Disability insurance is an insurance contract wherein an insurer undertakes the responsibility to pay money, usually a proportion of the insured’s most recent income, or another agreed upon benefit, in the event that the insured becomes disabled and is unable to engage in his/her occupational functions or other daily activities as a result of bodily injury, disease or mental disorder.
Disability insurance is intended to indemnify the insured for the loss of earned income caused by a disability.
When you’re looking for disability protection, you have to know how the policy defines the term “disability”. In case of life insurance, when the life insured dies the beneficiary collects the death benefit but for disability insurance there are complicated definitions that need clarification.
The definition of “total disability” is different depending on the occupational risk class of the insured.
The own occupation definition of “total disability” is used for those placed in the lower risk class. If the insured person suffers an inability that prevents him or her from performing the duties of his or her own occupation, that person will be considered disabled even if he or she can work in other occupational fields.
The definition of “total disability” in higher risk occupations is a disability that prevents the insured from working in any occupation for which he or she is suited by education, training or experience. Essentially, he or she is unable to work; period.
Some policies will use the “own occupation” definition for the first two years, but will continue to pay benefits only if you qualify under the “any occupation” definition after that time.
Waiting period or Elimination Period
Individual disability insurance policies contain a period known as the “elimination or waiting period”. This refers to the period of time after an insured person suffers a disability during which no benefit payments are made.
The longer the elimination period, the lower the premium required for the same amount of disability coverage.
Short Term and Long Term Disability Benefits
Short term disability plans usually offer disability benefits for two to five years.
Long term disability plans do not pay the benefits for the life of a person with a disability. The longest period of coverage extends to age of 65.
The longer the benefit period, the higher the premium.
Non-cancellable, Cancellable and Renewable Disability Plans
A non-cancellable disability insurance plan is similar to a life insurance contract. After a life insurance policy is issued and the insured pays the premium, the insurer cannot cancel or change the policy.
Cancellable policies can be cancelled by the insurer at any time for any reason, by notifying the policy owner that the policy has been cancelled.
A renewable disability policy requires the insurer to renew the policy as long as the insured pays the premiums and until the insured attains the age limit specified in the policy contract.