances. Consult a financial advisor early to get the necessary policies so that you can protect your most valuable asset – your future earning potential.