Disability Insurance

Disability insurance is a form of insurance designed to provide periodic income to a policyholder in the event of his/her inability to work as a result of sickness or injury. Disability insurance with coverage for periods longer than six months is termed long-term disability insurance. Typically, disability insurance policies are designed to pay forty to sixty percent of an insured person’s actual earnings on tax-free basis.

Disability insurance may be purchased by individuals, provided by the government, or included in insurance packages provided by employers. Most employer-provided disability insurance coverage ends in the event of termination or change of a job. Several states in the U.S. manage a public disability insurance coverage scheme, which is funded by payroll taxes.

Among the most important factors to be considered while opting for a disability insurance policy are definition of total disability and renewability. The three basic definitions of total disability are own-occupation disability insurance, income-replacement insurance, and gainful-occupation coverage. The basic types of renewability features widespread in disability insurance policies are non-cancelable and guaranteed renewable, guaranteed renewable, and conditionally renewable.

Other fine points to be evaluated for a disability insurance policy are residual disability insurance for persons actively engaged in their jobs but restricted due to sickness or injury; presumptive disability insurance that offers protection in the event of severe disabilities; and recurrent disability insurance for protecting against disability occurring soon after recovery from disability. Details such as elimination period, benefit period, and policy exclusions must be carefully addressed. Optional riders commonly available with disability insurance are cost-of-living adjustment, future-increase option, automatic-increase rider, and social-insurance-substitute rider, in addition to residual-disability insurance.

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