Disability Insurance Provisions

Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology.

If someone becomes ill or injured, it may be difficult or impossible for them to work and pay their bills. Disability insurance is intended to help with this situation. In this lesson, you will learn about disability insurance.

What Is Disability Insurance?

Let's meet Monica, who is married with two children. She and her husband have a mortgage, a new car, and childcare expenses. Monica was recently speaking with her insurance agent, who suggested that she and her husband obtain disability insurance to help with household expenses if Monica experiences an illness or an injury that affects her ability to work full-time. Monica isn't sure what this is or how it might benefit her. Let's see if we can help Monica with this issue.

Disability insurance provides benefits if you become ill or injured and are unable to work. You will receive benefits under a long-term disability plan once you have exhausted your sick leave and short-term disability benefits and have satisfied the qualifying or waiting period for your policy. This period is a specific amount of time between when your illness or injury started and when your benefits begin.

Let's examine some of the options that Monica and her husband have for disability insurance.

Total Disability

If you are totally disabled because of an injury or illness, you are unable to complete the duties of your regular occupation (i.e. the one in which you were working for two years before your illness or injury). Your insurance company will want a formal doctor's diagnosis to support the total disability designation. To be considered totally disabled, you must also be unable to work in any gainful occupation, or one that you would be suited for given your training, level of education, and/or past experience.

Monica is an accountant. If she were to become totally disabled, she would be unable to work as an accountant (her regular occupation) and she would not be able to work at any job where she could use her experience, education, or training, such as a bookkeeper or an instructor.

Partial Benefit

Monica would qualify for partial disability benefits if she had an illness or injury that prevented her from performing one or more of her job duties. Under a partial disability provision, Monica would receive a stated percentage (such as 50%) of the amount she would receive if she were totally disabled. The insurance company would not consider the amount of income that Monica made prior to becoming disabled in the calculation of her disability payment. Most individuals receive partial disability benefits for a short period of time, which is usually less than one year.

Residual Benefit

A residual benefit is similar to a partial benefit, but the insured receives a percentage of his/her pre-injury income in the event that they are unable to be fully employed as a result of an illness or injury. In many policies, the insured must incur a loss of income of at least a certain percentage (such as 20%) before he/she is eligible to apply for residual benefit payments.

Let's assume that Monica suffered an injury but was able to return to work and assume 60% of her job responsibilities. If she had a residual benefit, her disability plan would pay her the remaining 40% of income that she had lost as she could not return to work on a full-time basis.

Recurrent Benefit

If Monica suffered the same or a similar disability after returning to work, then her insurance company would pay her a recurrent benefit. Most policies will pay a recurrent benefit if the disability reoccurs within 12 months of the insured returning to full-time work. It would not be necessary for Monica to satisfy another qualifying or waiting period before the insurance company started the recurrent benefits.

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