Disability insurance protects you from the financial risk of losing your income when you become disabled and can’t work. Those are the basics, but understanding disability insurance can be confusing if you aren’t familiar with all of its components.
The following disability insurance definitions are common words and phrases you’ll see while shopping for a policy. Knowing them will not only help you make an informed decision about the disability insurance coverage you need, but also help you get the most use out of a policy you already have.
Under any-occupation coverage, if you can work another job besides your regular one, you aren’t considered disabled enough to receive benefits. You may pay less for any-occupation coverage, but that’s because it’s harder to qualify for benefits if you become disabled.
Attending physician’s statement
When you apply for disability insurance, you’ll go through a process called underwriting. During underwriting, the insurer confirms the health details from your application. Sometimes, the disability insurance company will request an attending physician’s statement, or APS, from your doctor that lays out all the information the doctor has about your health.
Automatic increase benefit
Disability insurance works by paying you disability insurance benefits that are meant to replace the income you would’ve had if you could still work. Occasionally, in exchange for a higher premium, the disability insurance company will raise your benefits. The automatic increase benefit is usually offered as a rider, and you have the option to accept the increase or not.
Benefits are the payments you receive from your insurer if you become disabled and can't work. Benefits are paid monthly, similar to a paycheck, and you choose the amount of the benefits when you take out the policy.
Your benefit amount is one of the most important factors in determining your premium, and it should be enough to cover 60% to 80% of your pre-tax income before you became disabled. Benefits are not usually taxed, unless you pay for your policy with pre-tax dollars or you have a group insurance policy paid in part by your employer.
Disability insurance companies offer benefits in other ways too, such as a rehabilitation benefit, which go toward the cost of your recovery.
The benefit period is the time during which you receive benefits. You choose how long you want your benefits period to last when you apply for your policy. Because the insurer will only have to pay benefits during the specified benefits period, it will offer you a lower premium in return for a shorter period. The benefit period ends when you recover from your disability.
In order to start receiving benefits, you need to file a claim with your disability insurance company after you become disabled. The claim will include a claim form on which you will thoroughly describe the nature of your disability, including when it began and what kind of treatment you’ve been receiving for it. You should file the claim as soon as possible, as you’ll have to wait out an elimination period.
When you file a claim, you’ll submit a claim form that contains all the information the disability insurance company needs to confirm your eligibility to receive disability insurance benefits. The claim form will have a section for you to fill out as well as sections for your employer, if applicable, and your doctor. Having these extra sections helps the disability insurance company make a determination about whether you meet its definition of disability, which states how disabled you need to be to qualify for benefits.
The cost-of-living adjustment rider adds a provision to your disability insurance policy that additional disability insurance benefits will be paid to account for inflation.
Coverage is what your policy offers you when you become disabled under its definition of disability. Essentially, it’s what you pay for when you take out a policy. This includes not only benefits but also services like rehabilitation or a provision to receive benefits when caring for somebody else. What’s covered and what’s not will be outlined in your policy.
Definition of disability
In order to receive disability insurance benefits, you need to meet your provider's definition of disability. There may be several definitions of disability spelled out in your policy, like total disability, partial disability, and catastrophic disability. Each describes a level of severity that needs to be reached for a given disability before you become eligible for benefits under the respective definition, and what percentage of the total benefit amount you can receive under that definition and for how long.
Under some definitions of disability, such as presumptive disability, you may not be subject to an elimination period.
The elimination period, also known as the waiting period, is the length of time you need to wait after you become disabled to start receiving benefits from the disability insurance company. The elimination period, under disability insurance, usually ranges from between 30 days to 365 days, although under short-term disability insurance the elimination period may be only a few weeks.
The elimination period begins on the date you become disabled, not the date you file a claim. Once the claim is successfully processed, you need only wait out the remaining days. If you recover during that time you become ineligible for benefits. For that reason, choosing a policy with a shorter elimination period could result in higher premiums.
An exclusion is a condition or activity in your disability insurance policy for which you will not receive disability insurance benefits should you become disabled due to that condition or activity. Pre-existing conditions are a common exclusion, but not all pre-existing conditions are excluded. Other types of exclusions include risky hobbies or lifestyle choices, such as smoking.
Future purchase option
The future purchase option, also called a future increase option, is a provision of disability insurance that allows you, up to a certain age, to increase your coverage even if your health has declined since taking out the policy. While you’ll have to pay higher premiums, you won’t have to take another medical exam.
Group disability insurance
Group disability insurance is an insurance policy you receive from your employer. Because it’s offered to a large group of people — your fellow employees — you’ll be offered a discounted rate, which may even be wholly or partially subsidized by the company. However, employer-sponsored disability insurance may offer lower coverage than a private disability insurance policy, and if you leave your job you’ll lose that coverage.
Most disability insurance policies are guaranteed renewable policies, which means that the insurance company won’t cancel the policy or change its terms, such as the benefit amount, as long as you continue paying your premiums.
It’s easy to confuse the guaranteed renewable provision with the non-cancelable provision. The latter enhances the guaranteed renewable provision by prohibiting the insurance company from raising premiums.
Long-term disability insurance
Like other kinds of disability insurance, LTDI doesn’t cover excluded conditions or activities, and your higher coverage needs will result in a higher premium. You’ll have to meet your disability insurance company’s definition of disability, but your benefits should replace between 60% and 80% of your income.
An important part of the disability insurance underwriting process is taking a medical exam. The medical exam confirms the information about your health that you gave when you initially applied. It may also uncover new information which could affect your eligibility for coverage, render a higher premium than you were originally quoted, or cause those conditions to be excluded from coverage.
A non-cancelable policy is one in which the disability insurance company can’t raise your premiums as long as you keep paying them. It may be included as part of your policy, or it may need to be added as a rider, sometimes at an additional cost. The non-cancelable provision works in tandem with the guaranteed-renewable provision, which states that your policy can’t be changed or altered as long as you’ve been paying your premiums.
Overinsurance is when you purchase more coverage than you need. Most people only need benefits that equal about 60% to 80% of their pre-tax income, which roughly aligns with their take-home pay. If you sign up for more coverage than that, you’ll pay much higher premiums. Because of the risk of your policy lapsing, your provider will make sure you’re not overinsured.
Own-occupation coverage, also known as regular-occupation coverage, is part of the definition of disability that describes what kind of work you must be too injured or ill to perform to be eligible for disability insurance benefits. Under an own-occupation policy, you only need to be too disabled to do your current or most recent occupation; if you can still do a type of less physically demanding work, you may be eligible for benefits.
Your policy functions as an agreement between you and the disability insurance company, and its terms, if followed correctly, are binding.
Your disability insurance coverage is described in the policy, which is a document that thoroughly spells out the various definitions of disability, the conditions under which you can receive benefits, the exclusions unique to your coverage, and details such as the premium, benefit amount, and the benefit period. Additional coverage may be added in a rider.
A pre-existing condition is any kind of medical issue that you had before taking out the disability insurance policy, from conditions as minor as anxiety to as severe as cancer. Many pre-existing conditions are excluded from coverage, meaning that you won’t receive benefits if your disability is caused by the one. However, depending on your disability insurance provider, some pre-existing conditions may be covered, albeit with a higher premium.
The premium is the monthly or annual amount you pay to keep your policy active. The rate is calculated as a factor of your pre-existing conditions; your coverage needs, including benefit amount; and the benefits period. If you choose a more lenient definition of disability, such as own-occupation coverage, your rate may also be higher. You should expect to pay between 1% and 3% of your income in premiums.
The reconsideration period is a part of some exclusion riders that lets you ask the disability insurance company to consider removing the exclusion from your policy, thus letting you receive coverage due to a disability caused by an excluded condition. If the reconsideration period is offered, you may be eligible for it within a few months or years of taking out the policy, and you’ll need to show that the condition is resolved and not getting worse.
A rider is a provision of additional terms to your policy that enhances the coverage in the policy. Some riders are included automatically, but others must be requested and can increase your premium. In disability insurance, a rider may attach additional conditions under which you can become eligible to receive benefits or increase your coverage amounts to meet different needs that may arise.
Short-term disability insurance
Short-term disability insurance (STDI) is like long-term disability insurance except that its benefit period lasts for a much shorter time. Short-term disability insurance only lasts for a few months and rarely more than a year. However, STDI also has a much shorter elimination period.
Simplified issue is a type of underwriting where your premiums are determined without you undergoing a medical exam. With a simplified issue policy, you can get coverage much faster because you may not be asked for an attending physician’s statement or even your medical records. However, the benefit amount may be smaller than a more traditional disability insurance policy, and you may be ineligible beyond a certain age or with certain coverage needs.
Social Security disability insurance
For people who become disabled but can’t afford a private disability insurance policy, Social Security disability insurance (SSDI) may be an option. The government pays Social Security benefits to people who become disabled, but the Social Security administration’s definition of disability is much more strict than a typical disability insurance plan, and the large majority of applicants are rejected. Additionally, SSDI benefits are much smaller than those offered by private plans.
A survivor benefit is a feature of some disability insurance policies in which the carrier will pay your designated beneficiary a small benefit if you die while receiving disability insurance benefits. The survivor benefit is usually equivalent to a few months’ worth of your usual coverage, so it may not be enough to cover any of the beneficiary’s expenses you were paying while alive. For that, you should look into a life insurance policy.
The opposite of overinsurance is underinsurance, where you get less coverage than you need. Sometimes you may understate your coverage needs because it may result in a lower premium, but it could come back to haunt you if you become disabled and need to replace your income with disability insurance benefits. You should aim to purchase coverage that replaces between 60% and 80% of your pre-tax income.
Underwriting is the point during your application process when the disability insurance company will determine your actual premium. Up to then, you only had an estimated quote, but during underwriting the insurer will take a look at your medical records, the results of your medical exam, and your finances, including tax returns, bank statements, or paystubs.
By weighing your risk and what you can afford against your coverage needs, the disability insurance company will use a formula to calculate what you’ll need to pay in premiums. Some people may be able to expedite the underwriting process by purchasing a simplified issue policy instead.