Disability insurance offers financial protection should you become ill, or sustain an injury that prevents you from working. This type of policy pays out on a monthly basis which lasts until you are fit enough to return to work, or the policy term comes to an end. Most medical conditions that prohibit you from working are covered; these include heart disease, cancer, back problems and stress.
The risk of becoming disabled or incapacitated is relatively high, so it makes sense to take steps to guard against a large drop in your income by taking out disability insurance. You can generally insure up to sixty five percent of your gross monthly earnings, and you can keep the policy in place until you retire, or for a minimum of five years.
When selecting which type of disability insurance policy is best suited to your needs you firstly need to take into account the length of time you receive sick pay from your employer. This is known as the deferred period and can last from between four weeks to fifty two weeks; it is basically the length of time you wish to wait until your policy starts to pay out.
In addition to selecting your deferred period you can also choose to take out a policy with guaranteed premiums. This means that the monthly premiums stay the same throughout the duration of the policy, regardless of whether or not you have made a claim. The opposite to this is a policy with reviewable premiums, and although a policy with guaranteed premiums generally starts out more expensive it usually works out cheaper over the term of the policy in addition to giving you peace of mind that your premiums will stay fixed.
If you are on a limited budget you might like to consider accident and sickness insurance. Similar to disability policies, accident and sickness policies only pay out for a specified length of time; usually six or twelve months, depending on which option you choose. With this type of policy there is also a restriction on the amount of insurance you can take out. In the UK this amounts to £1,850, or £2,500 if the sum assured is to cover mortgage payments. All accident and sickness policies are reviewable so rates will rise over time.
All insurance providers define long term illness in different ways, but generally you must be unable to carry out your usual occupation as a result of an accident or serious illness. Some insurers stipulate that you must be unable to carry out any occupation; these are best avoided as they are extremely unlikely to pay out.
Insurers recognize that sometimes you suffer an illness or disability that leaves you able to work, but in a lesser paid job, or on a part-time basis. In this case you will normally receive a reduced benefit. There are, however, some illnesses that a disability policy will not cover, these include illnesses that result from alcohol or drug abuse, Aids, self-inflicted injury, pregnancy and childbirth, acts of war, and injuries sustained during criminal activities.
Insurance providers take a number of factors into account when determining how much you should pay. They do this initially by categorising people into four different employment grades, the first of which is Class 1 which covers individuals in professional and administrative roles, and the last is Class 4 which includes those people who are involved in heavy, manual labour. Class 1 comes with the lowest premiums, and Class 4 has the highest as individuals in this group are deemed to be more at risk of accident or injury. Some insurers will refuse to cover you at all if you have a high risk occupation, for example, a deep-sea diver, so always remember to inform your insurer if you start a new job. If you fail to do this then any future claims could be invalidated.
You can keep premiums to a minimum by opting for a longer deferred period, but only do this if the deferred period is in line with the length of time that sick pay is paid to you via your employer. In addition, the shorter the period you choose that you want the policy to pay out benefits, the lower the premiums.
If you need to make a claim it is important that you inform your insurance company as soon as possible; don’t wait until after the deferred payment period has elapsed, if you have one . They will start by making sure that you are eligible to claim benefits, and may ask for a medical report from your doctor. Alternatively, they may wish to carry out their own medical examination. They will also determine how much benefit you are entitled to, and you will have to provide proof of your income.
Disability insurance provides essential cover should you be unable to work due to illness or accident. However, all policies set a maximum benefit in order to not reduce your financial incentive to continue in full or part-time employment. When the policy starts paying out monthly premiums will usually stop until you are fit enough to return to work. It may be advisable to seek the help of a professional financial advisor when taking out a policy for the first time in order to ensure that the level of cover, and the policy term, meets your needs in full.