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When was the last time you read the fine print of an insurance policy?
You should, especially when you're buying disability insurance. The
fine print tells you how the policy defines disability, which is important
information. The disability definition used in the policy determines
both how you can qualify for disability benefits, and, in part, how
much the policy costs.
To be considered disabled under most policies, you must be unable to
work and earn income; however, many policies narrow down this definition
quite a bit. They may specify that you must try working in another occupation
if you can't do your own job, or they may pay benefits if you can do
some but not all of the duties of your own occupation. Other policies
aren't concerned with occupation at all; they consider you to be disabled
when, because of illness or injury, you earn less than you did before.
"Own occupation" coverage
Although the terminology used to define disability varies from policy
to policy, an "own occupation" policy generally defines disability
as the inability to perform the usual and customary duties of one's
own occupation. This is a liberal definition of disability, because
even if you can work in another occupation, you still receive disability
benefits. Because it is relatively easy to qualify for benefits under
this definition of disability, insurance companies are limiting the
availability of this type of coverage. Own occupation coverage is often
extremely expensive, and may only be available to individuals who have
a clean medical history and work in a relatively risk-free occupation.
"Any occupation" coverage
An "any occupation" policy defines disability as the inability
to perform the duties of any occupation. This definition of disability
is strict. To receive benefits according to this definition, you have
to be unable to work in any occupation, not just your own. Occasionally,
however, the wording is modified to take into consideration your earning
level, education, training, and experience.
Split definition coverage
Many disability policies incorporate both an "own occupation"
definition of disability and an "any occupation" definition.
You purchase a policy that provides own occupation coverage for a limited
period of time, and after this period ends you must meet the any occupation
definition of disability in order to continue receiving benefits. This
is sometimes known as short-term own occupation coverage.
Presumptive total disability
coverage
No matter how your insurance company defines total disability, most
companies automatically consider certain catastrophic ailments to be
totally disabling. If you are disabled by one of these ailments, you
don't have to meet the conditions normally required in order to be considered
totally disabled. Not only do you receive immediate benefits, but you
also continue to receive benefits even if you are able to return to
work. These ailments (which may be caused by injury or illness) are
the loss of sight in both eyes, hearing in both ears, speech, the use
of both hands, the use of both feet, and the use of one hand and one
foot.
Residual disability coverage
Traditional total disability policies pay benefits in the event that
you are totally disabled and can no longer work. However, a newer type
of policy called a residual disability or income replacement policy
pays benefits according to how much income you have lost due to disability.
These policies pay benefits even if you are not totally disabled and
can work part-time. Your benefit will be based on the percentage of
income you earn working part-time in relation to what you used to earn
working full-time. In general, to qualify for benefits, your earnings
have to be at least 20 percent less than your pre-disability earnings.
Residual disability is often long-term coverage, especially if your
policy requires a period of total disability first.
Some confusion surrounds residual
disability coverage. In the past, it was available primarily as a rider
to a total disability policy, and you were required to be totally disabled
before you were eligible for residual disability benefits. Today, however,
you can also purchase residual disability coverage as a stand-alone
policy, and you can receive disability benefits even if you never suffer
a total disability. Some policies combine both types of coverage in
the base policy or offer one as base coverage and the other as add-on
coverage.
Partial disability coverage
Partial disability coverage is usually offered as an optional rider
to a total disability policy, although it may be included in base coverage.
It is similar to, but not the same as, residual disability coverage.
Both types of coverage provide benefits to you if you return to work
after a period of total disability and pay benefits if you can perform
some but not all of the duties of your occupation. However, unlike residual
disability, a partial disability definition does not consider loss of
income. Rather, you are paid an amount equal to 50 percent (occasionally
less) of the benefit that you would earn if you were totally disabled.
In addition, the benefit period is much shorter than that for residual
disability (a few months or a year at most).
Does your policy cover illness,
injuries, or both?
Disability insurance contracts further limit disability definitions
by restricting coverage. Most policies offer coverage for both injuries
and illnesses and pay benefits no matter where you were disabled. Some
policies, however, offer accident-only protection and don't cover work-related
injuries or illnesses, because work-related disabilities are covered
by workers' compensation.
Sickness
is usually defined in disability policies as illness or disease that
manifests itself while the policy is in force. This definition covers
mental as well as physical illness. Knowledge is key here; you may have
a pre-existing condition, but you may not know it, or a medical exam
may not reveal it. Injury is usually defined as accidental bodily injury.
The term accidental, however, doesn't necessarily mean that an accident
caused the injury. It may simply mean that you didn't sustain the injury
intentionally, or that it didn't happen while you were doing something
that you knew could cause injury.
Did you get sick or hurt on
the job or at home?
Your policy may cover either occupational or nonoccupational illness
or injury. An occupational illness or injury is caused by, and related
to, your job. To be eligible for benefits under this definition, your
illness or injury must be work-related. These types of disabilities
are covered under workers' compensation, so they are sometimes excluded
from group disability insurance contracts. A nonoccupational injury
or sickness is unrelated to your job and occurs away from your workplace.
Nonoccupational coverage is much more liberal than occupational coverage
and often implies 24-hour benefits. This means that if you get injured,
either away from home or on the job, your disability insurance will
pay benefits.
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