Disability And Life Insurance: Paid-Up Policies At Risk?

Life insurance is a financial safety net for families and loved ones, but what happens when a disability is involved? For the 27% of American adults living with a disability, the challenge of qualifying for life insurance is very real. While a disability does not disqualify a person from obtaining life insurance, it can impact the available options and the cost of coverage. The nature and severity of the disability, overall health, and life expectancy all play a role in determining eligibility and premiums. This is what individuals with disabilities need to know about their life insurance options and how to secure the best coverage for their situation.

Does disability impact life insurance rates?

Disabilities can impact life insurance rates, and people with disabilities may find it challenging to qualify for life insurance. Insurance providers view applicants with disabilities as a greater risk, and the nature of a person's disability will affect the available policy choices.

If an individual's disability does not impact their life expectancy, they can still qualify for life insurance. For instance, if someone is disabled due to physical impairments like blindness or deafness, they may be able to qualify for a traditional term policy, especially if their spouse also has life insurance. In this case, most insurance providers will allow the disabled individual to purchase a policy that offers at least half of the coverage their spouse has.

However, if a disability affects life expectancy, it can limit life insurance options. In such cases, most traditional life insurance providers will likely deny the application. Disabilities that affect life expectancy include advanced stages of multiple sclerosis, PTSD, anxiety, and depression.

Additionally, certain medications can also impact life insurance rates for individuals with disabilities. If an individual is on high doses of painkillers or narcotics, it may be more challenging to qualify for life insurance, even if they are in good health aside from their disability.

To increase their chances of receiving affordable rates and qualifying for the desired coverage, individuals with disabilities can work with experienced life insurance agents. These professionals can anonymously shop their applications to find companies willing to offer coverage. It is recommended that individuals with disabilities do not apply for quotes online or submit applications on their own, as denials can make it even more difficult to purchase life insurance in the future.

While having a disability can impact life insurance rates and options, it does not make someone ineligible for life insurance altogether. By working with knowledgeable professionals and focusing on maintaining their health, individuals with disabilities can still access suitable coverage.

How does disability affect life insurance options?

According to the Centers for Disease Control and Prevention, up to 27% of American adults live with a disability. For many of these people, qualifying for life insurance can be challenging. This is because insurers view applicants with disabilities as a greater risk, and so they may struggle to find suitable coverage options. However, it is still possible for people with disabilities to qualify for life insurance, as long as their disability does not impact their life expectancy.

The nature of a person's disability will affect the available policy choices. For example, if someone is disabled due to a physical impairment like blindness or deafness, they may be able to qualify for a traditional term policy, especially if their spouse also has life insurance. In this case, most life insurance providers will allow them to purchase a policy that offers at least half the coverage their spouse has.

If a disability affects a person's life expectancy, it can limit their life insurance options. If the disability is severe or the person has other compounding health problems, most traditional life insurance providers will likely deny their application.

Disabilities can be physical or mental, and can be caused by an illness or injury, or something a person was born with. Common disabilities include cognitive conditions, hearing and vision problems, medical issues that affect movement, and mental health conditions such as post-traumatic stress disorder.

While underwriting processes vary among life insurance companies, the life insurance underwriting process revolves around predicting an applicant's life expectancy. Applicants will be grouped into a life insurance underwriting class depending on their health and other factors that can affect their lifespan. The underwriting class will help determine their rate.

Qualifying for Life Insurance with a Disability

There are a few things people with disabilities can do to increase their chances of receiving a more affordable rate and qualifying for the coverage they need:

• Work with an experienced professional: An experienced life insurance agent will know which companies are most likely to offer coverage for their condition. They can anonymously shop their application around to see who is willing to offer coverage.
• Apply for an appropriate amount of life insurance: The amount of coverage a person can get depends on their financial situation. For example, someone with a net worth of $2.5 million will have a much better chance of getting a high amount of life insurance to cover financial obligations and business succession.
• Focus on health: Since insurance companies favor applicants in good health despite a disability, it is wise to get as healthy as possible. This could include following medical treatment, exercising and eating well, regulating blood pressure, and quitting smoking.

Types of Life Insurance for People with Disabilities

The types of life insurance available for people with disabilities will depend on each individual’s risk, including overall health and life expectancy. Here are some traditional life insurance options that may be available:

• Term life insurance: With term life insurance, the policyholder chooses the length of the level term period (e.g., 20 years) and their coverage amount. If the policyholder dies while the policy is in force, their beneficiaries will receive the payout. The policy expires if the policyholder outlives the length of their term without renewing the policy.
• Permanent life insurance: Permanent life insurance typically guarantees lifelong protection and a death payout to beneficiaries, no matter when the policyholder dies. It also usually allows the policyholder to build cash value, which accumulates on a tax-deferred basis.

Life Insurance Options If You’re Denied Coverage

If someone can’t qualify for traditional life insurance coverage, there are other options available:

• Guaranteed issue life insurance: With guaranteed acceptance or guaranteed issue life insurance, applicants can’t be turned down, and there are no medical questions or life insurance medical exam. However, coverage limits are minimal, and the policies have graded death benefits.
• Service-Disabled Veterans Life Insurance (S-DVI): Some disabled veterans may qualify for life insurance through the U.S. Department of Veteran Affairs. Service-Disabled Veterans life insurance provides low-cost coverage to eligible service members with a service-related disability.
• Group or supplemental life insurance: Many employers have a group life insurance plan that provides affordable life insurance to workers, with no underwriting process required for the base coverage.
• Funeral and burial insurance: These policies typically do not require a medical exam and have minimal or no health questions on the application.
• Joint survivorship life insurance: Also known as second-to-die insurance, this type of policy insures two lives and pays out the death benefit when both policyholders die.

Life Insurance and Social Security Benefits

Whether or not a life insurance payout impacts someone's Social Security benefits depends on why they are collecting those benefits. A life insurance payout will not typically impact benefits if they are being collected due to retirement. However, if someone is collecting Social Security disability benefits, a life insurance payout or taking out a loan against their own policy's cash value can impact their benefit amount. It may even put their benefits in jeopardy.

The Supplemental Security Income (SSI) program is the Social Security program available to people with disabilities. SSI has strict asset limitations, so if someone's countable resources exceed SSI limits, their benefits may be cut or discontinued. To qualify for SSI, an individual's countable resources can't be more than $2,000, or $3,000 for a couple. While many assets don't count toward the resource limit, a life insurance payout is considered a countable asset and may push someone over the threshold.

What is the impact of disability on Social Security benefits?

Disability can have a significant impact on an individual's Social Security benefits. In the United States, the Social Security Administration (SSA) provides monthly Social Security Disability Insurance (SSDI) benefits to people with disabilities who meet certain criteria. To be eligible for SSDI, individuals must have worked in jobs covered by Social Security and have a medical condition that meets the SSA's strict definition of disability. This definition includes being unable to engage in substantial gainful activity (SGA) due to a medical condition, which means the inability to work and earn more than a certain amount each month.

The SSA's disability determination process involves evaluating an individual's work history, medical condition, age, education, and work skills. The SSA also maintains a list of severe medical conditions that are considered disabling, and if an individual's condition is not on the list, it must be deemed as severe as one that is. Benefits are typically paid out to those who are unable to work for a year or more due to their disability, with a 5-month waiting period before the first benefit is paid in the 6th month.

The amount of SSDI benefits received is based on the individual's work history before their disability began. These benefits can be impacted by other forms of income, such as workers' compensation or public disability benefits. If the combined total of SSDI and other disability benefits exceeds 80% of the individual's average earnings before their disability, the SSA may reduce the SSDI amount. However, disability payments from private sources, such as private pensions or insurance, do not affect SSDI benefits.

Additionally, life insurance payouts can affect SSDI benefits, particularly for those enrolled in the Supplemental Security Income (SSI) program. SSI has strict asset limitations, and if an individual's countable resources, including life insurance payouts, exceed the SSI limits, their benefits may be reduced or discontinued. Therefore, it is essential for individuals with disabilities to carefully consider their financial situation and how it may impact their Social Security benefits.

What are the insurance options for people with disabilities?

People with disabilities have several options for health and life insurance coverage. Here are some of the insurance choices available:

Health Insurance Options

People with disabilities can qualify for health insurance coverage through various programs:

• Medicare: If you have a disability and are under 65, you may be eligible for Medicare. To qualify, you must meet specific criteria, such as receiving Social Security Disability Insurance (SSDI) for at least 24 months (with some exceptions) and meeting the Social Security Administration's standards for disability.
• Medicaid: If you or the child in your care has a disability, you may be eligible for Medicaid. To qualify, you must meet the Social Security Administration's standards for disability and other income and living requirements. There are also specific programs within Medicaid, such as the Medicaid Purchase Plan (MAPP) and Katie Beckett Medicaid, which cater to people with disabilities.
• Marketplace Plans: If you don't have health coverage, you can explore options through the Health Insurance Marketplace. You can fill out an application to determine your eligibility for savings on a private health plan or coverage through Medicaid.

Life Insurance Options

Regarding life insurance, people with disabilities should be aware of the potential impact on their Social Security benefits:

• Social Security Disability Benefits: Receiving a life insurance payout or taking out a loan against your policy's cash value can affect your Social Security disability benefit amount. It may even jeopardize your benefits if it pushes you above certain asset limits.
• Supplemental Security Income (SSI): SSI has strict asset limitations. A life insurance payout or policy with a significant face value may exceed the individual or couple asset limits, resulting in decreased or discontinued SSI benefits.

It is important to consult a financial advisor or tax attorney to navigate the complexities of insurance options and their interactions with disability benefits.

How does disability affect insurance underwriting?

Disability insurance underwriting is strict because insurance companies have only one chance to evaluate the potential risk, and the risk factors for disability are hard to evaluate. Disability claims can also cost insurance companies a great deal of money. The underwriting process is when the insurance company measures the risk that you'll become disabled and need to receive benefits.

The underwriting process has three main parts: financial, medical, and occupational. The process takes approximately four to six weeks but can take longer if there are delays in collecting necessary information like medical records. The underwriter assesses your job, income, and personal information (age, gender, health, and hobbies).

Your occupation has a large impact on disability underwriting and whether the insurance company considers you risky to insure. Some occupations come with higher chances of injury than others. The underwriting process will look at your work history and job responsibilities, then assign you an occupational classification (a risk rating). Occupation classes usually have a number and letter designation (e.g. 1A to 5A) — a higher number means you pose less risk, which could also mean lower premiums.

Financial underwriting helps the insurer decide how much your monthly benefit should be if you make a claim. A disability policy is meant to protect your income, so the underwriter will look at your financial details to make sure you don’t under- or over-insure yourself. The underwriter also uses your financial information to confirm that you can afford the premium payments. A higher income usually means you’ll get larger disability benefit payments, which could mean higher premiums, too.

The insurance company will look at your health history for signs that you might become seriously ill or injured and need to file a disability claim. This takes into account information like age, gender, health and lifestyle habits, hobbies, and medical history. Pre-existing conditions may not be covered by your insurance company.

The underwriter will also want to know if you have other disability coverage. Insurance companies want you to get better and return to work rather than living off your disability income forever. To give you an incentive, they limit the amount of coverage you can buy, based on the amount of coverage you already have. They take into consideration what other private disability policies you own, what group insurance disability benefits you will be entitled to, and your Social Security disability coverage. Your new policy will be designed to supplement, not add to, the benefits of any other coverage you have.

Frequently asked questions