What is Disability Insurance?

August 17th, 2011 | Author: Mitch Reynolds

What is Disability Insurance and How Does It Work

This article, what is disability insurance, is the sixth in a series of articles explaining the fundamentals of how different insurance products work. To get a full list of all article in the series, please go to What is Insurance for the series overview.

Definition of What is Disability Insurance

What is disability insurance? Disability insurance, often called DI or disability income protection, is a health insurance policy that insures the beneficiary’s earned income is maintained in the event of a disability that prevents him/her from working. There are two main types of disability insurance; short-term disability and long-term disability insurance.

Short-term disability benefits usually start after two weeks in the case of sickness and immediately in the case of an accident preventing the insured person from working. Short-term disability insurance is most commonly offered through an employee group benefits plan. Personally owned disability insurance has a minimum waiting period of 30 days for sickness in Canada.

Long-term disability benefits usually start 90-120 days after the onset of the disability. If the person is still unable to return to work, and has exhausted their short-term disability benefit, they transition into long-term disability insurance where the claim and condition is expected to last for a number of years.

The maximum monthly benefit an insured person can get on their disability insurance policy is usually about 65% of your prior taxable earned income. Unearned income, like rents and interest payments from investments, are not insurable. Also, high income earners have a decreasing percentage of total earnings they are allowed to insure. This is to prevent over-insurance when people are on claim, causing lack of motivation to return to work.

How disabled do you have to be?

When making a claim for disability insurance benefits, a person can always qualify under the definition of “total disability”. This means that your doctor has said that, for reasons of illness or injury, you are unfit to return to work in any capacity at the present time. All employee group benefits plans have this definition of disability.

There are two other definitions of disability which you can get on a personally owned disability product. Those are “partial disability” and “residual disability”.

Partial disability is defined as losing approximately 50% of your working income and/or being unable to do one or more of the major duties of your job.

Residual disability is a simpler definition. If you are under a doctor’s care for an illness or injury and are losing income due to the disability, the insurance company will pay you the percentage benefit to match you percentage loss. For instance, if you were working only two days a week and losing 60% of your prior income, you would receive 60% of your monthly disability benefit.

How long are disability benefits paid out?

Another important part of your disability insurance contract is the length of time you could receive benefits. This length of time could be as short as 24 months, or 5 years, or benefits until age 65. With a personal disability insurance plan you can choose the length of benefit you want. With most employee group insurance policies, you get 24 months of benefit (at “own occupation” definition – see next section).

The definition of occupation

And, you thought, disability insurance is not complicated enough, let’s add another layer of complexity. Welcome to the definition of occupation. An insurance policy could have one of three occupational definitions.

Any Occupation – the ability to work in any occupation for which you are adequately trained, educated and fit to work in. Cannot be working or earning money in any job to receive benefits.
Regular Occupation – the ability to work in the industry and occupation you were in at the time of your disability insurance claim (i.e. if you can’t work as a Mechanical Engineer you continue to receive benefits). Cannot be working or earning money in any job to receive benfits.
Own Occupation – this has the same definition as Regular Occupation but allows the insured to work and earn money in a new job that is unrelated to their previous industry (i.e. a doctor can no longer practice medicine but become a university professor).

Most employee group insurance has a 24 month Regular Occupation definition and then it switches to Any Occupation. Lower cost personally owned disability policies also have this definition.

Riders to enhance your disability insurance policy

There are many valuable riders you can add to a personally owned disability policy. These riders could give you extra money for retirement savings, keep your monthly benefit indexed to inflation, allow you to automatically buy more insurance coverage as your income goes up, and more. If you are looking into a personally owned disability policy please have your insurance advisor tell you about such riders.

The cost of disability insurance

Disability insurance is one of the more expensive insurance products. Price is affected by the amount of insurance you are buying (the higher your income the more insurance you are allowed to buy), the quality of your product (Regular and Own occupation is more expensive than Any occupation), and specific riders you might add to the policy.

There are a few other factors that can affect the cost:

The type of work you do. The higher risk jobs have higher premiums.
Your age – just like all insurance products, it gets more expensive as you get older.
Your gender – women tend to pay more for disability insurance than men due to higher claim rates.
Your smoking status – there is extra premium added to a smoker policy vs. a non-smoker policy.

What is Disability Insurance – Find out more from Life Guard Insurance

If you are interested in protecting your income from an illness or injury causing you to be disabled then a disability insurance plan might be right for you. Feel free to contact Life Guard Insurance to answer the question what is disability insurance for your unique career situation.

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