What is a Disability Insurance Elimination Period?
Disability insurance can be a valuable financial tool to help protect your ability to earn a paycheck. However, you should consider several aspects of disability insurance before purchasing a policy, especially the elimination period.
For many Americans, a steady paycheck is their biggest financial asset. Without an opportunity to work each day, you wouldn’t be able to afford a home or build a savings account. Without a paycheck, you could not find financial stability and live a comfortable life.
The median U.S. household income is $60,336, according to U.S. Census Bureau data. This means that over a lifetime of working, the average American can earn more than $1 million. However, if you become sick or injured, you might lose your ability to work. That’s where disability insurance comes in.
Disability insurance, sometimes referred to as income insurance, helps offset the financial risk of being unable to earn a paycheck. Long-term disability insurance policies pay for a portion of your earnings if you are sick or injured to the point where you cannot work. These policies continue to pay a portion of income until you can get back to the job, do another job, or retire. Short-term disability insurance, on the other hand, only pay out for a set amount of time, typically under a year.
While disability insurance is a powerful tool in protecting you and your loved ones’ financial health, it can be a confusing product with several components to consider before you buy it, especially the elimination period.
If you are considering purchasing a disability insurance policy, here’s what you need to know about the elimination period and its impact on your coverage and cost.
A Closer Look at the Disability Insurance Elimination Period
Within a disability insurance policy, the elimination period dictates how long you must wait for disability insurance payments to start once you become disabled. You can think of the elimination period as your waiting period. Any care you need during the elimination period essentially falls on your shoulders, not the insurance company.
While each insurance company offering disability insurance differs slightly from the next, policy owners can choose from several standard elimination periods. The most common elimination period is 90 days, meaning benefits are not paid out until three months after the qualifying injury or sickness starts. However, insurance companies may allow you to select a 30-day, 60-day, 120-day, or 365-day elimination period, based on your ability to cover expenses at the onset of your disability before the benefit period begins.
The most prominent insurance companies offering disability insurance offer these standard elimination periods, including Guardian, MassMutual, Ohio National, and Principal. Guardian also offers a 720-day elimination period, as does MassMutual. All disability insurance has an elimination period.
How Can the Elimination Period Affect You?
The elimination period is an important consideration for those interested in purchasing a disability insurance policy. A shorter elimination period means the cost of the policy is higher, but you will get paid sooner if you suffer from sickness or injury.
A longer elimination period brings the total cost of the monthly premium down, but if you need the funds, you must wait longer for them. The elimination period has an impact on your cash flow, too. You must be able to cover your expenses during the elimination period from other savings such as an emergency fund.
How Does it Affect Payout?
You will not receive your disability insurance benefits until the elimination period is over. Once it passes, benefits are paid out, typically on a monthly basis, until you are able to go back to work or for as long as the policy dictates. In most cases, disability insurance pays between 40 percent and 80 percent of your income once the elimination period is met depending on your policy.
How Does the Elimination Period Affect a Disability Insurance Policy?
For some, a longer disability policy elimination period is not worth much. For instance, a two-year (720-day) elimination period means you receive no benefit payments for two years after you are disabled. Many individuals do not have this amount of money set aside in regular savings, creating the need to go into debt or come up with another solution to afford their monthly required expenses. While the premium cost for a longer elimination period is lower, it may not be worthwhile unless you are in a great financial situation.
Also, it is important to note that insurance companies may offer different elimination periods for different disabilities. A severe disability or permanent disability may have a shorter elimination period than less serious sicknesses or injuries. It is necessary to review the elimination period provisions of a policy before accepting.
Pros & Cons of Disability Insurance
Disability insurance can be a smart way to protect your ability to earn an income. If you are the primary earner in your household, having disability insurance in some amount can help cover necessary monthly expenses should you get sick or injured. Some employers offer disability insurance at little to no cost in most cases. Others may have to seek out disability insurance through a private insurance company, which comes at a cost.
Disability insurance requires a premium payment that is determined by your age, gender, and health status. Additionally, disability insurance companies offer different levels of benefits depending on your annual income. The higher your income, the higher the payment you may receive if you are sick or injured. This, however, increases the cost of your policy. Similarly, those in poor health, higher age, or smokers will pay more for a policy. To determine if disability insurance coverage is worth the monthly investment, be sure to compare the cost of the policy with the benefits it pays, as well as the elimination period.
Having the right disability income insurance can protect you and your loved ones in the event of a long-term sickness or injury. However, it is crucial to investigate the elimination period and ensure you are able to meet your monthly obligations should you need to make a disability insurance claim.