Your ability to make a living is your greatest asset, especially if you’re the family’s breadwinner. Having income protection when you become unable to work (due to an injury or illness) could save you from the pain and worry of not having money to pay for day to day expenses.
“But I already have worker’s comp and group disability insurance. That should be enough.”
Well…it depends. As you’ll learn in a bit, not all types of disability insurance are the same.
Knowing their differences is crucial because disability insurance policies vary greatly from one type to the next, so having a solid foundation of their differences will help you choose which one is best for your needs.
Long Term vs. Short Term Disability Insurance
Short Term Disability Insurance (STDI)
It’s a type of disability insurance that pays benefits covering the policyholder anywhere from three to six months, sometimes up to a year (after the elimination period). Many employers offer a short-term group plan as part of the employee benefit package. However, not all companies have to offer it.
At the time of this writing, only California, Hawaii, New York, New Jersey, and Rhode Island-based companies are mandated by the government to offer short-term disability insurance. Still, many employers opt to offer it since they’ll receive a federal tax deduction if they do so.
STDI covers your expenses for the following types of events:
- The birth of a child
- An illness that lasts for a few weeks to several months
- An injury that prevents you from working and requires a few weeks to a few months to recover
A short-term disability insurance policy offered by an employer is either Self-funded/Self-administered or as Insurance.
- Self-Administered means your employer will provide and fund the benefit on their own.
- Insurance: The employer gets the services of an insurance company to provide the policy.
If your employer doesn’t offer STDI, you can choose to get one on your own. It can be pricey, and will vary based on the type of coverage you’ll get, along with your age and health condition. In general, expect to pay something between 1-3% of your yearly gross income for short-term disability coverage.
Pros of Short Term Disability Insurance
- Most employers offer it; they either help you pay the premium or pay it entirely
- Helps you pay your expenses while you rest and recover for a few weeks to a few months due to a disability
- Option for pregnant women to take time off work
- Benefits from STDI can cover the elimination period for long-term disability insurance
Cons of Short Term Disability Insurance
- Since it’s just good for a few months, it won’t be enough to cover you for disabilities that last for more than a year
- If you’re living from paycheck-to-paycheck, the benefits may not be enough to sustain you (and your family) since coverage is typically just around 60% of your income
- It might make more sense to simply build an emergency fund that can sustain you for 6 months versus getting a short-term disability insurance policy (if you have to pay for it)
Long-Term Disability Insurance (LTDI)
A type of disability insurance that pays benefits for coverage that lasts anywhere from 2, 5, 10 years—-up to 67 years old (sometimes even for an entire lifetime, depending on the policy). You’ll receive 50-60% of your salary once the benefits kick in and will last until you can get back to work or it reaches the policy’s maximum number of covered years.
STDI covers your expenses for these types of events:
- Musculoskeletal/connective tissue disorders
- Injuries and poisoning
- Mental disorders
- Nervous system-related
- Pregnancy and childbirth complications
Unlike Short-term disability insurance, LTDI is not required to be offered in any state. However, many employers still include it as part of their benefit package (usually funded through a third-party insurance agency).
Some of the main conditions that need to be met when someone claims for an employer-sponsored long-term benefit insurance usually include the following:
- Have worked for the company/employer for a certain period of time before coverage begins
- Be a full-time employee working for a minimum of 30 hours a week
- Should elect their benefits and contribute to the plan
Pros of Long Term Disability Insurance
- Helps you pay for living expenses and medical costs if you had a life-changing injury
- Even if it doesn’t pay your full income, the benefits are tax-free
- Helps you get back on your feet while waiting for your condition to get better, especially if you’re the family’s breadwinner
Cons of Long Term Disability Insurance
- Premiums tend to be pricey due to the longer coverage
- Most policies include exclusions and bans on several pre-existing conditions and forms of injuries
- You have to wait for the Elimination period to complete before starting to receive the benefits
Individual vs. Group Disability Insurance
We’re now going to categorize disability insurance based on the ownership of the policy: Individual and Group.
Individual Disability Insurance
Also known as Private Disability or Personal Disability Insurance. This type of insurance means the policyholder is the sole owner and payor of the insurance. It’s very similar to traditional life insurance, you’re basically paying the full amount in exchange for a benefit.
Pros of Individual Disability Insurance
- Ownership—-completely belongs to the policyholder. The contract is stronger and more binding versus that of Group DI.
- Portable—-The policy will remain active (as long as you’re paying premiums) even if you switch jobs. Unlike Group DI, it allows the person to carry the policy with them no matter who their employer is.
- Non-cancelable—-No need to worry about a policy cancellation for any reason as long as premiums payments are on time.
- Tax-free—-You’ll receive payment with tax-free income when you become disabled.
- Flexible—-Even if your health declines, you have the option to increase your policy (via cost of living adjustment rider) in the future or add indexation to combat inflation. And if you add an “Own protection” rider, you receive disability benefits if you’re unable to work in your current job.
Cons of Individual Disability Insurance
- Cost—-Individual DI tends to be more expensive than Group DI
- Stricter underwriting—-It’s easier for approval for Group DI since it doesn’t require conventional medical tests and questionnaires for underwriting.
- More expensive for women—-The likelihood of giving birth in the future makes premiums for women higher than that of men.
Group Disability Insurance
This type of disability insurance is typically offered by employers to their employees as part of their group benefits. Considered cheaper (sometimes even free) since it’s sponsored by your employer compared to individual DI.
Pros of Group Disability Insurance
- Cheaper—-Compared to Individual DI, Group DI is a lot less expensive (sometimes even free)
- Easier to obtain—-Most Group DI plans give guaranteed coverage at a set price based on age. This makes it easier for employees (who usually have a hard time with approval for individual DI due to poor health) get disability coverage.
Cons of Group Disability Insurance
- Definition of “Own Occupation” —-Group DI tends to have a more limited (narrower) scope for its definition of disability. Group DI usually defines disability in “own occupation” as being unable to work in the same occupation for two years. While “any occupation” defines as the inability to work in any reasonable occupation.
- Not portable—-When you leave the employer sponsoring your Group DI, your policy will get cancelled.
- Less secure policy—-Group plans have a possibility of cancellation by the insurance company. Also, the rates at which you pay your premiums can be raised across all participants.
- Offset—-Most group DI payouts offset worker’s compensation and social security disability payments
Other Types of Disability Income
So far we have tackled the most common options to choose from if you’re considering getting a disability insurance policy. In this section, we’ll take a look at the other types of disability income.
Social Security Disability Income (SSDI)
It’s a Social Security program that pays out monthly benefits to qualified SS members when they become disabled with a medical condition that is expected to last at least 12 months (or result in death).
In order to qualify, members must have worked a certain number of years in an occupation where you paid Social Security taxes. Also, you must have acquired a certain number of work credits. These can be earned at a maximum of 4 per year.
Your age when you become disabled will determine how many work credits you need to qualify for SSDI. The older you are, the more work credits required for qualification for disability benefits. To determine the actual number, you’ll be assessed for “Recent Work Test” and “Duration of Work Test”.
A person applying for SSDI should also have a medical condition that fits within the Social Security’s definition of disability. They can only approve your application if your medical condition classifies as severe (condition interferes with your occupational activities), long-term (expected to last at least a year), or totally disabled (unable to perform substantial gainful activity for a year).
It’s an employee benefit you receive with an injury you get at work. Whether it was the person’s fault or not, as long as it happened at work, he or she is eligible to apply for worker’s compensation.
The main difference between this and disability insurance (DI) is that the latter pays you benefits if you get injured or disabled away from the office and cannot perform your regular work. Also, DI is something you pay for yourself (if it’s not 100% employer-sponsored) while worker’s comp is paid by the employer (medical bills and lost wages).
State Disability Insurance
It’s an insurance program created to support workers who are ill or injured. Its goal is to replace lost wages (partially) when a worker loses the ability to do their job and earn money due to a disability. As of this writing, five states offer SDI: California, Hawaii, New Jersey, Rhode Island, and New York.
Medicare Disability Insurance
Medicare provides disability benefits (hospital, nursing, home health, physician, etc.,) to qualified participants who are:
- Collecting Social Security Disability Benefits for 24 months or;
- Have End Stage Renal Disease or ALS “Lou Gehrig” Disease
Note though that Medicare coverage is not strictly limited to people with the above conditions. If an applicant is given doctor’s orders for a certain treatment and it meets Medicare’s criteria/requirements, then they may qualify for benefits.
What makes the most sense for your financial needs?
There are three common scenarios when it comes to disability insurance:
- Having a group disability policy via your employer
- Deciding to purchase an individual disability policy
- Having a cheap/free group disability policy and also having an individual policy
In general, the last option would be ideal as it will allow you to have the benefits that a group policy may fail to have. As you’ve learned above in the Pros and Cons section, a group plan is cheaper and easier to get. But an individual disability trumps it when it comes to the coverage and benefits. Also, an individual plan is portable and non-cancelable, which means your policy will remain active even if you change jobs.
It’s all about knowing what each plan covers and then deciding if it’s sufficient enough for your needs. If you want to discuss all your options and how to maximize disability insurance benefits, feel free to contact us today.