What Does Disability Insurance Cover?

Whether you’re looking for a new disability insurance plan or are reviewing your existing coverage, it’s extremely important to know exactly what your disability insurance policy covers and what it does not.

Disability insurance coverage varies based on several factors:

  • short-term or long-term plan
  • your insurance carrier
  • the specifics of your particular plan

However, there are also some additional points to consider as you assess your new or existing disability coverage.

What Expenses Does Disability Insurance Cover?

While many people think of disability insurance as a failsafe to pay their mortgage, their car and other key expenses, actual coverage works differently.

Rather than covering specific expenses, a disability insurance plan will provide a lump sum that the recipient can allocate as they see fit.

There is some variability in how much of your income your plan will cover in case you’re unable to work. This is particularly true if you go with a private insurance provider. In any case, there are limits to how high your monthly benefits can go.

Under Short-Term Disability Plans

Short-term disability insurance covers a temporary disability up to a year.

Based on data from NerdWallet, most short-term disability insurance plans cover between 60 and 70 percent of the holder’s base salary. The base salary caveat is key, however; if you earn much or most of your income through commission or bonus, almost all disability insurance providers will exclude those numbers from their calculations.

A monthly cap typically applies as well, commonly set at $10,000.

Under Long-Term Disability Plans

As the name suggestions, long-term disability plans provide benefits for as long as the life-impacting disability exists. If the disability is ongoing, the plan may provide benefits until death or could terminate coverage at retirement age.

Most plans aim to replace between 40 and 60 percent of former base salary. Keep in mind that the limitations on bonuses and commissions and the monthly cap that apply to short-term plans also apply here.

What Types of Medical Conditions Trigger Disability Insurance Benefits?

Short-term and long-term disability plans both cover a wide variety of illnesses and injuries that can prevent policyholders from working.

Some of the most common reasons for a short-term disability claim include a broken bone, a back injury, a diabetes flare-up and maternity leave.

Long-term disability benefits are often triggered by cancer, degenerative disorders and catastrophic accidents that result in the loss of hearing, sight, limbs, and mobility.

Before you commit to relying on disability insurance benefits, it is worthwhile to familiarize yourself with pre-existing condition terms as well as the common injuries and medical conditions that are excluded from most plans.

Pre-Existing Condition Limitations

In almost every case, a medical condition that you have been recently diagnosed with and treated for at the time you obtain your disability insurance plan will be excluded from coverage for some period of time.

Disability insurance plans often assess such pre-existing conditions using two criteria: look back periods and waiting periods.

Look Back Period

This refers to the time period prior to coverage that former medical conditions that have been diagnosed and treated will be considered pre-existing.

Many policies apply a standard of between 90 days and six months, though it’s not unusual to see a year-long look back period.

For example, a condition diagnosed and treated 10 years prior probably won’t be excluded from coverage, but an injury sustained in the past month almost certainly will.

Waiting Period

If a condition is deemed pre-existing under the look back test, a waiting period applies.

Typically this means that policyholders will not receive benefits due to a pre-existing illness or injury for the first year or two of coverage.

Commonly Excluded Injuries and Illnesses

Beyond pre-existing conditions, some injuries and illnesses are commonly written out of disability insurance coverage for a variety of reasons.
Mental or nervous conditions, as well as those caused by substance abuse are often excluded unless a drug prescribed to treat it meets qualification guidelines.

Other injuries and illnesses often excluded include those that happen under the following circumstances:

  • Committing a felony
  • Working an illegal job
  • Crashing a vehicle during a race or stunt show
  • Playing a professional sport
  • Any intentional injury (such as a failed suicide attempt)
  • Injuries sustained while in the armed services

Other Events that May Change What Disability Insurance Covers

Change in Employment Status (For Employer-Provided Plans)

If you receive your disability insurance coverage through your employer, you may be aware that coverage will generally end when your employment does.

One other thing to remember is any reduction in hours that changes your status from full-time to part-time may have the same effect.

Change in Income

Lastly, keep in mind that almost every disability insurance policy pegs coverage to a percentage of your base salary at the time you sign up.

This means that if you experience a significant increase in your base salary, your disability insurance coverage benefits may no longer meet your needs. If this is the case, speak with your insurance agent to see if your coverage can be adjusted.

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