Definitions and Disability Policy Provisions
What counts as disabled? Long-term disability insurance plans generally define "disability" in one of two ways: It can mean the inability to perform the tasks of one's own occupation or the tasks of any occupation at all. This is an important distinction to address inasmuch as if you are a concert pianist but neglect to specify "own" occupation, you may end up unable to perform Chopin etudes but quite able to flip burgers or drive a cab.
Disability policy provisions. If you are considering the purchase of a disability policy, you should note that such policies may differ in several different ways:
- When do the benefits start? Do benefits begin at the onset of disability or is there a waiting period? Common elimination periods include 30, 90, or 180 days. A lengthy waiting period gives no protection for short-term disability.
- How is disability defined? Older policies paid full benefits for the inability to perform the exact duties performed before the disability, but no benefits if the disability permitted some gainful employment. Newer policies may grade benefits with the job function permitted by the disability.
- Is there a monetary limitation on payments? State law may impose such a limit. No matter what you earn or how the policy is phrased, an insurance company may not pay out more than the maximum permitted by law. For example, someone who earns $150,000 per year has a policy that promises to pay 80 percent of the pre-disability salary in the event of permanent and total disability. If state law sets a $100,000 limit on such payments, that is all that will be paid to the owner of the policy, even though it appears that the policy will pay $120,000 ($150,000 x 80 percent). In such instances, the owner has "overpaid" premiums, since he or she did not receive the full amount contracted for under the policy. (A good insurance agent will alert you to this possibility regarding your own state, but if you move to a new state, check with a local agent to see whether your existing policy will conflict with your new state's laws.)
- Will multiple policies generate multiple benefits? State law may also affect whether benefits are cumulative. If they are, there's no use in carrying multiple policies. For instance, say you have three separate disability policies, each one providing a benefit of $100,000. If state law requires that benefits be cumulative and if there is a $100,000 limit, each insurer will contribute 1/3 of the $100,000. Thus, even though you paid for three separate $100,000 policies, you only receive the benefits as if only one of these policies was purchased.
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