When shopping for disability insurance, many people get confused by the different types of disability insurance products available and how they work.
Long term disability insurance is much different than short term, which is typically provided by an employer. We’ve broken down some of the major pieces of long term disability insurance and made it a little easier to understand.
What is long term disability insurance?
In short, long term disability insurance helps replace your income if you become disabled and can’t work for an extended period of time. It’s designed to protect people from catastrophic illness or injury that would cause you to not be able to produce an income. The amount the insurance company will pay you is typically capped around 60% of your gross income.
How does long term disability insurance work?
When you buy a long-term disability insurance policy, you enter into a contract with an insurance company. You make regular premium payments to the insurer, usually monthly, quarterly or annually. In exchange for those payments, the company agrees to pay you contracted benefits in the event you suffer a disability that limits your ability to earn income. The benefits from the insurer essentially replace some or all of the income you lost by being unable to work.
Isn’t this the same as long term care insurance?
Many people confuse long-term disability insurance with long-term care insurance.
Long-term disability insurance is for income replacement resulting from an illness or injury that prevents a person from working or limits their ability to earn a living.
Long-term care insurance pays benefits to cover the cost of long-term care, such as nursing home care or an at-home care provider.
What else should I know about long term disability insurance?
When it comes to the potential benefits you will receive, there are four main questions you need to understand:
- How does my policy define disability? Some policies will pay out a monthly benefit if an injury prevents you from working at your normal job, but allow you to do other types of work that will nonetheless reduce your income. These policies are called own occupation policies, and provide the most flexibility to the insured but also have higher premiums. These types of policies are the most commonly selected by doctors.
Other policies, while charging less for premium, will not pay benefits if you are able to work in any capacity, even if your injury prevents you from working in your chosen field of medicine. These types of policies are typically called “any occupation” policies.
- How much will I receive if I become disabled? The insurance policy pays a percentage of your income. Therefore, the more you earn, the more you will pay in premium. Many policies have add-ons that will increase your benefits, such as cost-of-living adjustments. These additional benefits also require higher premium payments.
- How soon after becoming disabled will I receive those benefits? Disability policies include a waiting a period — sometimes referred to as an elimination period — which is the period of time between when the disability occurs and when benefits are paid. For example, a policy with a 60-day waiting period would not pay benefits for the first 60 days after the insured becomes disabled.
- How long will I receive benefits? You can often choose how long the policy will pay in benefits. The longer you receive payments, the more you pay in premium. Some policies will pay a monthly benefit for a pre-established period of time. Others will pay up until the insured reaches a certain age, typically 65. A few insurance companies have an option that will pay lifetime benefits, provided the insured remains disabled for life.
The answers to the above questions will determine some of how much you will pay for coverage. The more you receive in benefits and the longer you can potentially collect them, the more you will pay in premium.
How much does long term disability insurance cost?
The amount of benefits is only part of the equation that determines how much you will pay.
Insurance companies also evaluate applicants to determine the risk of them becoming disabled and collecting benefits. This is done through the process of underwriting.
Individual disability insurance for physicians is underwritten much like life insurance. Factors about you that will affect the cost of your policy include:
- Your age. The older you are, the more likely you are to incur a disability and the more you will pay for coverage.
- Your health. You will have to submit to medical underwriting, including blood and urine tests, and a medical history. The healthier you are, the less you will pay for coverage. Factors such as chronic diseases like diabetes, previous health conditions, and tobacco use will increase the cost of coverage.
- Your gender. Women tend to file more claims and will therefore pay more in premium.
- Your medical specialty. Insurers that specialize in disability insurance for physicians will separate different medical specialties into occupational classes based on the perceived risk of that specific specialty. Generally, the higher the occupational classification assigned to your profession, the lower the premium rate. Keep in mind that different insurance companies may assign different classes to the same profession or specialty.
Individual disability insurance policies for physicians are typically sold as non-cancelable or guaranteed renewable.
A non-cancelable policy is one in which the insurance cannot cannot cancel coverage or increase your premium for any reason.
Guaranteed renewable policies also prevent the insurer from canceling coverage, but the company can raise rates on a certain class or group of policyholders with the same policy. They cannot, however, raise rates on a single policyholder.
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