Disability insurance: definitions and terms you should know

Disability insurance provides a portion of your income if you become sick or injured and are unable to work. It can help everyone who depends on their job for living expenses. The Social Security Administration estimates one in four 20-year-olds will experience a disability for 90 days or more before they reach 67.¹

If you’re getting a disability policy – or just looking into it – it’s important to know the key terms and phrases specific to this coverage. To help understand those terms, we’ve divided this article into three groups:

• Basic disability insurance definitions

• Claim and benefit definitions

• Policy and coverage definitions

Basic disability insurance definitions

• Long term disability insurance: Also called LTD, this type of policy is designed to last for many years – up to retirement if needed – replacing around 40 to 60 percent of your income if something happens and you can no longer work.

• Short term disability insurance: Also called STD, this policy is designed to replace your income for a much shorter period than LTD – typically a few months until you can get back to work, and almost never more than a year.

• Social Security disability insurance: Also called SSDI, this is coverage that comes as part of your Social Security benefits. However, it is usually much harder to qualify for, and the benefits are typically lower than with a disability policy you purchase individually or receive through work.

• Group disability insurance: This is a policy you get at work through your employer. Because your company may be buying for a large group of people, the premium is typically lower than for an individual policy. And the company may subsidize a portion to lower the cost further. But if you leave the company, in most cases you’ll also lose your coverage.

• Individual disability insurance: This is a disability policy you purchase for yourself, typically purchased through a financial professional. (For example, a Guardian financial professional can give you a disability insurance quote.) Most policies sold this way are considered long term.

Definition of disability

Every disability policy has a specific definition of disability that you must meet in order to qualify for benefits. A policy may also spell out different specific levels of disability, (for example, “partial disability”) along with the percentage of the total disability benefit you can receive under that definition. If you have a long-term disability through work, your policy will likely be a blend of the following definitions.

Own-occupation

This may be part of a policy’s definition of disability. “Own-occupation”  means that, solely due to injury or sickness, you are not able to perform the duties of your occupation For example, a surgeon who becomes disabled and can no longer use their hands to perform surgery would likely qualify, even if they were healthy enough to do other work. If you have a long-term disability benefit through work, the “own-occupation” definition would typically apply to the first 24 months of using the benefit.

Any-occupation

Like own-occupation, this is a part of a policy’s definition of disability. With this kind of policy, you only qualify for benefits if you are unable to work in any occupation for which you are suited based on your education, training and/or experience. If you’re still able to work at another job – even a simpler, lower-paying job – you might not qualify for benefits under an individual policy. However, if you have disability benefits through work, and depending on the nature of your claim, you might still be able perform some work while earning a partial benefit. If you have a long-term disability benefit through work, the “any-occupation” definition would typically apply after you have been on long-term disability for more than 24 months.

It’s important to remember that disability benefits are evaluated on a case-by-case basis, , taking into consideration the factual circumstances presented as well as the terms and conditions of his/her policy(ies).

Claim and benefit definitions

Benefit

The amount of money you receive each month in the event you are unable to work due to a disability. The benefit of an individual policy usually isn’t taxed, unless you paid for it with pre-tax dollars. If you have a group plan paid in part by your employer, the benefit may be taxable*.

Benefit period

The length of time you can receive benefits under the terms of the policy. For a short-term disability policy this will typically not be more than a year; for a long-term disability policy the benefit period could range from two years (less common) to retirement (age 65, 67 or Social Security normal retirement age), or until you recover from your disability.

Claim

Disability benefits are never automatic – you need to file a disability claim showing proof of disability in order to begin the process and determine if you are eligible for benefits.

Residual (or partial) benefit

A residual or partial benefit allows you to qualify for benefits when a disability isn’t a total disability, but rather when sickness or injury prevents you from working full-time in your occupation.

Cost-of-living adjustment

An optional provision (or rider ) that allows your benefit to increase during extended periods of disability to help account for the costs of inflation.

Survivor benefit

A feature of some policies in which the insurance company pays your beneficiary a limited amount – typically equal to a few months of benefits – if you die during the benefit period. For individual disability plans, this may be referred to as “survivor benefits.”

Transition benefits

If you have a business or professional practice, transition benefits help offset financial losses you may have while rebuilding your business after a disability. This can also be referred to as “recovery benefits.”

Automatic increase benefit

An optional provision (or rider) in which allows you to increase your disability benefits annually over a specified time period. The increases are a fixed percentage stated in the provision or rider.

Policy and coverage definitions

Coverage

An umbrella term for any or all the monetary and other benefits (e.g., rehabilitation) you may be eligible for under the terms of the disability policy. In other words, what you are buying when you purchase a policy.

Elimination period

Also called a waiting period. This is the period of time you have to wait after you are disabled until you may start receiving benefits. It’ll generally be shorter for an STD policy, and longer for an LTD policy.

Exclusion

A condition or activity that the insurance company will not have to pay benefits for if it results in a disability.

Future purchase option

An optional provision (or rider ) that will allow you to buy increased coverage at a later point, even if your health has declined without providing additional medical information. Financial information may still be requested.

This option is typically not available with disability coverage obtained through an employer. In the case of group disability insurance, there is usually an open enrollment period that might allow members of the group coverage to change their disability benefits according to their needs.

Pre-existing condition

A pre-existing condition (e.g., heart disease or cancer) you had before getting your policy. Many, but not all pre-existing conditions can be excluded from disability coverage or may result in the individual paying a higher premium. Pre-existing medical conditions are often subject to a limitation clause for a set period of time. For example, if a person makes a benefits claim tied to a pre-existing condition, the benefit may be subject to a limitation if the claim is made during the defined pre-existing conditions timeframe which is often within 12 or 24 months after policy issue.

Premium

The amount you pay for your policy. Your premium amount will vary based on the type of disability coverage, the benefit amount, benefit period, your health, and the optional provisions or riders included in your policy contract.

Reconsideration period

This is a provision that lets you ask the insurance company to reconsider and/or remove an exclusion from your policy – for example if a medical condition becomes resolved.

Underwriting

The process in which the insurance company looks at all your medical records and other information then determines if they will issue you a policy and the cost of your policy based on the risks involved. For group disability coverage, underwriting does not determine the cost, although it may be needed to determine an additional coverage amount over the guaranteed issue of a policy.

Simplified issue/underwriting

A type of policy where your premiums are calculated (or underwritten) without having to undergo a medical exam. This may result in higher premiums, because the insurance company assumes that there will be more medical risks involved.

Waiting period

Also called an elimination period. This is the period of time you have to wait after you are disabled until you can start receiving benefits. It will generally be shorter for an STD policy, and longer for an LTD policy.

Riders

Policy provisions that typically enhance your coverage, for example, a cost-of-living adjustment rider that increases your benefit to account for inflation. Riders usually come at an added cost to your policy but can provide important added value.

Non-cancelable provision

A common policy provision that states that the insurance company cannot raise your premiums or change the terms of the coverage as long as you keep paying them. Typically goes with a guaranteed renewability provision.

Guaranteed renewability

A common provision that states that the insurance company will renew a policy at the end of each term up to a specified age or date as long as the premiums pare paid. The insurer may make changes in the premium rates.

Substantial Gainful Activity (SGA)

A term used by the Social Security Administration referring to work for which you get paid. In order to qualify for SSDI you’re not allowed to earn over a certain dollar amount each month. Note that income from other sources, such as investments or interest, does not count as SGA income.

Attending physicians’ statement (APS)

A report by a doctor or medical facility that has treated you. During the underwriting process, the insurance company will often ask for an APS to either verify the state of your health or get more background about a medical issue.

Presumptive disability

A provision to start paying benefits earlier if you have a sudden, drastic disability such as the total and complete loss of sight in both eyes, hearing in both ears, speech, or the use of any two limbs. This is often not a provision for which you pay an extra premium – it’s built into most contracts.

There’s a lot more to know about disability insurance. Talk to Guardian.

Knowing the terminology is a start, but there’re a lot of things to think about when you’re getting a disability policy. How much coverage do you really need to maintain your lifestyle? What if you’re closer to the end of your career? What if you’re just starting out?

A Guardian financial professional can help you better understand all the important issues to consider, and guide you to the disability plan that makes sense for you and your family.

Or get an online disability insurance quote to see how affordable a disability policy can be.

If you are an employee, taking advantage of your benefits at work is a smart and affordable way to help get the financial protection you want for yourself and your family. Contact your HR department to review your plan details and determine how much disability insurance is available to you. Your employer may provide disability insurance as a benefit, or you may opt to pay for additional disability insurance through payroll deductions.