Disability income protection insurance allows you to insure your income against the financial impact of a disabling illness or injury. This type of insurance can help you prepare for the unexpected for example, the effects of a car accident, cancer, debilitating arthritis or a stroke and the expected, including routine pregnancies or recovery from a planned surgery.
You wouldn't think about going without auto insurance. Income protection is also important it can help you to continue to pay your bills if you have a loss of income due to disability.
What exactly is a disability?
Mention the word disability and people will likely think of congenital or developmental disabilities such as cerebral palsy, multiple sclerosis or accident-induced injuries.
But in the insurance industry, a disability is defined as a medical condition that leaves you unable to perform the most important aspects of your occupation and results in a loss of 20 percent or more of your earnings (this is why insurance companies sometimes refer to disability policies as income protection insurance). So a disability can be something as common as time off for having a baby, recovering from surgery or undergoing cancer treatment. Since policies can vary, individuals should be familiar with their policy to know what is covered and how the benefits are calculated.
Due to medical advances and ever-evolving work flexibility, it's not necessary to be totally disabled in order to be eligible for disability benefits. Most contemporary disability insurance policies provide proportional benefits if you can only work part time. You're almost always better off financially when working and receiving a partial disability benefit than if you were just receiving disability benefits alone.
Why should someone consider purchasing This type of insurance?
- Health insurance will cover medical costs, but does not replace lost income.
- Workers' compensation only covers accidents and injuries that occur on the job.
- Your life savings could be drained quickly by the costs of a disabling illness or injury. The U.S. personal savings rates averaged 10.4 percent in the 1980s, but in 2005, it had dropped to -0.5 percent. In other words, Americans spent more than they made, something that has not happened since the Great Depression.
- Social Security Disability Insurance only pays a limited benefit for severe disabilities that are expected to last at least 12 months or result in death.
What are the types of disability coverage?
There are two main types of income protection insurance: short-term disability and long-term disability coverage.
- Short-term policies provide benefits when you are unable to work for a short period of time due to an illness or injury for example, while recovering from surgery or while undergoing chemotherapy treatments. Typically, short-term disability benefits are provided for 13, 26 or 52 weeks and can help to replace 50 percent to 60 percent of your prior earnings.
- Long-term policies provide benefits when you are unable to work for a longer period of time due to an illness or injury. Benefits often last until you are able to return to work, or until the end of the benefit period stipulated in the policy typically to age 65.
How much does disability insurance cost?
The cost of coverage varies and is based on the type of policy, insurance carrier and other factors, but here are some examples:
Group insurance that is purchased by a business as an employee benefit averages $228 per employee per year for long-term disability and $192 per employee per year for short-term disability
. The employee usually pays nothing or a small amount for this coverage.
Rates for short-term disability products that are sold directly to employees at the workplace may benefit from group discounts. For example, a 35-year-old light blue collar worker could choose a policy that provides a $2,000 a month benefit for 12 months for a covered disability. The average monthly premium for this policy would be $58
Here is an example of an individual policy that may be purchased through an independent insurance agent. A 40-year-old professional man who makes $50,000 a year would pay about $1,700 a year for a policy that would pay him $2,900 a month for up to five years for a covered disability.
How does the annual cost of disability insurance compare with other forms of insurance?
- The average annual cost for auto insurance nationwide is $867.
- The average cost for homeowners insurance is $677.
- The annual premium for family medical coverage reached $10,880 in 2005, eclipsing the gross earnings for a full-time minimum-wage worker ($10,712). The average worker paid $2,713 toward that premium for family coverage in 2005, about 26 percent of the total, with the employer picking up the rest of the cost.
Where is this coverage available?
Disability income protection insurance is frequently part of an employee benefit package, but it may be purchased from an individual insurance advisor or at the worksite.
When coverage is provided as an employee benefit, the workplace company may own the policy and be identified as the policyholder. The policyholder makes the decisions about the type of coverage and provisions offered to employees, and picks up most, if not all, of the cost of coverage.
When coverage is purchased by an individual directly from an insurance broker or at the worksite through an insurance carrier, the individual is the policyholder. In this case, the individual may make all decisions about the coverage purchased and is responsible for all associated costs.
Who regulates the insurance industry?
Each state has its own insurance regulatory commission, so insurance offerings may vary from state to state in accordance with the laws of that state.
The National Association of Insurance Commissioners (NAIC) is the organization of these state insurance regulators. Its website www.naic.org
includes extensive information on insurance regulation, including consumer information on complaints against insurance companies.
How many disability claims does Unum receive each year?
Unum received more than 412,000 new disability claims in 2005 and paid $4 billion in disability benefits to individuals and their families
Of all the disability claims received in 2005, 92 percent were approved and paid; 7 percent involved individuals no longer claiming benefits before benefits came due, not eligible or not covered under the contract; and only 1 percent were determined not to be disabled under terms of their policies
What are some of the circumstances that wouldn't be covered by disability insurance?
- Some injuries that occur on the job.
- Injuries or illnesses that are not substantiated by your physician or medical records.
- Injuries or illnesses that are not covered by the policy.
How common is disability insurance as an employee benefits offering?
According to the Bureau of Labor Statistics, 39 percent of employees participate in short-term disability benefits and 28 percent participate in long-term benefits
The short-term disability market includes more than 15 million employees who work at 212,357 companies in the United States. This coverage generates $2.8 billion in annual premium
The long-term disability market includes nearly 36 million employees who work at 240,357 companies, and the coverage generates $7.8 billion in annual premium
Unum is the leading provider of group and individual disability income protection in the United States, with more than 11 million working Americans enrolled in the coverage
. The company works with more than 80,000 employers nationwide, including more than 40 percent of the Fortune 500.