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Information about all aspects of finances affected by a serious health condition. Includes income sources such as work, investments, and private and government disability programs, and expenses such as medical bills, and how to deal with financial problems.
Information about all aspects of health care from choosing a doctor and treatment, staying safe in a hospital, to end of life care. Includes how to obtain, choose and maximize health insurance policies.
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Summary

When purchasing or qualifying for a Disability Insurance policy, keep in mind that there is no such thing as a standard Disability Insurance policy.

An individual long term disability insurance policy can be difficult to get post diagnosis. The longer you wait after an acute episode, the more likelihood you will be able to get a disability income policy. As a general matter, these individual policies are not available to people who have had any medical treatment during the past 7 - 10 years for a potentially disabling medical condition. To learn what may be available in your state, contact an experienced insurance broker. You do not have to disclose your name. The broker can find what is available for an anonymous client with your medical history.

If you are able to obtain an individual policy, it will likely be "rated" - you will be charged more than a person without a health history, and/or the policy may exclude coverage for your health condition.

When you apply for an individual disability policy, you will likely be asked to take a physical exam. You will also have to complete an application which requests your current and past health condition. While a policy may have a "contestable" clause which provides that the existence of the policy cannot be contested after a period of time, you cannot rely on this provision if you lie about your health condition on the application.

Following are the basic features to note:

  • Cost.
  • Pre-Existing Condition Provisions.
  • Definition of "Total Disability".
  • Whether the policy covers "partial disability" (also known as "Residual Benefits").
  • The length of time from the disabling moment until payments begin (known as the "Elimination" or "Waiting" period).
  • The benefit amount, and maximum period during which it is paid.
  • What happens if you return to work and become disabled again.
  • Survivor Benefits.
  • Recurring Disabilities Provision.
  • Mental and Nervous Limitation.
  • Other Exclusions and Limitations.
  • The type of individual disability insurance policy. The most common are known as "Guaranteed Renewable" and "Noncancellable."
  • Waiver of Premium.
  • Renewal Terms.

Whether or not your benefits are taxed depends on how the premiums were paid. Either the premium or the benefits will be taxed, but not both.

If you are interested in purchasing an individual policy, also read: Disability Insurance: Individual: Things To Think About When Purchasing.

Pre-Existing Condition Provisions

Just like health insurance policies, a Disability Insurance policy can provide that there is no coverage for pre-existing health conditions.

Each pre-existing condition provision includes two time periods: a "look back period" and a "pre-existing condition waiting period."

Look Back Provision

A look back provision determines which conditions are considered to be "pre-existing." Typical wording is something like: "A condition for which medical treatment or advice was rendered, prescribed, or recommended, or for which a reasonably prudent person would have sought treatment, within the six months prior to effective date of coverage."

Note the inclusion of the words:"For which a reasonably prudent person would have sought treatment" in the six months prior to the effective date of coverage. That makes it much easier for the company to exclude some conditions for which you never went to the doctor. In one recent case, a company tried to exclude HIV as pre-existing, because the claimant knew he was HIV positive for over eight years, but had chosen not to seek treatment as long as he remained asymptomatic. The insurance company argued that a reasonably prudent person who was HIV positive would go to the doctor at least every six months whether or not he had any symptoms.

Pre-Existing Condition Waiting Period

This is the period of time you must wait before you are covered for a pre-existing condition.

A pre-existing condition waiting period is usually one year. The period can be longer.

The practical effect of a Look Back Provision and a Pre-Existing Condition Waiting Period

To understand the practical effect of these two provisions when taken together, let's assume you have a plan with a Look Back Period of six months and a Waiting Period of twelve months.

Example 1. Suzie is being treated for diabetes. She takes insulin regularly and sees the doctor every three months. Because she had medical treatment in the six months before the coverage started, the plan will not cover a disability related to diabetes until Suzie has been covered under the plan for twelve months. If Suzie leaves work due to a diabetes-related disability after twelve months, the plan will pay benefits.

Note: If using this example, Suzie went on disability during the 12 months Pre-Existing Condition Waiting Period, but didn't file a claim until after the 12 months is up, her claim will still generally be excluded since the disability started during the pre-existing condition period.

Example 2. James had colon cancer which has been eliminated. James is not on medication. His last annual checkup was nine months ago. Since James didn't have a cancer-related charge in the six months before the coverage began, and there was no reason a prudent person would have seen the doctor during that time, cancer is not considered to be a pre-existing condition for purposes of his group disability insurance policy. Should cancer return, even in the first month of coverage, the plan will pay benefits to James.

NOTE: There may be a law in your state which limits the length of time you can be denied disability insurance based on a diagnosis, such as cancer.

Premiums

A premium is the payment for an insurance policy.

A “rated” premium, is a premium for which an insurance company charges extra to take account of the extra risk involved. For example, airline pilots pay more for life insurance than business executives.

Elimination Period (Also Known As "Waiting Period")

The elimination period is the period of time between leaving work on disability and the time when you start receiving payments.

In order to be certain that you are disabled rather than temporarily sidelined, and to coordinate with other disability income programs such as Social Security Disability Insurance (SSDI) and Short Term Disability Policies, the "elimination period" commonly six months. The period of time can range from two months to longer than six months.

The longer the elimination period, the lower the premiums.

Definition of Total Disability

A long term disability income policy pays benefits should you become totally disabled. This begs the question: how is "total disability" defined for purposes of these policies?

Generally, the following relate to a definition of "total disability" for purposes of long term disability insurance policies:

  • You must be under the regular care of a licensed physician other than yourself.
  • You must not be gainfully employed and must be unable to either perform your "own occupation" and/or "any suitable occupation." Most group policies use both definitions. For example, a policy may use "Own-occupation" definition during the first two years of disability, and apply the "any suitable occupation" standard after you have been disabled for two years.
  • You are presumed to be disabled if you fit within the policy's definition of "Presumptive disability." For instance, you may be considered to be totally disabled if you lose use of two or more limbs or the total loss of sight.

Own-occupation

Under an "own-occupation" definition of disability, you are considered to be "totally disabled" if you are unable to perform the material (necessary) duties of your own occupation.

For example, if you are a surgeon, you injure your hand and can no longer perform surgery. You are "totally disabled" within the definition of this type of policy because you can no longer perform your own occupation, even though you could still continue to practice as a doctor.

If you are a switchboard operator and have polyps removed from your vocal cords, you are totally disabled because you can't speak on the telephone. Speaking on the telephone is clearly a material duty of your own occupation.

On the other hand, if you are a typist and occasionally cover the switchboard when the operator is at lunch or on breaks, you can still perform the "material" duties of your own occupation and would not be able to make a claim under this definition.

Any-suitable-occupation

Under an "any-suitable-occupation" definition of disability you are totally disabled if you are unable to perform the material duties of any occupation for which you are reasonably suited by education, training, or experience. As you can imagine, it is harder to be considered to be disabled under this definition than under an "own-occupation" definition of disability.

As noted immediately above, materiality and suitability go together. An example of being disabled so you can't perform your own-occupation is a surgeon with arthritis in her hands so that she can't perform surgery. On the other hand, if the definition is "any-suitable-occupation", she won't receive benefits because she is capable of teaching or consulting on surgery.

Both definitions

Even though there are policies available which apply an "own-occupation" definition for the life of the disability, many disability policies use both "own-occupation" and "any-suitable-occupation" definitions. The "Own-occupation" definition is generally applied during the first two years of disability, and the "any-suitable-occupation" definition starts after two years.

Applying this combination of definitions to the above example of the surgeon, she would only be eligible for benefits for the first two years of her disability. After that she would not be totally disabled because she could perform any-suitable-occupation: she could work as a doctor.

Presumptive disability

Most individual disability policies contain a provision that you will be presumed to be disabled if certain events occur, For example, a common provision is that you will be considered to be totally disabled if you lose use of two or more limbs or the total loss of sight.

Appeal

An insurance company's determination about disability can be appealed.

Partial Disability

Some long term disability policies pay a partial benefit if you are able to do some work, but are unable to work full-time.

Just as the definition of total disability varies from policy to policy, the definition of partial disability also varies from policy to policy.

Generally a partial disability occurs when you can perform some, but not all, of the major duties of (depending on the definition in the policy) your own occupation or any occupation for which you’re reasonably suited by education, training or experience.

Most plans will pay a percentage of the benefit described in the policy based on the percentage of income lost. For example, if you’re only able to earn 40% of your old salary through part-time work, the plan will pay you 60% of the benefit for total disability. The percentage you can earn through partial employment plus the percentage of the total disability benefit you receive will always equal a total of 100% of the benefit specified in the policy.

For example, many policies express Partial Disability benefits in the form of a formula:

A - B

x

C

=

Partial Disability Benefit

A

In this formula: A = Income prior to disability indexed for inflation. (The longer you are on full disability, the more indexing benefits you.)

B = Current income from partial employment

C = Total Disability Benefit Amount.

For example, Jane had an income of $2,000 per month. Her long term disability plan would pay 60% ($1,200) for total disability. She is able to work part-time and earns $500 per month.

Applying the above formula to Jane’s situation:

2,000 – 500

=

1,500 2,000

= .75 x 1,200 =

$900 Partial Disability Benefit

2,000

Jane would receive a total of $1,400 per month, $500 from work (which is 25% of her old salary) and $900 (75% of the total disability benefits) from Partial Disability benefits.

If your policy uses a formula, the clearest way to understanding how it works is to plug in sample numbers, like we did above, and work it through.

Recurring Disabilities Provision

Most disability plans contain a provision to determine how a second claim is treated if it comes shortly after the disabled person has returned to work. This provision determines whether the second claim is a new claim and requires a new Elimination Period or whether it is considered part of the first claim and benefit payments start immediately.

The typical provision will state that the second claim is a continuation of the first claim if:

  • It is due to the same cause as the first claim, AND
  • The time between the two periods of disability does not exceed a period of months which varies by policy but is generally six months.
  • For example, if your policy has a recurring disabilities provision: If you return to work and find that after four months, you can't continue. The reason you have to stop working again is the same diagnosis that originally disabled you. The new claim will be considered to be part of the first claim. Your benefits will start immediately. On the other hand, if you were disabled due to heart problems and return to work, but the next week you get hit by a car, the second disability is a new claim and the Elimination Period must be met all over again.

Benefit Amount

The amount of the benefit can be expressed as either a:

  • Specified dollar amount that is decided at the time the policy is purchased (such as $1,000 or $5,000 per month). Since the benefit is an amount of money, rather than a percentage of salary, the policy will pay the full monthly benefit provided under the policy regardless of how much income is derived from other sources.
  • A percentage of your salary, with a cap. A typical plan reads: A benefit in an amount equal to "60% of your Basic Monthly Earnings to a maximum monthly benefit of $5,000." Each plan defines the earnings on which the benefit is based. Generally, the earnings on which the benefit is based is your gross (not your take-home) salary at the time you became disabled. The definition will also state whether the earnings on which the benefit is based includes overtime, commissions, bonuses, etc. Generally these extra amounts are not included.

Individual disability income policies generally provide a benefit equal to a flat dollar.

Maximum Benefit Period

Disability income policies limit the amount of time income will be paid. Individual plans can be purchased with benefit periods ranging from one year to policies which provide an income until age 65.

Most plans limit the Benefit Period if the disability is due to a mental or nervous disorder, typically to a maximum of 24 months. NOTE: If your illness is not a mental disorder, but there are some mental symptoms such as short term memory loss, disorientation, even dementia due to either the disease or medication, make sure the doctor is clear in his or her statements about your symptoms so the insurance company won’t try to impose a two year limit on benefits.

Many plans, even plans that pay benefits to age 65, will reduce the benefit period if you become disabled after turning age 60. Many will pay benefits for only two years in such cases.

Survivor Benefit

Sometimes a policy will have a survivor benefit which will provide an additional amount of benefits to a surviving spouse or significant other.

If there is such a benefit, benefits are payable to a survivor in the range of three to six months.

Mental And Nervous Limitation

Most plans limit the Benefit Period if the disability is due to a mental or nervous disorder. The plans typically pay such claims for a limited period of time, such as twenty-four (24) months.

If your illness is not a mental disorder, but there are some mental symptoms such as short term memory loss, disorientation, even dementia due to either the disease or medication, make sure the doctor is clear in his statements so the insurance company won’t try to impose a two year limit on benefits.

Exclusions And Limitations

All plans have exclusions -- reasons the plan will not pay benefits -- or limitations on the maximum benefit period such as the Mental and Nervous limitation just mentioned.

Disabilities for the following reasons are usually excluded from coverage completely:

  • Pre-existing conditions.
  • Declared or undeclared war.
  • Injury incurred while participating in the commission of a felony.
  • Work-related injury which is usually covered by Workers' Compensation Insurance. To learn more, see Workers' Compensation.
  • Substance abuse, although some plans will pay benefits provided the claimant is participating in an approved treatment program.
  • Self-inflicted injuries.

Rehabilitative Training Or Employment

In an effort to encourage people to go back to work, most long term disability plans provide benefits for rehabilitation. The benefits vary dramatically from plan to plan, but all of them require that the insurance company approve the rehabilitation program before you start it. If this applies you and you are considering returning to work, see Return to Work-Impact on Benefits.

Waiver Of Premium

Most plans waive any premiums while you are disabled.

If your policy contains a waiver of premium clause and you become disabled, continue to pay the premiums on time. It is advisable to write on the check: “Contested premium, should be on waiver.” Keep doing this until the insurance company confirms the waiver in writing.

You can always get a refund for premiums you didn’t have to pay. It’s not so easy to have a policy reinstated once the company knows it is facing a claim.

Riders: Guaranteed Insurability, Social Security Offset, Cost Of Living

Several optional riders (additions to the policy) are available with an individual disability income policy for an additional premium.

Guaranteed Insurability

This rider guarantees that the amount of the disability benefit will rise as your income rises.

The rider usually provides several specified times during the existence of the policy when the insured will have a right to increase the amount of the benefit regardless of health condition. For example, every two or three years, this rider may allow the insured to purchase an additional amount of benefit such as $200 or $500 per month. Many policies will allow you to advance an increase date in the event of a named life event, such as marriage or birth of a child, or purchase of a home.

Although the insurance company must offer these increases regardless of the insured's current health condition, the insured must generally show that income has risen enough to justify the additional benefit.

The charge for the increased benefit will be based on the insured's age at that time of the increase.

There is usually a maximum amount of benefit and/or number of purchasing opportunities under the rider.

Social Security Offset

A Social Security Offset rider protects you in case you don't qualify for Social Security Disability Insurance (SSDI). While a person collecting benefits under a private disability policy may also collect under SSDI, the definition of disability to qualify for SSDI is much more restrictive than most Disability Income policies

The rider is subject to the same waiting period as the policy to which it is attached. After the waiting period, the rider will pay what you would receive from SSDI if you received SSDI benefits.

Once Social Security approves the SSDI claim, the offset rider stops paying benefits. If SSDI is never approved, you keep collecting. Of course, you have to make a good faith application to obtain SSDI.

To learn more, see: Social Security Disability Insurance (SSDI).

Cost of Living

This rider provides for a set percentage increase in benefits, usually annually after the first year of disability, to approximate the rise in the general cost of living.

The amount of increase is frequently tied to the Cost of Living Index with a maximum cap of anywhere from 4 to 15%.

Renewal Terms

There are three types of individual disability contracts:

Noncancellable

Policies that are noncancelable cannot be terminated, amended or extra premiums charged by the insurance company, as long as the insurance policy is in effect.

You can renew the policy on the same terms each year so long as you pay premiums on a timely basis.

This is the most expensive type of policy because it locks the company into a permanent contract with a pre-set price.

Guaranteed Renewable

The insurance company can neither cancel nor alter the provision of a policy that is guaranteed renewable.

The insurer cannot raise a particular individual’s premiums. However, the insurer can raise the premiums for everyone who has purchased the same type of contract. Notice must be given before an increased premium takes effect.

Noncancelable and Guaranteed Renewable

The insurance company cannot change any policy provisions and cannot increase premiums as long as the premiums are paid in a timely manner. To understand what happens when “noncancelable” and “guaranteed renewable” are combined: if you change to a more risky job, the insurance company could change the premiums with a guaranteed renewable policy – but not with a policy that is both noncancelable and guaranteed renewable.

Commercial (also known as “Conditionally Renewable”)

In commercial contracts, the insurance company retains the right to raise the premium at any time and may cancel the contract at its discretion.

Insurance Company Financial Situation

It doesn't do you any good to purchase a Disability Insurance policy if the insurer won't be able to pay the benefit, or if it goes out of business.

You can check the company's financial situation through third party rating agencies such as AM Best (www.ambest.com offsite link), Standard and Poor's (www.standardandpoors.com offsite link) or TheStreet.com (www.TheStreet.com/ratings offsite link) formerly Weiss Ratings.

Check with your state insurance department to find out whether there have been complaints about the company, and if so, what they are. For contact information for your state agency, see: www.naic.org offsite link.

Also check to see what, if anything, is known about the company at your local Better Business Bureau. For contact information, see: www.bbb.org offsite link.

Taxation of Benefits

Whether or not your benefits are taxable depends on how the premiums were paid.

If you pay the premiums with after tax dollars (you don't deduct the premiums for tax purposes), the income is tax free.

If you deduct the premiums, the income would be taxable.

Applying For Individual Long Term Disability Insurance

You can start the application process either with an experienced insurance broker or directly with companies that write these policies. It is recommended that you use a broker because it is easier to apply without disclosing your name.

If a quote is obtained based on your medical history, do not expect that it is binding until a policy is actually issued.

To apply:

  • You will be required to complete an application which requests your current and past health condition. Do not lie and expect to rely on the "contestable provisions" of a policy which provide that a policy is not contestable after a period of time, such as two years from the date of issuance of the policy.
  • To take a physical exam.
  • That your doctor will be asked to send copies of your current and past health condition. It is advisable to let your doctor know to expect such a request and to ask that that it be responded to on a timely basis. Follow up with the doctor to be sure the information is sent to the company.

There is no standard period of time between the application and date of issuance of a disability policy. Expect at least a few months.