Disability Insurance: Why It’s Important for Workers

How does disability insurance work?

In order for disability income insurance benefits to be paid, you must meet your policy’s definition of disabled. The strictness of the definition can vary across plans.

There are three common definitions:

Own-occupation disability
Modified own-occupation disability
Any-occupation disability

Own-Occupation Disability

Under the own-occupation disability insurance definition, you will receive benefits if you are unable to work in your “own occupation,” regardless of whether you find employment in another profession. This is the most common definition used and more flexible for the policyowner.

Example:

Pete is a surgeon who enjoys doing home improvement projects in his free time. One day, Pete’s hand slips while using his table saw and the accident requires a finger amputation. Pete can no longer perform surgeries, but may be able to find work in another medical specialty or even work outside the medical industry.

Pete cannot perform the substantial duties of his own occupation as a surgeon. With an own-occupation disability insurance policy, he would receive full benefits, regardless of whether he chooses to work in another medical specialty or another profession altogether.

Modified Own-Occupation Disability

This definition is similar to own-occupation, but full benefits are only paid if you aren’t working. If you choose to work then benefits from the policy are proportionally reduced. This definition can also be referred to as “own occupation if not working”.

Example:

Cassie is a paralegal at a law firm. At a routine wellness checkup, she was diagnosed with stage II breast cancer.

Cassie cannot work due to her treatment schedule and nausea side-effects. Her disability insurance policy provides her full benefits.

After a few months, her doctor says she can go back to work part-time. Her disability benefits continue but are reduced by income she is now receiving for work.

Any-Occupation Disability

Under the any-occupation disability insurance definition, you only receive benefits if you are unable to work in any job that is reasonably suitable for you based on your education, experience, and age. In other words, if you are still capable of working, even at a lower-paying job, an any-occupation policy would not pay.

Example:

John is a dentist who enjoys doing home landscaping projects in his free time. One day, John’s hand is accidentally crushed under a cinderblock while building a retaining wall and it causes nerve damage. John can no longer carry out precise dental work, but may be able to find work in another medical specialty or even work outside the medical industry.

Because John is still capable of working in the medical field, if he had an any-occupation disability insurance policy, he would not receive any benefits.

How do disability benefit payments work?

Monthly disability benefit amounts typically range from $500 through $20,000—maximum limits depending on your occupation and salary. These benefits are paid tax-free if you pay the premiums yourself (versus an employer) with after-tax dollars.

There are specific provisions to be aware of in your disability insurance policy.

Disability Insurance Policy’s Waiting Period

If you become disabled, you will begin to receive the benefits laid out in your policy. There is often a waiting period before payments begin, however.

Common waiting periods are 30, 60, 90, 180, and 365 days. A few policies are available with a 0-day waiting period but this is only for disabilities that occur from an accident.

Disability insurance policies with a shorter waiting period have higher premiums. If you have the means to pay for typical living expenses for a few months in the event of a disability, you can save money by purchasing a disability policy with a longer waiting period.

For example, the annual premium for a policy with a 180-day waiting period can be less than half the cost of a policy with a 30-day waiting period.

Disability Insurance Policy’s Benefit Period

Just as disability insurance policies have different waiting periods, they also have different benefit periods. A benefit period is the duration of time in which an insurance company will provide funds to an individual once he or she becomes disabled.

Benefit periods can include one year, 2 years, 3 years, 5 years, 10 years, to age 65 or age 67, or even the insured’s lifetime. Not all insurance companies offer all of these options.

Disability benefits will continue as long as you are disabled according to the policy’s provisions. The insurance company will most likely require proof of continued disability if the duration is long-term. The benefits from a disability policy cease once you are no longer considered disabled.

The longer your benefit period, the higher the premium. For example, the premiums for a policy with a 2-year benefit period may be 40-50% less expensive than a policy with a benefit period that goes until age 67.

How much does disability income insurance cost?

The cost of a disability income insurance policy varies by person. It can cost as little as 1% of your income.

The cost of your policy will be determined through underwriting.

Disability Insurance Underwriting Basics

Here at Quotacy our world revolves mainly around life insurance. However, life insurance and disability insurance are similar in the way that they both are made to protect income.

» Compare: Term life insurance quotes

Life insurance protects your loved ones from financial difficulties in the event of your death and disability insurance protects you, and in turn your loved ones, from financial difficulties in the event of a disability that prevents you from working. They are not underwritten the same though.

Life insurance underwriting involves mortality risk, basically the assessment of medical impairments and how they can attribute to premature death. Disability insurance underwriting involves morbidity risk, basically the assessment of medical impairments that can result in prolonged disability. As an example, a painful back isn’t going to cause a person’s death, yet back problems are a major cause of disability.

There are three levels of disability insurance underwriting:

Occupation
Medical
Financial

Occupation

For disability insurance, classifying an applicant in the correct occupation class is critical in determining the proper benefit amount and premium rate. When determining occupation classification there are five major factors:

Job duties
Environment
Income
Stability
Dual occupations

Common questions asked when applying for disability insurance include:

What is your typical day like?
If you work any manual duties, what are they and what percentage of time do they represent?
Do you have ownership? If so, how many employees?
Do you work multiple jobs?
How many hours do you work?

Higher occupation classes typically perform fewer manual duties.

The table below shows some examples of the different occupation classes.