Q: What are the different types of individual disability insurance policies?
Generally, there are two types of policies: long-term coverage and short-term coverage. Usually, short-term pays for benefits up to six months. After the expiration of your short-term benefits, the long-term coverage, if you have purchased it, may start.
Long-term policies break down into an “own occupation” period for two years and then an “any occupation” period for two years.
Under the “own occupation” period, you have to be disabled according to the definition of the policy from performing the necessary duties of your own occupation. Then, it switches after the two-year period to having to be disabled from any occupation in which that individual has training, skill, or knowledge.
The switchover from “own occupation” to “any occupation” is often where insurance companies deny claims.
Q: How do I decide whether to buy both short-term and long-term insurance?
When an individual is shopping for insurance, what kind of insurance and how much, hinges on the buyer’s need – based on their occupation and their propensity for taking on risk. The options available for buying short-term and long-term depend on the individual and the market.
Many disability policies, both short-term and long-term, are given to employees as a benefit of their employment. When it is an employee benefit, there is a different body of law that applies known as ERISA.
When purchased independently, the type and amount of insurance depends on what individual’s need, and maybe what the salesman encouraged them to buy that day.
Q: Why would someone buy short-term disability insurance but not long-term?
Short-term disability insurance provides benefits for six months typically. A person may feel like any injury they are going to have will only render them unable to work for a short period of time, and they are not too worried about being unable to work for a long period of time. The short-term disability insurance policy costs less because it will only provide six months of benefits.
Many high-income earners, however, purchase long-term disability insurance in case they can’t perform their specialized occupation after an accident. An example of this might be a surgeon or dentist who gets carpal tunnel or a serious hand injury. If they have carpal tunnel and can no longer continue to perform their craft, then a long-term disability policy makes sense.
Can someone collect disability benefits even though they are still able to work, but not in their usual career? For example, a physician who can no longer perform surgeries due to a hand injury, but can still work as a doctor in another capacity.
It depends on the language of the disability insurance policy. A lot of long-term disability policies switch after a period of time, typically two years, from “own occupation” to “any occupation.” For the first two years, a physician may be able to collect benefits because they can work their own occupation but maybe able to work in a related filed. But when the policy switches to “any occupation,” the language of the policy will dictate whether or not the insured can still collect benefits. For example, an insurance company may stop paying benefits to a surgeon under the “any occupation” provision by claiming the surgeon can still be a general practitioner.