Disability insurance replaces a portion of earned income when an individual is unable to work due to a covered sickness or a covered accident. Disability insurance has certain characteristics that aren’t found in other policies.
Disability insurance uses something called an “elimination period” or a “waiting period” to allow the policy owner to take more or less of the risk on their own shoulders. The more risk the insured takes on the lower his or her premium will be when they purchase private disability insurance.
The waiting period is the period of time one needs to be disabled before they are eligible for benefits. If you are disabled (per your contract’s definition) for three months and have a two month waiting period, you can claim benefits for the third and subsequent months of your disability.
If you continue to be disabled, you can continue to receive a benefit check each month thereafter. With most contracts, if you recover and are not disabled for a period of six months or more your elimination period will come into play again if you become disabled again.
(Auto and homeowners policies also allow policy owners to manage risk retention. On these types of policies this is done by raising or lowering the deductible.)
Another characteristic of disability policies not found in other policies is the maximum benefit period. This gives the policyholder another form of risk retention management.
The maximum benefit period is the longest period of time that you can receive benefits. This can be based on a maximum number of years. It can also be based on a maximum age.
Some policies will pay for a maximum of 2 years or 5 years. Others will pay you until you reach a certain age. That age is typically 65 or 70.
Other characteristics associated with disability policies are the unique riders that are available. These riders include:
- Waiver of Premium Rider
- Social Insurance Rider
- Cost of Living Adjustment Rider
- Guaranteed Purchase Option Rider
- Return of Premium Rider
These riders will be covered in future posts.
Disability Insurance and the Self-Employed
Many disability insurance companies cater to the self employed. This is because self employed individuals are almost always in need of this coverage.
If you are self-employed, you have to build your own benefit package. Although you may receive your medical benefits from your spouse’s employment it is unlikely that you will be covered for disability.
Should you purchase private long-term disability insurance?
Everyone who needs to work for a living should seriously consider owning disability insurance. What will happen to your family if you could never work again?
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