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Disability Insurance

Importance of Disability Insurance:

Taking a disability insurance for the breadwinner of a family is very important as a sudden incapacitation can put a severe economic burden on the family. Disaster can strike anytime making a serious dent on savings of a family besides eroding the present income. Despite the disability one has to pay all the monthly bills, including for food, utilities and other payments. The grim reality is that one cannot look forward to income sources like Social Security for protection. In a lot of these situations, they are not even applicable or are not enough either. Hence an urgent need for disability insurance for the working populations is needed.

Disability Insurance defined:

Individual Disability insurance is a type of insurance which covers about 45-60% of an individuals gross income in case an illness prevents him to make an earning from his occupation. Disability insurance policy offered by various insurance companies is different. Every disability insurance plan contains an exact definition of what total disability is in the policy is and it is important on the part of a person shopping for such a policy to be aware of the precise definition before going in for a policy. There are basically three basic types of Disability Insurance policy. These are (i) True own-occupation (ii) Modified own-occupation (iii) Gainful occupation

(i) True own-occupation:

This is the broadest type of total disability insurance available. Under this, the insurance company states that in case of inability to carry out the material and important duties of ones regular occupation, the insurance company will consider the occupation as the one presently engaged in at the time of disability and they will settle the claim even if one is engaged in some other capacity. Own-occupation disability insurance is among the only plan available which does not penalize someone for getting back to work in a different occupation while on a claim. In this type of plan, the underlying feature says that in the event of an illness or injury, one is unable to perform an occupation, he will be taken as totally disabled, although he chooses to carry out something else.

(ii) Income Replacement Insurance:

Currently this has been acknowledged as the most widely accepted definition of total disability in the industry. Nearly all insurance carriers have stopped giving own-occupation disability insurance and have gone in for income replacement definition. There is a vital difference between an income replacement and an own-occupation definition of total disability.

The income replacement clause will fine a person at the time of a claim, in case he makes the decision to get back to work, or earn another source of earned income at the time of a claim. It is seen that most of the people, in case, given a choice would return to some type of work if possible, under this plan in case someone desires to return to work in some capacity, the insurance company might compensate his monthly benefit check. A common misconception holds that own-occupation disability insurance is costlier compared to an income replacement policy. A lot of professional occupations are there where an own occupation contract is really less costly compared to an income replacement policy. In case of several companies for instance, they do not prefer writing individual disability insurance on doctors. Chances are ripe that an own-occupation disability insurance policy might be cheaper offered by a company that continues to enjoy writing disability insurance for doctors.

Gainful Occupation coverage:

This type of total disability is very usual in case of an employer sponsored group long term disability insurance policy, or with property and casualty insurance companies who took a decision to release a disability insurance policy. The typical clause of this type of insurance is as follows: Due to sickness or injury one is unable to perform the material and major duties or ones occupation, or any other occupation one is considered eligible by education, training or experience.

Income replacement insurance against loss of income can take the following forms:

(i) Employer-paid disability insurance:

This is needed in majority of the states. Most of the employers give some short-term sick leave. A lot of larger employers offer long-term disability coverage, normally with benefits with upto 60 percent of salary lasting from five years to sixty-five, and in certain instances that is extended for life.

(ii) Social security disability benefits:

Social security disability benefits can be paid in case of workers whose disability might continue for at least 12 months which can be so serious that the question of getting into a gainful employment does not arise.

(iii) Individual disability income insurance policies:

Other limited income replacement is there in case of workers, under some situations, from workers compensation in case the injury or illness connected with job. In case of most of workers, even in case of those with some employer-paid coverage, an individual disability income policy is the optimum means to guarantee income in the event of disability. While buying a private disability income policy, one can hope to replace from 50% to 70% of income. It is a fact that insurance will not replace the entire income as they want the person to have an incentive to return to work. But in case the insured person pays the premiums himself, the disability benefits are not taxed.

Disability policies contains two different protection features which are (i) non-cancelable and (ii) guaranteed renewable

(i) Non-cancelable:

These are disability insurance policies that cannot be cancelled by the insurance company except in the event of non-payment of premiums. This gives the insured the right to renew the policy annually without an increase in the premium amount or a reduction in benefits

(ii) Guaranteed renewable:

Under this policy, one has the right to renew the policy with the identical benefits and the company cannot cancel the policy. But the insurer reserves the right to hike the premiums as long as it acts in the same manner in case of all other policy holders in the same rating class as the person insured.

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