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Private Disability Insurance
November 16, 2017
Disability does not only affect you physically. It takes a toll on every area of your life. If you were to become disabled due to an injury or sickness your financial well-being would be decimated if you had no plan in place to supplement your income. Private disability insurance provides the income replacement protection you need to survive what may be the hardest time in your life.
What is private disability insurance?
Private disability insurance is a policy you individually own, as opposed to employer based coverage. Most employer based disability insurance is limited in scope and time. Additionally, group based disability insurance through an employer may not be portable, i.e. you can’t take it with you.
Instead, private disability insurance is your own personal coverage that you can tailor to your specific needs and goals. You can take it with you if you leave your current employer and you can choose the benefits and features that makes sense for you.
As you will see from the remainder of our article on private disability insurance, there are many factors that go into designing the right policy. Due to all these variables it is difficult to offer private disability insurance quotes other than by providing a ballpark figure. Typically, you can expect to pay anywhere from 1-4% of your monthly income on your disability insurance premium.
For example, if you currently income is $5,000 a month, then your disability insurance premium would range from $50-$200 a month. We can help tailor your policy to provide the maximum income replacement benefits or focus on the cheapest disability income coverage. It all comes down to your specific needs, goals and objectives.
What types of private disability insurance are available?
There are two primary types of private disability insurance, short-term disability (STD) and long-term disability (LTD).
Short-term disability insurance provides income replacement for accidents or sickness in the near term. Typically, short term disability coverage kicks in within 7 days, and provides a cash indemnity income replacement benefit to help with your finances as you deal with your new disability. Most short-term disability coverage last between 3 to 12 months, with some policies stretching to 24 months.
Long-term disability insurance provides income replacement for disability caused by injury or sickness in the long-term. The typical policy pays income benefits for 24 months or longer. Upon filing your private disability insurance claim, income benefits kick in after your elimination period ends, usually around 90 days.
What are the key features of private disability insurance?
The key features of a private disability insurance policy include:
- Elimination Period
- Benefit Period
- Income Benefit
The elimination period is the waiting period required by the disability insurance company that you must wait after filing a claim before your disability benefits kick in. On short-term disability insurance, the elimination period is usually between 0 days, to 7 days, 14, 30, 60 or 90 days. For long-term disability insurance, the elimination period is typically between 30 days, 60, 90, 180, 365, or up to 730 days.
The benefit period is how long your income benefit lasts. It starts after your elimination period has ended. For short-term disability insurance, the benefit period ranges from 3 months, 6, 12, 18, or up to 24 months. The benefit period for long-term disability insurance ranges from 2 years, 5, 10, to age 65, to age 67, or conditionally to age 75. Since the typical timeline of a disability claim ranges from 2.5 to 3 years, having at least a 5-year LTD plan is ideal.
The income benefit is how much money you will receive form the insurance company. Generally, the income benefit for both STD and LTD insurance is around 50-60% of your income. Since your private disability income benefit is tax free, 50-60% income benefit is usually enough to replace your prior income before you became disabled.
The Best Private Disability Insurance
When designing your private disability insurance there are certain key features that you should consider, such as own occupation definition of total and partial disability, guaranteed renewability, non-cancelable, a cost of living adjustment rider. In addition, if you have student loans you may also want to consider the student loan protection rider.
Own Occupation
Although we go into own occupation in greater depth in our article covering own occupation disability insurance, it is important to understand what it is and how it relates to private disability insurance. An own occupation definition of total disability requires that solely due to injury or illness, you are not able to perform the material and substantial duties of your regular occupation. The definition is important because it differentiates between your regular occupation and any gainful employment.
You see, with a true own occupation definition, if you return to work at a different job than your regular occupation, you may still qualify for your disability income benefit, even though you are making money at your new occupation.
Guaranteed Renewability
The term guaranteed renewability refers to your contractual right to renew the policy until the term ends and the insurers obligation to continue your coverage regardless of your health or age until the term ends. You disability insurance policy is a contract between you, the insured, and the company, the insurer. The guaranteed renewability provision in your policy protects you against the company cancelling your contract before the underlying policy term ends.
Non-Cancelable
The non-cancelable provision in your private disability insurance policy actually means the company cannot raise your premiums. If your policy is non-cancelable, your premiums are fixed for the duration of your disability income coverage. If this provision is not part of your policy the company reserves the right to raise your premiums, as long as the company raises the premiums on everyone within your specific class or group.
Cost of Living Adjustment (COLA) Rider
Adding a cost of living adjustment rider to your private disability insurance allows your income benefit to increase. Inflation runs at about 3% a year, which means goods and services today will cost roughly 3% more next year. Over a 20 year period of time, that is a huge increase in prices. One way to insulate yourself and your disability income benefit is with a cost of living adjustment rider.
Student Loan Protection Rider
If you are disabled and cannot make your student loan payments your loans could go into default. Upon going into default, your loan will be sold off to a company that specializes in making your life a living financial hell. One way to avoid such an event from happening is with a student loan protection rider.
The student loan protection rider reimburses you by paying you a monthly benefit amount that you can use to make your student loan payments. So, rather than waste your deferment or forbearance, you can file a claim with your private disability insurance provider and have the company pay your student loans down.
