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Disability Insurance - How it works

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If you work in a sedentary occupation and are young and healthy, insurance and especially disability insurance is probably not at the top of your list of things to investigate. Would you be able to pay your bills should you be out of work for 90 days? Most people look at the odds of something happening to them and discount themselves as part of the statistics but at least 30% of people 35-65 suffer a disability lasting 90 days. It could be broken bones from any number of accidents or a problem pregnancy or any of many possibilities.

Disability Insurance was created with the intention of replacing approximately 45-60% of your gross income tax free should you become sick or ill enough that it prevents you from working and earning a living in your occupation. Most Disability insurance is geared toward white collar occupations. Blue/Gray collar disability insurance is available through some insurance carriers. If you are a fireman, policeman or a roofer or any the other occupations considered blue collar you will need to do more research for basic information beyond this site.

Different insurance companies offer disability insurance policies but they are not the same. Do not assume they are and go for the lowest cost. Do not buy the cheapest disability insurance policy you find. Doing this would lower your odds of getting paid a monthly benefit and the benefits could be significantly lower than what you would receive from a better contract. If you are in the initial stages of investigation of such policies know that they are not easy to shop and just compare prices, you need to compare the following to truly get what you need.

Disability insurance policies have a definition of total disability written in the policy. You should understand this before you buy. There are three basic types of policies.

Own Occupation - "Unable to perform duties of your regular occupation." If you are not severely disabled and you can do work in some other occupation you will still be considered totally disabled in your own occupation but you will not be penalized while on claim for working in another occupation.
Modified own occupation (Income Replacement Insurance) - This is the most common definition in the industry today. "Unable to perform duties of your regular occupation, and are NOT engaged in any other occupation." In other words if you go back to work in some other capacity you will be penalized during a claim. The insurance company MAY offset your monthly benefit check.
Gainful Occupation - This is the common definition for a policy written for an employer sponsored group. "Unable to perform duties of your regular occupation, or any occupation for which you are deemed qualified." This definition leaves the determination of your disability up to the insurance company. It is not clear what would happen should you become disabled. Avoid this type of policy if you are buying disability insurance on your own. If you receive it through your employer look into supplementing it with a better policy.

Renewability is another aspect that you should understand when buying a disability policy. Review the following three types available.

Non-Cancellable and Guaranteed Renewable - Guarantees that after purchasing this policy they will not change your premium schedule, your monthly benefits or your policy benefits to age 65 or whatever age you agreed to. Even if your income goes down later in life and you become totally disabled the insurance company will pay you the total disability benefit you originally placed in force. Even if you changed jobs from a white collar to a more risky occupation later on. As long as you kept your policy in force they can not change anything. This is the best and really only way to go. Make sure the exact words "Non-Cancellable and Guaranteed Renewable" are written into the policy.
Guaranteed Renewable - This guarantees that they will probably not change anything about the policy, but they can. They can change the policy year, occupation class and the premium with approval from the state. Be very careful of this type of policy.
Conditionally Renewable - You get no guarantees with this type of policy. Different companies may offer you different conditions for you to renew each year and these conditions may be very hard to meet. Avoid this completely.

Many disability claims involve a residual claim. This means a person can still perform the duties of their occupation but they have a loss of income of at least 20% or they have suffered what is called a loss of time and duties. On a loss of time and duties claim they normally stop paying a residual claim once you are back at work full time. But, your income may not be back to what it was before you were disabled. A residual provision based on loss of income would appear to protect you for an unlimited amount of recovery time. The loss of time and duties portion of a policy may have a recovery benefit portion but may only pay out for a limited time. A person may be residually disabled longer than totally disabled.

Presumptive disability protects against drastic disabilities that occur. Presumptive disability varies. This covers for loss of sight, hearing, speech, and limbs. This coverage is built into most contracts but not all. The wording maybe different and they use words like, Total, Irrecoverable and Permanent. An irrecoverable loss or disability is permanent and that is what they will pay on. Total loss means if you have a total loss and it is permanent it covers you. Total loss also covers broken bones and temporary loses of sight, hearing, and speech etc. Make sure you understand their meaning.

Recurrent disability is where you recover from one disability and then another one pops up. There is what the insurance industry calls an "elimination period". The time you wait between the onset of a disability and when you are eligible to collect benefits. Most policies are for 90 days. Recurrent disabilities should have no elimination period. Look for a policy that has at least a 12 month recurrent clause in case some new problem shows up. Make sure your elimination period can be satisfied with either a total disability or a residual. Policies that have an elimination period just for total disability or with just consecutive days of disability are not good.

Be sure to find out how long disability benefits will be paid. This benefit period is from the time you are eligible to collect benefits while on a claim and when you go back to work or if you are permanently disabled it would pay the claim until the "To Age 65" or whatever the age or time frame stated on your insurance policy. To age 65 is the most popular and most disabilities last a little over 3 years.

There are optional riders you can add to a base policy for additional protection. They may include a Cost of Living Adjustment, Automatic increase rider and other options. There are also exclusions that your insurance agent should discuss with you.

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