All ABout Disability Insurance
When was the last time you read the fine print of an insurance policy? You should, especially when you're buying disability insurance. The fine print tells you how the policy defines disability, which is important information. The disability definition used in the policy determines both how you can qualify for disability benefits, and, in part, how much the policy costs.
To be considered disabled under most policies, you must be unable to work and earn income; however, many policies narrow down this definition quite a bit. They may specify that you must try working in another occupation if you can't do your own job, or they may pay benefits if you can do some but not all of the duties of your own occupation. Other policies aren't concerned with occupation at all; they consider you to be disabled when, because of illness or injury, you earn less than you did before.
Look out for these key words when selecting a disability insurance plan
"Own occupation" coverage
Although the terminology used to define disability varies from policy to policy, an "own occupation" policy generally defines disability as the inability to perform the usual and customary duties of one's own occupation. This is a liberal definition of disability, because even if you can work in another occupation, you still receive disability benefits. Because it is relatively easy to qualify for benefits under this definition of disability, insurance companies are limiting the availability of this type of coverage. Own occupation coverage is often extremely expensive, and may only be available to individuals who have a clean medical history and work in a relatively risk-free occupation.
"Any occupation" coverage
An "any occupation" policy defines disability as the inability to perform the duties of any occupation. This definition of disability is strict. To receive benefits according to this definition, you have to be unable to work in any occupation, not just your own. Occasionally, however, the wording is modified to take into consideration your earning level, education, training, and experience.
Split definition coverage
Many disability policies incorporate both an "own occupation" definition of disability and an "any occupation" definition. You purchase a policy that provides own occupation coverage for a limited period of time, and after this period ends you must meet the any occupation definition of disability in order to continue receiving benefits. This is sometimes known as short-term own occupation coverage.
Presumptive total disability coverage
No matter how your insurance company defines total disability, most companies automatically consider certain catastrophic ailments to be totally disabling. If you are disabled by one of these ailments, you don't have to meet the conditions normally required in order to be considered totally disabled. Not only do you receive immediate benefits, but you also continue to receive benefits even if you are able to return to work. These ailments (which may be caused by injury or illness) are the loss of sight in both eyes, hearing in both ears, speech, the use of both hands, the use of both feet, and the use of one hand and one foot.
Residual disability coverage
Traditional total disability policies pay benefits in the event that you are totally disabled and can no longer work. However, a newer type of policy called a residual disability or income replacement policy pays benefits according to how much income you have lost due to disability. These policies pay benefits even if you are not totally disabled and can work part-time. Your benefit will be based on the percentage of income you earn working part-time in relation to what you used to earn working full-time. In general, to qualify for benefits, your earnings have to be at least 20 percent less than your pre-disability earnings. Residual disability is often long-term coverage, especially if your policy requires a period of total disability first.
Some confusion surrounds residual disability coverage. In the past, it was available primarily as a rider to a total disability policy, and you were required to be totally disabled before you were eligible for residual disability benefits. Today, however, you can also purchase residual disability coverage as a stand-alone policy, and you can receive disability benefits even if you never suffer a total disability. Some policies combine both types of coverage in the base policy or offer one as base coverage and the other as add-on coverage.
Partial disability coverage
Partial disability coverage is usually offered as an optional rider to a total disability policy, although it may be included in base coverage. It is similar to, but not the same as, residual disability coverage. Both types of coverage provide benefits to you if you return to work after a period of total disability and pay benefits if you can perform some but not all of the duties of your occupation. However, unlike residual disability, a partial disability definition does not consider loss of income. Rather, you are paid an amount equal to 50 percent (occasionally less) of the benefit that you would earn if you were totally disabled. In addition, the benefit period is much shorter than that for residual disability (a few months or a year at most).
Does your policy cover illness, injuries, or both?
Disability insurance contracts further limit disability definitions by restricting coverage. Most policies offer coverage for both injuries and illnesses and pay benefits no matter where you were disabled. Some policies, however, offer accident-only protection and don't cover work-related injuries or illnesses, because work-related disabilities are covered by workers' compensation.
Sickness is usually defined in disability policies as illness or disease that manifests itself while the policy is in force. This definition covers mental as well as physical illness. Knowledge is key here; you may have a pre-existing condition, but you may not know it, or a medical exam may not reveal it. Injury is usually defined as accidental bodily injury. The term accidental, however, doesn't necessarily mean that an accident caused the injury. It may simply mean that you didn't sustain the injury intentionally, or that it didn't happen while you were doing something that you knew could cause injury.
Did you get sick or hurt on the job or at home?
Your policy may cover either occupational or nonoccupational illness or injury. An occupational illness or injury is caused by, and related to, your job. To be eligible for benefits under this definition, your illness or injury must be work-related. These types of disabilities are covered under workers' compensation, so they are sometimes excluded from group disability insurance contracts. A nonoccupational injury or sickness is unrelated to your job and occurs away from your workplace. Nonoccupational coverage is much more liberal than occupational coverage and often implies 24-hour benefits. This means that if you get injured, either away from home or on the job, your disability insurance will pay benefits.
