Disability Insurance

What is disability insurance

The concept of Disability Insurance is a policy that will pay you an income in the event that you become unable to earn your own income through illness.

Disability insurance can be included as part of a comprehensive insurance package, but it is also possible (and sometimes advisable) to buy it separately.

One way to think of disability insurance is as something that fills in the gaps between life insurance and the everyday cover provided by health insurance and your employer's provision of sick days etc.

Disability Insurance is therefore something that fits an obvious niche, and provides cover that will be a great comfort to many people. It is somewhat unfortunate that it has not been taken up as widely as other forms of insurance, despite its obvious benefits.

When you are choosing a disability insurance policy, you will need to look in particular at two areas: what forms of disability are covered, and what amount will be paid.

What counts as disability?

It is very contentious to determine whether somebody is truly disabled, for the purposes of paying out a Disability Insurance plan. Insurers use a variety of language, and it is important to understand exactly what they mean by each phrase.

The most restrictive form of Disability Insurance will only pay out if somebody is unable to engage in any 'gainful employment'. Since it is possible to imagine disabled people somehow engaging in employment of a kind, insurers can very often wriggel out of paying anything under these policies. For example, somebody may be severely disabled, but still fit to watch CCTV cameras. It's hardly a way of life most skilled workers would choose, but if you've bought the wrong policy an insurer could argue that if you can watch a CCTV camera and hit a button when you see a crime, you are fit for 'gainful employment' and therefore not eligible for Disability Insurance payments.

Better, more comprehensive forms of Disability Insurance are those which will pay out if you become unable to continue in your own career. These can be further subdivided into those which pay out only if you are not employed, and those which will pay out if you are unable to cointinue in your existing profession, regardless of whether or not you could theoretically find other employment. The second o these sub-types is generally preferable (and hence, regrettably, more expensive) because it does not penalise you if you try to find some occupation while disabled.

Under some policies, the definition of a disability will be simplified in a few cases where a person is clearly disabled. For example if you lose your sight or your arms, you are likely to be unable to continue in your career. If your Disability Insurance policy includes provision for 'presumptive disability', the process of proving that you are disabled becomes much simplified. You simply demonstrate that you fit into a set category of 'inability to work', and receive your payments.

How much is paid?

It is typical for Disability Insurance policies to pay you a set fraction of your income. Typically, the percentage is somewhere slightly over 50% of your income prior to your sickness,but obviously this can vary depending on which policy you choose.

Some policies will pay different amounts for disabilities which limit your ability to work, but do not prevent you from working altogether.

Temporary disability

Another area in which Disability Insurance policies vary is the approach they take to temporary inability to work. If you are sick for, say, 6 months, and therefore unable to work, some Disability Insurance policies will refuse to pay you anything. One phrase to look for in the contract is the 'elimination period'. This refers to the amount of time that you must be ill before your Disability Insurance policy will pay out. It is used by Disability Insurance providers both to filter out ill-founded 'nuisance claims', and to avoid paying for temporary disability if this is not covered. The problem is that it can leave the disabled seriously out of pocket in the period while they are disabled, but before theyare able to claim.

You should compare Disability Insurance policies both on the minimum length of inability to work which they will cover, and on how they treat the situation when you return to partial work, or to work at a lower rate of pay than you received before you became ill.

Complicated, but worth it

All the paragraphs above might make Disability Insurance seem more complicated and full of difficulties than it really is. Sure, there are some pitfalls to be aware of, but in general some form of Disability Insurance is a real benefit, and you will certainly appreciate having this cover if you are ever unlucky enough to need to claim against it.