The Importance of Disability Insurance

We all know someone who has had a major medical emergency throughout their life.  Medical emergencies such as heart attacks, strokes, and physical accidents can cause victims to become dependent on the help of others for extended periods of time and can cause a significant gap in employment and wage earning.  These long-term medical incapacity scenarios, coupled with the high costs of medical care necessary to recover from such events are the main causes of financial loss.

How do you protect against income loss during a disability period?

While health insurance is designed to protect against financial loss in the event of medical expenses, it does not replace lost income during a period of disability.  Health insurance does not cover monthly mortgage payments, auto and home utility expenses, or food and other daily consumption expenses.

So, how do you protect against income loss during a disability period? Disability insurance.  This specific type of insurance is designed to provide payment of continual, periodic income in the absence of working income due to a qualifying illness or injury disability event. Disability can vary from partial or temporary, to recurrent or permanent, and benefits are paid accordingly.  As a licensed insurance agent, it is important to understand the basics of a disability insurance policy and how to best service your clients.

Also known as disability income insurance or income replacement insurance, it provides for both short and long term protection depending on the nature of the event and is used to provide a continuance of income flow to the insured in the form of monthly payments at around 60% of the pre-disability income level of the insured.  Simply stated, disability insurance provides financial protection against the loss of one’s ability to earn income due to a qualifying injury or illness.

Key Benefits to Consider when Selling Disability Insurance include:

  • The elimination period in a disability policy is similar to the deductible in a health policy.  The longer the elimination period, the lower the premium.  It is important for a client to understand the length of time that must pass before benefits are paid, and that the premium affects such time period.
  • The benefit period represents the amount of time that benefits will be paid.  Benefit periods are classified as either short-term or long-term.  The longer the benefit period, the higher the premium
    • Short-term disability coverage includes a short (30 days or less) elimination period and provides benefits usually lasting around 6 months to 2 years with disability benefit income amounts equal to 60-70% of the insured’s pre-disability income.
    • Long-term disability coverage includes a longer (90 days to 6 months) elimination period and provides benefits lasting serveral years, up to age 65.  It also provides benefit amounts equal to 60-70% of the insured’s pre-disability income.
  • Rehabilitation benefits are considered an optional benefit that an insured can include to provide vocational training in preparation for a new occupation after the disability period ends.
  • A ‘Cost-of-living’ benefit is another optional benefit that provides for an increase in benefit payment on an annual basis to keep up with rising inflation.
  • Lifetime benefit options allow an insured to extend long-term disability coverage past age 65 up to the actual lifetime of the insured.
  • Adding a waiver of premium benefit to a policy provides an insured with a full refund of all premiums paid in addition to a waiver of any future premium in the event of permanent and total disability.
  • An AD&D rider allows for a lump-sum life insurance benefit payment to the insured’s beneficiary in the event of the accidental death of the insured, or periodic payments of the policy’s AD&D disability benefit to the insured in the event of the loss of 2 or more limbs and/or eyesight.

Finding the correct balance between the amount of coverage needed and the affordability of the premium is the key to selling the correct disability insurance.  While it is important to insure against such a loss, it must also be affordable to ensure that the client maintains premium payment on the coverage.