Disability Insurance: What You Need to Know

The screening a person goes through for disability insurance is far more onerous than life insurance. This may seem odd since everyone is going to die, but not everyone is going to become disabled. But this is not how insurance companies think about it. Death is something an actuary can calculate fairly easily and accurately. Someone who is overweight, smokes and drinks too much, for example, could be expected to die before someone who is fit and free of harmful vices.

Predicting who will become disabled is not so easy. It is a calculation based on chance. While someone building skyscrapers would seem to be at more risk for disability than a secretary, this is not always the case. One constant, though, is that women will be charged more for disability insurance than men. Reasons for this vary, but any candid insurance agent will explain that women are more in tune with their bodies and more apt to go on disability during their working lives. This does not mean men are tougher; it means men are generally less aware, continue to go to work when they are sick, and die younger. (No one said an actuary’s calculations were cheery.)

The two things that will hurt someone the most trying to buy private disability insurance (as opposed to a group policy offered by a company) are back problems and psychiatric care. These are the categories that generate the largest number of claims: lower back injuries and depression. If one of these conditions is pre-existing, the underwriter may deny coverage. Or the underwriter may attach a rider exempting those areas from coverage or, worse, limit the payout period for any disability claim. Again, this may seem deeply unfair, but insurance companies are for-profit entities.

SHORT-TERM VS. LONG-TERM DISABILITY Disability insurance is divided into two broad categories, based on the length of the claims — short and long. They are exactly as they sound. Short-term disability kicks in soon after a claim is made but generally stops within two years. Long-term takes longer to start, from 31 days to a time set by the insured, but can last until the insured’s death. Among insurance products, long-term disability is among the most expensive and the one insurance companies are least eager to underwrite. The reason is simple: It is a hard product for them to make money on. Unlike life insurance, where the actuarial tables are on their side, long-term disability could cost an insurance company dearly. A man in his early 30s, for instance, could pay $5,000 annually for insurance that would replace a yearly income of $400,000. If, however, he is disabled a couple years into the policy, the insurer could be paying that claim for 40 years.

http://www.nytimes.com/2009/04/28/your-money/life-and-disability-insurance/lifeinsureprimer.html?pagewanted=2&_r=1&ref=your-money