As more and more Americans are purchasing voluntary insurance coverage using flexible spending and health savings accounts, the question of how to choose the right policy for you and your family looms large. Most of us are aware that health insurance policies vary widely and take great care to compare premiums, deductibles and maximum out-of-pocket costs before making a choice. Unfortunately, many people do not know that the coverage offered by disability insurance policies — especially long term disability policies — vary widely as well.
What is Long-term Disability Insurance?
Disability insurance is coverage that pays you a portion of your earnings if you are unable to work due to an illness or injury. Short-term disability typically covers you for the first six months, after which time long-term disability insurance kicks in.
Some, but not all, states provide short-term disability insurance for all employed individuals through payroll deductions. However, this coverage is typically very limited in scope. For example, in New York the maximum benefit is $ 170 per week.
In general, long-term disability insurance covers a portion of a disabled individual’s earnings from the time he loses his short-term disability benefits until he reaches age 65. However, limitations and exclusions often limit payments and benefit periods substantially.
Common Limitations of Long-Term Disability Insurance
One of the most common misconceptions about long-term disability is that coverage is guaranteed. In truth, there can be limitations on conditions covered as well as the length of time benefits will be paid. For example:
“Own-occupation” versus “any occupation”
Most long term disability policies pay a portion of a disabled person’s income if he is unable to perform the duties of his own occupation for a limited period of time–typically two years. After that, the individual must be unable to perform any “meaningful work” for which he is or can be “reasonably trained.” Under these policy terms, if the insurer determines that a person is able to work at a job that is comparable to his prior occupation, it can terminate his benefits after two years.
Many long term disability insurance policies limit payments for pre-existing conditions. Although these conditions may be covered, the coverage period is often restricted to between two and five years. Coverage for a disability due to a mental health condition or substance abuse usually is limited to two years as well.
Additionally, some insurers provide limited coverage or no coverage for conditions that cannot be substantiated by “objective evidence,” such as X-rays, imaging studies of diagnostic tests. Under these policy terms, coverage can be denied for diagnoses such as back pain, myofascial pain, fibromyalgia and chronic fatigue immunodeficiency syndrome (CFIDS).
Further, most, if not all, long-term disability policies exclude disability due to self-inflicted injuries, injuries that occur during war and injuries incurred during the commission or attempted commission of a crime. Coverage is also denied if the individual is incarcerated.
All disability insurance policies require certification of the disability from the patient’s treating physician. However, many long-term policies require an independent medical evaluation, or IME, by a physician of the insurer’s choice. Other examinations, such as functional capacity evaluation (which looks at the person’s ability to perform certain types of job duties, such as lifting and standing) may be required as well. Some insurers also enlist the aid of a forensic accountant to determine if the disabled person is generating an income from an undisclosed source.
Full, Partial and Residual Disability
These are important terms that limit the insurer’s exposure if a disabled person returns to work. Full disability generally implies that the disabled individual has no meaningful income from work. However, insurer’s define partial or residual disability by the percentage of earnings lost. For example, if the policy defines partial or residual disability as 20 percent loss of earnings, a person who returns to work and earns 81 percent of his former salary loses his disability benefits.
Other Long-term Disability Policy Considerations
- Coverage limits: Generally, long-term disability policies provide coverage as a percentage of earnings, which decreases as a person’s salary goes up. For example, someone earning $100,000 per year may be eligible for long-term disability insurance that covers 60 percent of his earnings, while a person making $300,000 per year may be insured for only 40 percent.
Additionally, some policies allow automatic increases in the amount you receive (for example 5 percent per year for five years) while others do not.
- Payment caps: Many policies place a cap on total payments from all insurers Thus, if you have two policies in force (for example, one that pays 60 percent of your earnings and one that pays 15 percent) you still may only be able to collect up to a set dollar amount.
- Waiting periods: Some policies require a waiting period of one year. However, for an additional premium, that period can often be cut to as little as 180 days.
Obviously, there is much to consider when buying a long-term disability insurance policy, and the cost of making the wrong decision can be very high. That’s why you need the advice of a skilled professional to guide your choice. Don’t wait until it’s too late; make a plan to provide for your future today. Contact us at 516-292-3780 to set up an appointment for your insurance review, or request a free consultation online now.