Most insurance policies have elimination periods between 60 and 120 days.  The longer your elimination period, generally, the lower the premium costs will be.  This is because many disabilities are for less than a year, so the more of that year that is eaten up without benefits paid, the less in total benefits that will be paid.

How long you want your elimination period to be will depend on your financial situation.  If you can go a substantial amount of time without an income, then you should consider a longer elimination period in order to save on premiums.  If you cannot do this, you should pay the extra to get a shorter elimination period.

Regardless, part of your disability insurance should be your own savings plan.  You should have enough savings to at least cover the elimination period on your policy—more is better, of course.

The other thing to watch for with elimination periods is the way they’re calculated.  If your policy has residual disability coverage, but does not consider the elimination period beginning until you make a full disability claim, your policy has a serious loophole that will mean you may not begin receiving benefits until much later than you thought.

It’s advisable to always have your elimination period begin counting from the day you make a partial or full claim.

The basis of a residual claim is that the person covered is still able to perform some or most of their occupational duties, but a substantial loss if income is still present because of a disability.

Residual coverage means any coverage that is not for the full benefit.  For instance, if you suffer sickness that causes you to lose some of your occupational skills (the ability to perform them) so that you lose 20% of your income, residual disability coverage will pay some of all of that difference.

Further, residual coverage also covers the times in the beginning and end of your insurance benefits.  In fact, most disability claims will start or end (or both) with a residual claim.

As an example, Ray is a lawyer whose work is mostly in patent and copyright law.  His work requires a lot of research, claim drafting, and filings with government agencies.  Ray is diagnosed with a mild form of cancer, but treatments will cause him to be unable to work for at least eight months.

In the few months leading up to the major part of his treatment, Ray loses more and more time at work and after his recovery time, he is only gradually able to return to work.

During the interim before and after his full disability, Ray is covered for his partial income losses by his residual disability insurance.

Obviously, disability insurance coverage with residual benefits can be extremely important.  In fact, many disability insurance claims never reach a full benefits point: they are purely about the residual claim instead.

While that may be true for some, it’s not always so easily quantified.  How much will you really need in order to maintain your standard of living and keep your obligations?

Let’s look at a simple worksheet that will help you make that determination more concrete.  This is an extremely important life decision, so it should not be taken lightly or without qualified advice.

Incomes
First, determine what your income from your current policy coverage would be.  If it’s 60% of your salary and is non-taxable, then you’ll need to look at your pay stub, find your salary before taxes were deducted and use 60% of that number.

Income from any other disability coverages such as a supplemental policy or a secondary benefactor such as the Veteran’s Administration.

Other income sources such as your spouse, interest on accounts, investments, and so forth.

These incomes should all to totaled to give you an estimate of your total monthly income while disabled.  For most people, this should total about 75% of your current, working monthly income.  If not, consider extra coverage.

To be sure that your disability income is high enough to pay your expenses, it’s a good idea to consider what those expenses are.  This is like most monthly budgets and should include all of your “hard” expenses—the ones you can’t do without.

Mortgage, insurances (health, life, homeowners, cars), car payments, utilities, food, child care, and so forth.  If your disability income will not meet these expenses, you definitely need supplemental or better coverage.

Your total income while disabled should equal an amount as close to your current take-home income as possible.  If your after-tax income is too much higher than your disability income, you will likely find yourself in a financial mess if you are ever forced onto disability.

Finally, you should also consider the grace period and how that will effect your income.  If your disability insurance’s grace period is 120 days and you typically only have 2 weeks of sick leave and another week or two of vacation, what will you live on during the interim?  You should have a special savings account to cover that 2-3 months of no income.

The key terms you’ll likely have the most interest in understanding in order to fully understand your policy and coverages are:

The Benefit Level and Period – Most policies pay a benefit level (percentage of income) for a specific period (maximum of X number of months or years).  The benefit level will have a compensation based on a benefit calculation formula (click here for more details) and will pay that amount for a specific period of time (usually up to 3 or 5 years).

The Elimination Period – This is also known as a “grace” or “waiting” period wherein the benefactor (you) must wait before receiving benefits.  This is typically 60-120 days from the point the disability occurs.  This is so that there is no double coverage from sick leave, workman’s compensation, or other payouts and to determine the approximate length of the disability.

Definition of Disability – We have covered this more in-depth in an earlier article, but this is the definition used to decide whether you are disabled or not.  It will be tied either to your ability to make an income or your ability to work at your current occupation.  Professionals will want to make sure they are defined by occupation.

Extent of Disability – Some policies pay only for full disability and we recommend that legal and medical professionals consider a policy that covers partial disability as well.  The extent of disability will determine the benefit payout.  So if you are disabled, but still able to function in your career, but only at partial time or without being able to do some job aspects, partial disability pays the difference.

Residual Benefits – Similar to the extent of disability consideration, this pays based on the amount of lost income.  This is more often used to define terms for payment of practice recovery after a disability, where a physician or lawyer returning to practice after a couple of years of not working must build up clientele and income.

Guaranteed Renewable – Similar to life insurance policies, disability insurance cannot be cancelled by the insurance company so long as premiums are being paid.  A guaranteed renewable policy cannot be canceled for any reason other than non-payment of premiums and premiums cannot be raised except for a whole class of covered persons, but not based on your individual circumstances changing.

Non-cancelable – Much like a guaranteed renewable policy, this policy also includes the caveat that its premiums cannot raise for any reason while the policy is in force.

Inflation Protection – This is also known as a cost-of-living rider and raises the benefit payout every year by a fixed percentage to account for cost of living increases and inflation.  Typically, this is 2-4 percent.

Hopefully this list of key terms helps you when considering your policies.

To put it bluntly, one of these four models will determine the dollar figure of the check you will receive every month for your disability benefit.

Salary Compensation
This is most common with group insurance policies and for those who are not self-employed.  This is the easiest model to understand since it is a pure percentage based upon your salary at the time of disability.

So if your salary (paycheck) is $10,000 per month and your policy pays 60% of income, your monthly disability check will be for $6,000.  Note that this almost never includes bonuses or other perks.

Productivity Compensation
This is very common for physician coverages as your income will be different month-to-month based on how much work your performed.  This is usually measured by number of hours worked, number of patients seen, the amount billed to patients (and their insurances), or the amount collected in billing to patients.

These are usually adjusted by overhead costs and other concerns of the medical practice.  While this type of compensation structure can work to the advantage of the physician when it comes time to collect a benefit, it is not always the best.  Because of its complexity, it can mean that you will not know your benefit until your first check arrives.  Many physicians prefer a net income compensation instead.

Net Income Compensation
This is a much simpler version of compensation and is the self-employed person’s version of salary compensation.  The amount is usually based upon income after all expenses (business overhead) or it is based upon the last year’s tax return.

So if your income for the last six months was $120,000 after expenses, your disability benefit would be the percentage of coverage (usually 60-80%) divided by six months.  In other words: $120,000 / 6 *0.6 or $12,000 per month.

Formula-Based Compensation
Lastly, we come to formula-based compensation schemes.  These are varied and not often used, so we have listed them last.  These usually combine things like productivity (above) with referral sources, board certifications, and other factors that might affect your income.  These plans are most often used for coverages of careers whose income is heavily reliant on commissions such as sales professionals and tort attorneys.

Low priced insurance doesn’t always mean cheap, of course, and some policies and carriers are capable of giving lower rates because of your situation, the size of their company, and other factors.

The question is: Does that cheap rate come with cheap coverage, or is that a quality contract that provides an affordable rate with coverage that truly benefits you?

Unlike, say, a term life plan or insurance on your teenager’s car, disability insurance requires that you look beyond the monthly or annual premium price and look at all of the coverages included in the disability plan itself.  Including when it will actually activate to pay a benefit.

Professionals such as lawyers or physicians are especially vulnerable to badly-written disability policies.  This is mainly due to the very definition of what disability might be in the policy itself.  The amount paid out may also be of concern.

We have covered disability definitions in an earlier article, which you can read by clicking here.  However, the payout or benefit payment is something we have only generally discussed.

Most disability policies pay a monthly premium to replace a portion of your income.  Most pay this as a tax-free income benefit, meaning it’s considered non-taxable income by the IRS.  So if your income from your occupation is $15,000 per month, on which you are required to pay taxes, your actual take home income may be 20-30% lower than that.  If your disability benefit pays 60% of your income tax-free, you would only be taking a loss of 10-20% of your take home income.

This is extremely important and knowing whether your disability benefit is tax-free is one of the many things you need to know about your policy.

What professionals will be interested in are two portions of this dynamic.  These are most commonly referred to in policies as the residual (or partial) benefits and return-to-work benefits.

The important point to look for is what the residual and return-to-work benefits are based upon: income or the ability to work.  If they are based upon your ability to work, then you will be compensated with benefits until such time as you can return to work full time.  If they are based upon your income from work, then they will pay out based upon your return to full income.

That’s an important distinction for most professionals.  Especially those who are members of a practice, are self-employed, or otherwise are in a position where their income is dependent on a client base and contracts.

As an example, if the payout is made until such time as you return to work, then a lawyer with a practice and regular clients would receive benefits until she can return to the office and work at her career again full time.  Whether her clients or business has returned to its previous level after her absence or not.

If the payout, however, is based upon a return to previous income levels, then the benefits will pay based upon missed income until her practice has returned to normal levels of income and work flow.

That distinction could mean returning to work only to find that your income suddenly drops (no benefits) and you have to struggle through recovering your business without that income.  So for many professionals, it’s an important distinction to make.

Group, Individual, and Supplemental Policies

If you’re employer provides disability insurance, you probably think you’re covered.  If you purchased a self-employed policy through a group plan from a union or professional association, you likewise probably consider yourself covered.

Group Policies
If you’re employed by a company providing disability insurance, you will want to review that policy, its coverages, and how much the payout is.  Most are surprised to find out how little these policies often actually cover.

Most group policies through an employer only pay about 60% of income in benefits and have pretty strict definitions of what “disabled” means.  Most will also have a 120 day grace period before they kick in to pay and almost all of them have a monthly or yearly cap on how much they will pay in total.

These are all important aspects, as they can decide your benefit: when it pays, how much it pays, and for how long.  Most common group disability policies will cap at around $60,000 per year, cover only salary lost (not bonuses) and most pay only 60% of your total salary up to that cap.

In this case, a supplemental policy is a very good idea to ride over that group coverage.  A supplemental policy can ad an additional 20% to the payout (making it 80%), can cover more situations under the definition of “disability,” and can raise the salary cap for payments.  They can also extend the total time the benefits will pay.  Most group policies are 3 year policies, meaning they will only pay disability for three years from the first claim and supplemental insurance can extend that to five years or more.

Individual Policies
These policies are usually of better quality than group insurance, but can still have some limits that you may want to review and change or negotiate.  If you can’t cover yourself for a full 120 days and would prefer the policy to kick in sooner, you can lower that number to 60 days, for instance.  This will cost more, of course, but it will be worth it if you need the coverage.

Supplementary Coverage
In either group or individual policy situations, adding supplemental coverage may be a better option for increasing your benefits.  It can often cost less and be easier to get than changing an existing policy or upgrading a group policy through an employer.

This is because while most of us would prefer not to think about our own demise, we can at least admit that it will happen and plan accordingly.  Disability is a little different, though.  We don’t often come to grips as easily with the idea that we might be handicapped for a year, three years, five years or unable to perform in our current career forever.

The question is, if that happens, will you have coverage?  How will your day-to-day expenses and living costs be paid?

Most disabilities are not the result of injury, but because of temporary or medium-term medical problems.  Heart attacks, surgeries, cancer, etc. are much more common reasons for disability claims than are injuries or accidents.

Professionals are even more at risk because the more specific their job requirements, the more likely they are to be disabled from performing job tasks due to sickness or injury.  A surgeon, for instance, might find that an ulcer leads to chronic shakiness in his hands for a few months, meaning he cannot perform surgery.  A lawyer might find that a minor stroke affects his ability to speak effectively on court or even on the phone.  Both are now effectively disabled, unable to perform part of their normal job duties.

Disability insurance usually covers from 1 to 5 years of disability either partially or fully, depending on the condition’s effect on your career.  Most plans pay 60-80% of your income during that time.

It’s important to know that if something happens to you, such as a medical condition or an accident, that you will have coverage so you won’t have to mortgage your home or sell assets to keep financially afloat during that time you’re unable to work.

That is what disability insurance is all about and that is why it’s so important for professionals, especially, to carry it for themselves and their family.

How Insurance Defines Disability

There are two major things to look at when considering a disability policy for your needs.  The first is how the policy defines “disability” and the second is what type of benefit payout the policy has.  Here, we will look at how policies usually define “disability” and what that means to you.  In another article, we will cover benefit payouts.

Defining Disability
Believe it or not, the definition of what is a disability is going to be spelled out in the policy documents.  This is important because that definition will decide when you can and cannot make a disability claim against the policy.

Two common definitions are often used.  The first defines a disability as being anything that prevents you from performing the major duties of your occupation.  This means that the policy pays benefits if you are unable to perform the “material or substantial” duties of your occupation.

The second definition is a little less covering.  This definition calls a disability anything that prevents you from performing a gainful occupation.  In other words, a lawyer who has a small stroke and cannot speak well and so cannot give oratory in court can still push a broom as a gainfully employed janitor.  Therefore, they are not “disabled” under this definition.

Obviously, the difference can be quite large.  The second policy, for instance, could mean that you will no longer make $200,000 per year and your policy will pay out nothing because you are capable of making $25,000 per year in another job.

So most professionals will want to make sure the definition of disability in their policy is occupationally-tied.  In other words, the policy covers you if you’re unable to perform your normal occupation or will have to substantially alter your career to continue working.

This is often the largest reason someone who is no longer able to perform their work and continue their career will find that they are not eligible for disability payouts from their insurance policy.