Disability Insurance, sometimes called “Health and Accident Insurance”, is a policy designed to pay a percentage of the owner’s current salary if he or she becomes unable to work. The two main reasons for receiving disability benefits are accidents (whether at work or not) and debilitating illnesses. Employees covered by disability insurance policies must prove that they are unable to perform most of their current duties in order to qualify for total disability status.
Insurance experts advise clients to do a shopping comparison before taking out disability insurance. The least expensive policies can also be the most restrictive in terms of eligibility and monthly payments. Individual insurance companies may set their own conditions, so look out for specific elements such as a significant payout percentage (typically 45% to 60%), a waiting period of 90 days or less to qualify for benefits, and fewer restrictions on employment alternatives. Many workers want to feel useful in occupations that are not affected by a disability, but some disability insurance policies strongly discourage this practice.
Some professional insurance agents believe that the ideal disability policy is a form called “own trade” coverage. Under this type of plan, workers with disabilities can continue to earn income from other jobs while receiving benefits. While policies such as “own business” may benefit the policyholder, insurance companies tend to promote other plans first. An alternative disability insurance policy pays a percentage of lost income if the insured worker agrees to consider only future employment in their current field. Perhaps the worst form of disability insurance could require disabled workers to seek any and all available jobs, including low-paying McJobs with no benefits.
Another element of disability insurance involves returning to work after an illness or accident. A business owner may be able to resume most of their duties but still suffer a loss of income and time. This leads to a requirement called “residual disability”. Residual disability insurance policies must continue to pay a percentage of the insured worker until he or she is working at the same level as before the illness or accident. Some cheaper insurance policies do not offer residual disability coverage or will only payout for lost time and not income.
As with many insurance plans, having disability coverage usually makes more financial sense than not having it. Many group insurance policies provide for emergency treatment or short-term medical care, but few protect workers from the long-term effects of disability or debilitating illness. Having enough income to pay off your mortgage and other basic credit obligations while recovering from a disability accident can be of enormous benefit. Finding affordable health insurance AFTER a major accident or illness can be nearly impossible.
Short-term disability insurance pays a percentage of your salary if you become temporarily disabled, which means that you are unable to work for a short period of time due to an illness or injury unrelated to your job (workers ’compensation coverage will provide replacement income if the condition disables due to work-related injuries). Typically, a short-term disability policy gives you 40 to 80 percent of your disability base salary.
Some people have short-term disability insurance through employers, unions, or other professional organizations. This type of policy is known as group coverage. You can also purchase an individual policy directly from an insurance company or agent, although it will generally be more expensive to purchase your own coverage.
How Short Term Disability Insurance works
Most short-term disabilities have a similar general design. You, or your employer, pay a monthly premium to be covered. When illness or injury prevents you from working, you apply for benefits by talking to someone in your company’s human resources department or your insurance agent. You may or may not have to pay tax on the money you get from a disability policy, depending on whether the premiums for the policy have been paid by you or your employer, and whether they are paid with money before tax or after tax.
Most short-term disabilities require evidence from your doctor that describes your condition and estimates how long you will be away from your job.
Most likely, there will be a waiting period between the date you leave work and the date you qualify for benefits, although short-term disability policies typically kick in within two weeks.
Your employer may require you to use some or all of your sick days before the policy starts paying.
When the period expires, you will receive a set percentage of the salary you received before you were disabled.
Under the Affordable Care Act, large employers are required to offer health insurance to full-time employees, and full-time is defined as 30 or more “hours of service” per week.
In 2015, the IRS clarified the time that an employee receiving disability benefits (short -term or long-term) is considered “hours of service” which means that employers must continue to offer health insurance benefits as long as the employee is still considered an active employee (note that the ACA does not require employers to offer any type of disability insurance, but if they do, and if the employee receives disability benefits, those hours are still counted as hours of service).
How is Long Term Disability Insurance Different?
Long-term disability insurance is also designed to replace a portion of your income when a disability prevents you from working, but it will pay benefits longer than a short-term disability plan.
Long-term disability coverage generally doesn’t start paying benefits until you’ve been unable to work for at least a month, and sometimes for a year or two. But when the benefits begin, they continue for years. Depending on the policy, they may continue until you reach retirement age.
Many employees have both short-term and long-term disability insurance, as the two products can work in tandem with efforts to ensure that disabled employees have access to partial income replacement for almost all disabilities.
Long-term disability coverage is more expensive than short-term disability coverage, because the potential payoff is greater, given the length of time a person can receive benefits.
How Troubled Disability Policies are different
While most short-term disabilities have similar characteristics, each may have different specifications.
Definition of Disability: Some short-term disability policies define disability as the inability to work in your own job. This is known as the “self-occupation” definition of disability. Another policy defines incapacity as the inability to work in any occupation, known as the definition of “any occupation”.
Wait for Service: Some employers will only offer a short-term disability plan after you have worked for them for a certain period of time, for example, six months or a year.
Waiting Period: This is also referred to as the elimination period, and it is the time between when you become ill or injured, and when your disability insurance benefits begin. Short-term disability plans have a waiting period of 0 to 14 days. In principle, policies with long waiting periods have lower premiums. Many short-term disability plans have different waiting periods for different types of disability. For example, a plan may have a seven-day waiting period for illness and no waiting period for accidents that occur outside of work.
Interest rates: Interest rates vary, but are generally between 40 percent and 80 percent of your pre-disability income. If you want a higher rate, you may have to pay a larger premium. Some short-term disability policies change the benefit rate over the benefit period. For example, your policy may pay 80% for the first three weeks of disability and then 50% for the remainder of your benefit period.
Interest Period: A short-term disability policy is intended to replace a portion of your income when you are unable to work for a relatively short period of time, usually three to six months. Some short-term disability policies will continue to pay benefits for up to two years, but they are less common (note that long-term disability coverage, described above, is a different type of policy that will continue to pay benefits for up to several years or even up to age 65. under some plans; long -term disability insurance is much more expensive than short -term disability insurance). Your short-term incapacity policy may allow you to return to work on a probationary basis. For example, your policy may give you a two-week trial period.
Changes to your premiums: If you sign up for a “non-waiver” short-term incapacity policy, the insurance company cannot change your premiums or benefits. However, if you sign up for a “guaranteed renewable” policy, the insurance company is allowed to change your premium, but only if they change it for the entire group of policyholders. The best coverage comes with a plan that is non -cancellable and guaranteed to be renewable, but the plan also tends to have higher premiums.
How to Get Short Term Disability Insurance
Signing a Group Plan
Your employer can offer a short-term disability plan as an employment-related benefit option. If your company offers short-term disability insurance, you can sign up for the plan during your initial enrollment period (when you first qualify for benefits), or during your employer’s open enrollment period.
You may be required to have coverage under the policy for a certain period of time before the pre-existing condition is covered (known as the exclusion period). The ACA eliminates the use of pre-existing waiting periods and exclusions for health insurance benefits, but it does not change the rules related to disability insurance. Details on how the existing situation is handled will be in the short-term disability insurance information provided by your employer, so be sure to read the fine print.
Rules on short-term disability insurance vary from state to state. If you feel your company or insurance company is not treating you fairly, check with your state insurance department. You can access your state insurance department through the National Association of Insurance Commissioners website.
Sign up for the Individual Policy
If you are self-employed or work for an employer that does not offer short-term disability insurance, you may want to consider purchasing an individual policy. You have to undergo medical underwriting to get an individual short-term disability plan (again, the ACA doesn’t change anything about this; health insurance is guaranteed to issue regardless of medical history, but disability insurance doesn’t). When shopping for an individual policy, find a reputable company and make sure you read all the details of your policy.