What Do Disability Insurance Policies Usually Cover?

Jun 03, 2022
Disability Insurance Policy document with glasses and pen

More than 1 billion people are estimated to have a disability worldwide, with up to 190 million aged 15 years and over having a disability linked to significant difficulties in functioning. In the United States alone, one in four adults lives with a disability impacting their ability to function. Also, 1 in 4 of today’s 20-year-olds are projected to become disabled before retirement. When a disability occurs that prevents someone from working for the short or long-term, it can have a significant impact on an individual’s and family’s financial wellbeing, especially since research suggests that 70% of Americans live paycheck to paycheck.


What’s the Purpose of Disability Insurance?


Disability insurance provides income replacement if an individual should incur an illness or injury that renders them unable to work for a specified period of time. The most common types of disability insurance are short-term and long-term.


Types of Disability Insurance


There are two basic kinds of disability insurance plans: short-term disability (STD) and long-term disability (LTD). Both are similar in that they replace a percentage of an individual’s wages, typically ranging from 50% to 80%, for a specified period as defined by the plan. Disability payments can be used towards any type of living expense that traditional income would go towards, including bills, mortgage payments, food, and gas, and can even be used towards a savings plan. Even though both types of insurance are income replacement plans with similar features, they are purchased separately and work differently in when and how long they pay out, partly because short-term disabilities and long-term disabilities are defined differently, and each type has different needs.


Short-Term Disability (STD)


Disabilities are often temporary, keeping an individual from working for less than a year. In these cases, short-term disability can kick in and replace income for shorter duration illnesses and injuries. Short-term disability plans typically replace income from 3 to 12 months. They are generally purchased through a group plan offered by an employer. In some instances, the plans may be mandatory due to local regulations with the employer covering the cost, and in other instances, the benefit might be offered as a voluntary benefit, where the employee covers the entire cost or shares the cost with the employer.


Long-Term Disability (LTD)


Some types of disability are long-lasting, severe, and sometimes permanent. Long-term disability insurance helps people in those situations replace their income for a longer period of time. LTD payments can last for years and sometimes through until retirement, if needed, depending on the plan design. LTD can sometimes be purchased through a group plan from an employer, though it is commonly purchased as an individual insurance policy. High-income earning professionals and business owners often purchase LTD to ensure their family’s lifestyle can continue should the unfortunate event of a disability occur.


Features of a Disability Plan


As with any insurance plan, a disability insurance plan has certain components outlined within the policy. STD and LTD plans have five items that outline your cost, benefit amount and length, and circumstances to qualify.


  • Premium: The amount the individual or employer pays each month to keep the policy and coverage in effect.
  • Benefit: The payout amount the disabled policyholder receives monthly if qualified as disabled and not able to work. The benefit is typically a percentage of the annual salary. A group STD plan benefit is taxable to the employee, whereas most LTD individual policies are not unless paid for with pre-tax dollars.
  • Benefit Period: The maximum length of time a benefit will payout. STD benefits typically pay out for less than a year. LTD benefits typically payout for a minimum period of two years and as long as 10 or more years through to retirement, based on the plan design.
  • Elimination Period: Also referred to as the waiting period, this is the amount of time a recipient must wait before benefits begin to pay out. It’s typically two weeks for STD and three to six months or more for LTD.
  • Disability Definition: Every plan outlines what is defined as a disability for benefits to payout. More is covered on the various definitions of disability in the following section.



Definitions of a Disability


Though there is a fairly straightforward definition of what a disability is around the world—an illness or injury that limits one’s ability to function and do normal day-to-day activities—when it comes to disability insurance, there are various definitions of a disability that dictates if and how much a policy will pay out.


When it comes to short-term disability, since the benefits only last for a few months, the definition of a disability is fairly straightforward. If you are not capable of performing the substantial duties of your current occupation due to injury or illness, you generally qualify for coverage. However, long-term disability plans need to consider what truly defines a disability since the plan can pay out for years to come.


Own Occupation vs. Any Occupation


If a disability, illness, or injury prevents you from doing work at your own occupation, though it doesn’t prevent you from doing all types of work, then an own occupation definition policy likely wouldn’t cover you. Own occupation coverage provides benefits if you cannot work at your profession, specifically. For example, if you’re a business owner that has worked hard to build a business or a surgeon that uses their hands to operate, you might need extensive coverage since a disability that prevented you to work at your primary occupation could have a significant impact on your earning potential. An own occupation policy offers the most risk mitigation in such scenarios.


Any occupation coverage only pays out if you are deemed disabled due to an injury or illness that prevents you from working in any occupation. In other words, if you can be retrained to do other types of work outside of your traditional profession, then an any occupation policy likely wouldn’t pay out benefits.


Modified Own-Occupations


If you can’t work in your regular profession but are able and willing to work in another capacity, and you choose to do so, then your disability benefit payout would cease based on the modified own-occupation definition. However, if you choose not to work in another capacity, then it would continue.


True Own-Occupation


If you can’t work in your regular profession but are able and willing to work in another capacity, the true own-occupation definition allows you to continue receiving your full benefit payment for the benefit period while holding down a different kind of job.


Two-Year Modified Own-Occupation


An individual receives two years of modified own occupation benefits under this definition. After two years is up, if you’re still disabled, the coverage converts to an any-occupation definition, meaning the payout continues if the person is unable to work in any occupation due to illness or injury.


Two-Year True Own-Occupation


An individual receives two years of true own occupation benefits under this definition. After two years is up, the coverage converts to a modified own-occupation definition for the rest of the benefit period.


Partial and Total Disabilities


Some people can continue to work at some capacity, though only partially at the level of responsibility they were able to previously due to a disability. An LTD policy’s partial disability feature will pay a reduced percentage of benefit when one is disabled in a way that it limits their ability to work but doesn’t result in total disability.


Where disability policies generally have an elimination period, many disability policies have a presumptive disability feature in the event of a total disability from loss of sight in both eyes, speech, hearing, or the use of at least two limbs. The presumptive disability feature eliminates the waiting period for these types of disabilities and begins paying out immediately. A catastrophic disability (CAT) rider is also an optional feature of many long-term disability plans to increase the amount of disability benefits for such circumstances.


Permanent and Temporary Disabilities


STD plans can take effect and fill in the gap until LTD plans take effect in cases of permanent disabilities. Having a short-term plan can help lower long-term plan premiums because long-term plans with a longer waiting period tend to have a lower premium.


STD and LTD plans can both apply to temporary disabilities, as well. STD plans are intended to pay out for less than a year and stop paying out when the individual is able to return to work following a temporary disability. Some temporary disabilities might last for longer than a year due to the necessary recovery period, such as following a major stroke or accident, so after any STD benefits have run out, LTD plans could kick in following the elimination period to provide benefits until the individual is able to return to work.


Maternity and Pregnancy Benefits


Though giving birth isn’t a disability, it does require individuals to be out of work for recovery. Some short-term disability plans offer maternity benefits lasting for up to six weeks after a natural birth and for up to eight weeks following a C-section.


In cases of pregnancy complications leading to a disability, the illness or injury would be covered under the traditional definitions of the plan and could also qualify under a long-term disability plan depending on the length of the disability.


Mental Illness Disability Exclusions


Many disability plans have exclusions for certain types of mental illnesses as pre-existing conditions. In instances where one is being treated for certain mental illnesses at the time a policy is acquired, the illness will likely be excluded as a pre-existing condition.


Disability Coverage Riders


Many carriers offer riders customizable long-term disability plans. Common riders include:


  • A cost-of-living adjustment (COLA) that allows for an increase in benefits to allow for inflation while receiving benefits.
  • Student loan protection that offers extra disability income to cover student loan payments.
  • Retirement protection which replaces retirement contributions someone would have made to a defined contribution plan while totally disabled.


How Can You Secure Disability Insurance?


There are a lot of carries of disability insurance available for plan considerations. An expert broker can help you or your organization identify the best options available, with the best variables and pricing to meet your needs and budget. A reputable broker, like those at KBI, can take the guesswork out of reading the fine print, identifying gaps, making sure you understand the various components available, like riders, and ensure you have the best plan options from which to choose. Let us help you begin your disability search today.



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At KBI, we work with all types of businesses and individuals from all walks of life to ensure they have peace of mind with the right benefits and protection for their employees and families, respectively. We're here to help you secure high limit disability insurance and other types of disability insurance based on your needs and budget.


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