What are the Different Types of Disability Insurance Policies
Types of Disability Insurance
Personal Disability Insurance
Personal disability insurance is insurance that you buy to guard against a loss of personal income in the event that you become disabled and are no longer able to work. There are several different types of personal disability insurance:
Individual Disability Insurance
As the name suggests, individual disability insurance policies are purchased by individuals directly from the carrier and provide long-term disability benefits in the event of sickness or injury. Individual polices fall into two categories: “general” and “occupational.” A “general” disability policy insures against sickness or injury that precludes the insured from performing all work while an “occupational” policy provides relief if the insured cannot perform the material and substantial duties of his or her own occupation. Thus, an “occupational” policy will provide greater coverage to the insured, who will be entitled to benefits even if he or she is able to engage in another occupation. Individual policies usually provide coverage in set amounts, e.g., $5,000 per month, rather than as a percentage of the insured’s salary.
Group Disability Insurance
Group disability insurance policies are made available to participants of organizations, such as members of the American Medical Association. Unlike most individual policies, group policies typically confer benefits calculated as a percentage of the insured’s base salary, usually from 50-75%. These policies may limit the maximum amount of benefits payable, e.g., no more than $5,000 per month, regardless of base salary. Further, group policies often reduce benefits when the insured receives income from other sources such as Social Security disability benefits or worker’s compensation.
Employer-Sponsored Disability Insurance (ERISA)
Employer-sponsored disability insurance policies are typically the least expensive policies and are similar to the “group” policies described above, providing employees with disability insurance based on a percentage of their base salary as part of the employer’s overall benefits package. Unlike group policies, however, employer-sponsored policies are governed by the Employee Retirement Income Security Act of 1974 (ERISA), which has significantly affected the administration and litigation of disability insurance claims. Unfortunately, ERISA deprives insureds of significant rights to which they would normally be entitled under state law. These include the right to a trial by jury and the possibility of punitive damages where the carrier has acted unreasonably or maliciously.
Key-Person Disability Insurance
Key-person disability insurance is a type of coverage for those that own their own business or practice. This form of insurance covers an employee that is “key” to your business: someone who would be impossible to replace due to their skill, customer base, knowledge or burden of responsibility. If this person was to become disabled, and you had key-person disability insurance, the business would receive disability income checks. These checks could be used to cover the financial loss of the missing employee, or it could pay for a temporary worker while the insured person recovers from the disability. Typically, these types of policies only provide benefits for 12–24 months. This is because it is assumed that you could find and train a replacement in that time span.
Disability Buyout Insurance
This type of insurance provides benefits in the event that a co-owner or shareholder of the business or practice becomes disabled, and the company would like to buy out that person’s shares. This is significant because when an owner becomes disabled, the company is typically obligated to continue to pay the disabled person even though he or she can’t work, and the remaining owners must pick up the slack of the person who became disabled. Thus, this buyout insurance provides the remaining owners with a sum that would allow them to purchase the disabled owner’s stake in the company. This insurance also pre-establishes a fair price and set time at which the sum will be paid, which gets rid of costly negotiations. It is also useful because it ensures that the disabled owner will not sell control to a stranger because of cash needs.
Disability Insurance for Overhead
This type of insurance pays for the expenses of operating your business if you become disabled and cannot work. This includes things such as rent, interest payments on some business debts, utilities, and employees’ salaries. These policies usually have short benefit periods that do not exceed two years.