Topics:Disability Insurance 101
Guest Post by Jack Wolstenholm
Disability insurance and critical illness insurance have quite a bit in common.
However, they are far from interchangeable. To better understand the key similarities and differences between disability insurance and critical illness insurance, let’s take a closer look at how each one works, what they cover, how much they cost, and who needs what.
Disability insurance replaces a percentage of your income each month if you experience a disabling injury or illness that prevents you from working. Coverage is either long-term or short-term, and can be obtained individually through a private insurance company or as part of a group. Employers often offer group disability coverage as a benefit at little to no cost to employees who elect to participate in the plan.
Critical illness insurance pays out a one-time lump-sum benefit if you experience a covered condition. Critical illness insurance can also be obtained individually or as a part of a group plan, and when employers offer it, they typically pick up the premium costs. Critical illness coverage is sometimes made available in the form of a benefit rider on life and disability insurance policies. This optional benefit comes at an additional cost when added to another policy.
Disability insurance and critical insurance differ in the amount of benefits they will provide, as well as when and how those benefits are paid out. But it’s important to note that both types of policies allow you to use the benefits you receive however you want. Buy groceries, cover medical bills not covered by health insurance, make mortgage payments, replace lost income — these benefits are truly intended for whatever you need when times get tough.
Disability insurance covers injuries and illnesses that limit your ability to perform the essential duties of your job occupation. What is and isn’t covered varies by carrier depending on the policy’s definition of disability. The two most common definitions of disability are any-occupation and own-occupation.
With this in mind, long-term disability insurance is most commonly used for serious disabling events that prevent you from working for longer than three months (even permanently), like stroke, musculoskeletal disorders, cancer, cardiovascular issues, and pregnancies with health complications. Short-term disability insurance is most commonly used for temporary disabling events that last less than three months and allow for a full recovery. Think minor injuries like fractures, sprains, and strains, and maternity leave for healthy pregnancies.
On the other hand, critical illness insurance is more straightforward. It typically covers first-time diagnoses of serious conditions like cancer, heart attack, stroke, coma, paralysis, kidney failure, organ transplant, bypass surgery, and Alzheimer’s disease. However, it’s important to note that the complete list of qualifying conditions a critical illness policy will cover varies from carrier to carrier. Always check with the insurance company you are applying for coverage with to make sure you understand what its policy does and doesn’t cover.
Both disability insurance and critical illness are most affordable for the young and healthy. Cost increases as you age because the risk of becoming sick or hurt and filing a claim for benefits increases, too.
The cost of disability insurance depends on a variety of personal factors and policy choices. Personal factors include gender, age, location, health history, job occupation, and income. Policy choices include the benefit period and amount, elimination period, and any optional riders you add to your policy.
That said, the average cost of disability insurance is typically between 1 percent and 4 percent of your annual income. Another way to think about this is you can expect to pay between 2 percent and 6 percent of your policy’s monthly benefit amount in premium. As a result, some will pay $10 or $20 a month; others $100 a month or even more. It all depends on your situation.
Like disability insurance, the cost of critical illness insurance can vary widely, and is determined by your personal background and policy choices. It takes all of the aforementioned factors into account except elimination period (since critical illness insurance policies do not have one), and your job occupation and income.
In a country where one in four people will experience a disability in their working years and two-thirds of bankruptcies stem from medical issues, the value for both disability insurance and critical illness insurance is clear. But how do you know which types of coverage you actually need?
Of course, there is no one-size-fits-all solution. To find your best-case coverage scenario, it’s important to do your own research, consult a reputable licensed agent, and shop around to compare rates. That way, you can lock in reliable coverage at a cost you can afford.
Jack Wolstenholm is the head of content at Breeze, a digital-first-insurance company offers simple, affordable disability and critical illness insurance online.