Types of Disability Insurance

The Main Types of Disability Insurance

There are two main types of disability insurance offered by employers and private insurers: short-term disability insurance and long-term disability insurance. The biggest difference between these two types is how long the benefits of the policies last.

Short-Term Disability Insurance

Short-term disability insurance replaces income lost due to a disability lasting from a few weeks to a year. This type of insurance usually reimburses up to 80% of a person’s compensation while they’re unable to work.

A short-term policy covers conditions that are expected to resolve within a year, such as recovering from surgery or an injury from an accident. Some people also use short-term disability insurance to take time off from work during or after pregnancy.

Most short-term disability claims pay benefits for between three and six months. Some policies include rehabilitation features to help policyholders recover faster and return to work sooner.

Long-Term Disability Insurance

A long-term disability insurance policy provides income benefits for disabilities that can last for multiple years. In some cases, the benefits could last for the rest of the policyholder’s working life. Because the benefits last longer, long-term disability pays out a lower percentage of the policyholder’s income, usually about 60%.

Long-term disability insurance covers more permanent illnesses and injuries. Conditions such as cancer, stroke, arthritis and mental illness may qualify for long-term disability insurance benefits.

Long-term disability insurance is less widely offered by employers than short-term, so many people turn to purchasing individual policies to obtain this important coverage. This type of insurance is also popular among self-employed individuals, business owners and physicians.

When it comes to disability insurance, there are many different options, features, and benefits. As such, it is important that you work with an expert to help you obtain the right policy and benefits for your specific needs.

— Daniel J. Adams, MBA, CFP®, CLU®

Protection Features

In addition to choosing a short-term or a long-term policy (or both), you can also choose a disability insurance policy with additional features to protect you from having your coverage canceled or your premium raised in the future. These protection features might affect the cost of disability insurance as the extra assurances can make premiums more expensive.

Noncancelable

A noncancelable disability insurance policy locks in the key elements that make up the policy. If your policy is noncancelable, your insurer must renew your coverage if you continue paying the premiums. Noncancelable also means your insurer can’t increase your premium cost or decrease your benefit amount for as long as you have the policy.

The only premium increases not prevented by a noncancelable policy are after the policy’s expiration date, which is at a typical retirement age. When you reach what may be considered retirement age (65, 67, or 70), and still continue working, your disability insurance premiums will likely increase. However, these price increases are predictable and the same for every policyholder.

Many experts recommend opting for a noncancelable policy because you won’t have to worry about requalifying for coverage later in life when your health might be worse. This type of policy further grants you peace of mind by ensuring that your premiums won’t change unexpectedly. However, a noncancelable policy can be more expensive than a policy without that feature.

Guaranteed Renewable

A guaranteed renewable policy is like a noncancelable one, but guaranteed renewable might be more affordable for some policyholders. With a guaranteed renewable policy, your disability insurance provider must renew your policy each year, but the premium cost is not locked in.

Still, there are a few restrictions to how insurers can change premiums on a guaranteed renewable policy. Your insurer cannot single you out for a rate increase; if they raise premiums, they must do so for every policyholder in the same state or from the same policy year or occupational class.

Risk-averse consumers can purchase a policy that is both noncancelable and guaranteed renewable to maximize the guarantees that their disability insurance will stay the same year after year.

For some people, it may be more cost-effective to purchase a policy with just the guaranteed renewable feature and put more money towards other features like a shorter elimination period or a greater base benefit.

Additional Policy Options

Besides protection features like noncancelable or guaranteed renewable, disability insurance customers can tailor their policy to best suit their needs. Most insurers provide a variety of additional provisions to customize your coverage.

One popular disability insurance option is an inflation protection rider, also known as a cost of living adjustment (COLA) rider. With this provision, your disability benefits are adjusted annually to offset inflation. Younger people who plan to have disability insurance for multiple decades will get the most out of a COLA rider.

Residual benefits are another common disability insurance provision. The residual benefits rider allows you to collect partial benefits if a disability forces you to reduce your hours and work part-time instead of full-time. This provision might not be beneficial for everyone, but if your livelihood would be significantly impacted by working limited hours, it may be worth considering.

Finally, you could choose to add a return of premium rider to your disability insurance policy. With this rider, you’ll receive either a percentage or up to the full amount of the premiums you’ve paid if you don’t file a claim for disability benefits. The details of a return of premium provision vary by insurer and policy; some may return part of your premium when you cancel your policy or your coverage lapses and come will pay a full return of premium once you reach retirement age.