Disability insurance

Disability insurance, often called disability income insurance, is a form of insurance that insures the beneficiary's earned income against the risk that disability will make working (and therefore earning) impossible. In other words, it answers the question, "How would I pay for my living expenses if I became unable to work?"

National social insurance programs
In most developed countries, the single most important form of disability insurance is that provided by the national government for all citizens. For example, the UK's version is part of the National Insurance; the U.S.'s version is Social Security (SS)—specifically, several parts of SS including Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI). These programs provide a floor beneath all the other piecemeal forms of disability insurance in our societies. In other words, they are the safety net that catches everyone who was either (a) otherwise uninsured or (b) otherwise underinsured. As such, they are very large, very important programs, with a lot of beneficiaries. The general theory of the benefit formula is that the benefit is not large but is enough to prevent abject poverty.

Employer-supplied disability insurance
Since one of the top reasons for becoming disabled is getting hurt on the job, it is not surprising that the second-most important form of disability insurance is that provided by employers to cover their employees. There are several subtypes that may or may not be separate parts of the benefits package: workers' compensation and more general (but very basic) disability insurance policies.

Workers' compensation
Workers' compensation (also known by variations of that name, e.g., workman's comp, workmen's comp, worker's comp, compo) offers payments to employees who are (usually temporarily, rarely permanently) unable to work because of a job-related injury. However, workers' compensation is in fact more than just income insurance, because it may pay compensation for economic loss (past and future), reimbursement or payment of medical and like expenses (functioning in this case as a form of health insurance), general damages for pain and suffering, and benefits payable to the dependents of workers killed during employment (functioning in this case as a form of life insurance).

More general (but very basic) disability insurance
These policies offer payments to employees who are (usually temporarily, rarely permanently) unable to work because of any injury or illness, even if it is not job-related. Unlike workers' compensation, this coverage may not involve any aspect of health insurance, life insurance, or payments for pain and suffering. Similarly to most employer-supplied health insurance, these plans are essentially just open-market plans with the advantage of a negotiated group rate. That is, they are similar to what an individual would buy, but they are purchased with a volume discount. Another general fact about them is that they tend to offer rather basic, low-end coverage, essentially because most people balk at paying for anything more. Sometimes each employee has the option to buy upgraded coverage if they are willing to pay for it.

Veterans' benefits
The various kinds of compensation and insurance that are provided to military veterans by organizations such as the U.S. Department of Veterans Affairs (VA) are very much analogous to workers' compensation, with soldiers, sailors, and marines being the analogues of the worker. In both cases, the overall compensation system involves more than just one type of insurance, but rather encompasses health insurance, disability income insurance, life insurance, and even mortgage insurance on VA mortgages. The scope of each of these is limited. For example, the life insurance aspect is limited only to paying (rather small) survivors' benefits to survivors of veterans killed in the course of their service; it is not a general term life policy.

Newsweek magazine's cover story for the issue of March 05 2007 discusses the problems that American veterans of the wars in Afghanistan and Iraq are currently facing in receiving their VA benefits. The article tells the story of one veteran who waited 17 months to start receiving payments from the disability income insurance aspect of his VA coverage. Another article, in the New York Times, points out that besides the long waits, there are also inequalities based on which state a vet is from and whether he or she is regular army, National Guard, or Reserve. The Newsweek article says that even when a veteran manages to get his or her claim approved (which can be burdensome),


 * "The compensation is not huge. A veteran with a disability rating of 100 percent gets about $2,400 a month—more if he or she has children. A 50 percent rating brings in around $700 a month. But for many returning servicemen burdened with wounds, it is, initially at least, their sole income."

A sidebar in the same Newsweek article points out an even more depressing truth: the Americans injured in these wars, for all the obstacles to proper care, will still probably receive much better compensation and healthcare in years to come than their injured Afghani or Iraqi colleagues. And of the two groups (U.S. disabled vets and middle-eastern disabled vets), the latter group is larger.

Individual disability insurance policies
Those whose employers do not provide benefits, and self-employed individuals who desire disability coverage, may purchase their own policies on the open market. Premiums and available benefits for individual coverage vary considerably between different companies, for individuals in different occupations, and by State and Country. In general, premiums are higher for policies that provided more monthly benefit, pay the benefit for a longer period of time, and start payments for benefits more quickly following a disability. Premiums also tend to be higher for policies that define disability in broader terms, meaning the policy would pay benefits in a wider variety of circumstances.

Claims: what is covered, and for how long
The important variables regarding claims are listed below. Not every variable matters to every type of disability insurance, but most of these are generally relevant.
 * Was the disability unpredictable (not resulting from previously-known chronic illness)?
 * Was the disability incurred in the course of performing job-related duties?
 * How long is the waiting period before claim payments start?
 * What other insurance policies will pay claims for this event?
 * How much money will be paid per week/month/pay period?
 * For how many weeks/months/pay periods will payments continue?
 * What if the beneficiary is not totally disabled, but only partially?

Was the disability unpredictable (not resulting from previously-known chronic illness)?
For example, a potential policyholder seeking a regular individual policy on the open market must warrant that he is in good health and to the best of his own knowledge is not currently HIV-positive. The reason is obvious and is not mere discrimination: Someone who is HIV-positive has an unusually high risk of getting sick and missing work over the next 20 years. This is simply a fact. A general principle of insurance is that the policyholder sells risk that, to the best of his knowledge, is not higher than the stated circumstances imply. Withholding relevant circumstances or hiding them is selling something that is not what it is represented to be. Analogies are insider trading using material non-public information and making fraudulent (incomplete or false) seller disclosure in a real estate transaction.

Was the disability incurred in the course of performing job-related duties?
For example, workers' compensation policies are not obligated to pay claims for disability that is not job-related. Insurance for such risks can indeed be purchased, but because the risks are more inclusive, the premiums are higher. A policyholder always needs to understand what she is or isn't buying with her premium. And the insurer is legally obligated to specify exactly what coverage is or isn't being sold.

How long is the waiting period before claim payments start?
Because most disability events are temporary, insurance coverage for them is cheaper when the policyholder agrees to wait longer before receiving claim payments. For example, if you break a finger, it may only be 2 months before you are able to do your job again. If you agreed to wait 60 days before receiving claim payments, then the insurer will not have to pay a claim for your event. This reduction to his risk is reflected in the lower price that you paid to purchase coverage (lower premiums).

Another important example in this category is that the standard waiting period before starting to collect Social Security's disability benefits is one year.

What other insurance policies will pay claims for this event?
For example, if an auto accident renders you unable to work for 5 months, your auto insurance policy with Company A may include coverage for lost income during this period. (Often lost-income coverage is a separate rider to the auto insurance policy that you must pay extra for if you choose to have it.) In this case, you may choose to make a claim with Company A and either (1) make another, secondary claim with Company B, who issues your disability income insurance, or (2) decide that the primary claim is enough and avoid making an unnecessary claim with Company B. Sometimes there is a previously established order of priority that rules that Company B is liable for the claim only to the extent that Company A's coverage is not enough.

Another important example in this category is that if your injury is someone else's fault, their liability coverage from, say, an auto, home, or personal umbrella policy may pay for your lost income, and therefore you will not make a claim on your own policy.

How much money will be paid per week/month/pay period?
For example, it is rare for any policy to pay the full amount of the beneficiary's regular salary. (Policies that do are expensive, "high-end-of-the-market"-type policies.) Generally it will pay only some percentage, such as 80%, or it will pay only a flat amount, such as $1500/month, regardless of the normal salary amount. The idea behind this reduced benefit is that it is enough to protect you from mortgage foreclosure, or to keep you from running up huge debts, during your convalescence, even though it is not enough to live a carefree lifestyle on. In return for this trade-off, your premiums are lower. This is a good trade-off when you remember that hopefully, you will never have to make a claim anyway, so why pay higher premiums than you have to?

For how many weeks/months/pay periods will payments continue?
Most policies in the lower and middle areas of the market will have a cap, for example, 5 years. More expensive policies will pay all the way to the age when the national social insurance program takes over as the primary income source. For example, in the U.S., this is at age 65, when Social Security takes over.

What if the beneficiary is not totally disabled, but only partially?
Most policies in the lower and middle areas of the market will only pay claims if there is no job that the beneficiary can possibly do. Others, referred to as own-occ policies, will pay the claim as long as you cannot return to your own occupation. Own-occ policies cost more to buy (higher premiums) than non-own-occ, because their claims risk is greater. For example, suppose that your normal job involves lifting heavy boxes and getting paid $4000/month. Then you get injured, and can't lift so much weight. However, you are still capable of doing light assembly work at a workbench for $2000/month. If your policy is a less-expensive model, the insurer will tell you that no claim will be paid, because you are capable of working (although not at your own occupation). But if your policy is an own-occ policy with a claim amount of 75% of your normal salary, it will pay you a claim of $3000/month. This payment will recur monthly until (a) you are able to do your normal job again; or (b) the cap is reached (for example, 5 years later); or (c) you reach age 65 (when the policy ends and you begin collecting Social Security).