Disability Insurance: Understanding the Ins and Outs of the Contract

When it comes to disability insurance, shop (and then purchase) with extreme care. One of our editors here at Start a Business FAQ opened his own small business many years ago and the first thing he did was to buy a disability policy. He thought this a smart move and paid faithfully every quarter for 35 years with a comforting knowledge that if he became ill or disabled, he would have income to carry him through. Fortunately, he never had to use it. As he reached 66, the policy was terminated because of his age. Just for the fun of it--and because he knew considerably more about buying insurance at that point--he read over his policy again...this time carefully. On this reading he realized that it was so full of holes, it looked more like Swiss cheese than a disability policy.

The take-away here is that if you will start a business, probably one of the first things you should shop for is a disability policy; one of the last things you should settle for is a policy that you do not fully understand. You need a policy that is iron-clad and will deliver what you need it to deliver, when you need it to deliver.

On this website we mention again and again that we want you to deal with an independent insurance agent who is experienced with the business you are in. Another reason we like that independent agent is because he or she is a small independent business person, just like you. When you are shopping for a disability policy, you can ask them what disability they carry and why. Chances are, if you are working with a smart and savvy agent, he or she will have purchased one of the best policies for themselves because they too need a policy to deliver what it promises to deliver.

Individual and Group Disability Policies

If you are currently employed at another company, you may be part of a group disability policy. If you are self-employed or about to start a business of your own, you will need to select an individual policy. In addition to the items discussed above in this article, you need to consider all of your other sources of income, before you determine how much disability you need. There is also public disability policies available that you will want to take into account.

These are as follows:

  • Social Security disability. There are two Social Security disability benefits programs. Applying for Social Security disability insurance programs can be done under a program for those under 65 and those over 65. Because of allegations of Social Security disability fraud in the under-65 program, those who make a Social Security disability claim must meet a high standard. Social Security disability claims for those over 65 can be made through Supplemental Security Income program for those who are disabled or blind with a limited income.
  • Workers Compensation. All of the states have a workers compensation program and part of that program is a disability program. In most cases, the workers comp disability has to be work related. In some states, small business employers are excluded as are some occupations that result in a high number of disabling injuries. Click on workers compensation insurance for more details.
  • Veterans disability benefits. If you are a vet, you are entitled to disability compensation for service-connected health problems. Veterans disability is handled through the Veterans Disability Benefits Commission.
  • Federal Employees Retirement System (FERS). Federal employees covered under FERS are eligible for federal disability benefits after 18 months of service. For more information, you many wish to search: federal employee disability insurance, federal disability act and federal disability retirement.
  • State programs. Five states (Hawaii, California, New York, New Jersey and Rhode Island) have rules requiring employers to provide short-term disability benefits to workers who are disabled by other than work related injuries. If you live in one of the states, go to your state website and search: New York State disability insurance; California state disability (also search: California disability insurance; New Jersey Disability Insurance; Rhode Island temporary disability insurance; or Hawaii disability policy. Even if you do not live in one of these five states, go to your state’s website anyway and click on the insurance page.

Short-term vs. Long-term Disability

What is short-term disability insurance? Short-term disability is like sick leave and many companies offer such a program. What is long-term disability insurance? Long-term disability kicks in when the short-term benefit ends. Many individual disability policies will cover you from anywhere from two years to five years up to retirement age. Long term disability insurance quotes can vary greatly depending on various factors within the policy

Shopping for a Policy

When shopping for a disability policy, here are a couple of areas to focus on:

  1. Waiting period. You can lower your premium by extending the waiting period. The typical waiting period may be 90 days. But it can be six months or even longer. Here’s what you need to be careful about when evaluating waiting periods: What happens if you have a six-month waiting period and you are sick for five months. Then you return to work only to suffer a relapse after one week on the job. Here’s the question to ask: does your policy require that you need to fulfill a second six-month waiting period or will they count both waiting periods together before you can receive benefits?
  2. Premium levels. Are the premiums level for the life of the policy or do they go up as you age? Level premiums are best, although if you plan to keep a policy for a relatively short period of time and you are young, you might consider the rising premium option to get lower premiums at the beginning.
  3. Non Cancellable policy. Individual policies are usually non-cancellable or guaranteed renewable. Non-cancellable gives the policy holder the right to renew. Guaranteed renewable can be renewed with the same benefits. The rates on the guaranteed renewable can change but only if they are changed for a whole "class." As a savvy business person, you are now asking what defines a class of policyholders. One definition of a class might be policy holders in California who have the same policy. But the freedom with which a class can be defined needs to be looked at carefully. Can a class be defined as Rhode Island policyholders who previously made a claim?
  4. Benefit payment. Here is where the rubber meets the road. What constitutes disability? Total disability? Partial disability? How is total and partial defined? Who defines it? The company?
  5. Benefit period. Policies vary from two to five years or until you reach retirement age.
  6. Residual benefits. Some policies will pay partial benefits if you return to work but are not capable of keeping a full schedule.

Do You Live in a 'Free-Look' State?

A lot of insurance agents just want to sell you a disability policy. You need to take responsibility for what you buy. Chances are that you live in a free look state whereby even after you buy a disability policy, you have 10 days to look it over and to return it and get all of your money back if you decide against it. Check with your state insurance department on the rules and regulations regarding the purchase of a policy.

Another point, how are benefits levels calculated? Here are a couple of scenarios: an entrepreneur pays himself $100,000 a year and can prove it either with a W-2 Form or a 1099 Form. If that individual has a disability policy in which he will be paid 60% of his salary up to $100,000, it is easy to calculate how much the insurance will pay him. What if that entrepreneur suffers a financial setback like many did in 2008-2009 and cut back his salary to $20,000 a year or nothing, yet he is there plugging away every day. What is he entitled to under the disability plan? 60% of $20,000 or 60% of nothing? Look at this closely.

Remember, disability plans are an important purchase because it furnishes you with income when you need it most and the last thing you want to do is tussle with an insurance company when you are ill and unable to work.

Disability Insurance Resources

One of the best resources for you to learn more about both long-term and short-term plans are to go to the websites of prominent insurance companies, which have a wealth of materials to help you select the plan that is right for you. Naturally, this material is slanted toward the particular insurance company products but you can still learn a lot. Here are a couple of Google searches you can do to return a wealth of valuable information: AFFAC disability insurance, disability insurance providers, Allstate disability insurance, Mutual of Omaha disability insurance, AARP disability insurance, Hartford long-term disability insurance, Metlife New Jersey disability insurances, Guardian disability.

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