Life Insurance And Disability: What's Covered?

Life insurance and disability insurance are two distinct types of insurance that serve different purposes. While life insurance provides financial protection to beneficiaries upon the insured person's death, disability insurance offers income protection if the insured becomes disabled and unable to work. It's important to understand that life insurance policies typically do not cover disabilities by default. However, there are optional riders or add-ons available for life insurance policies that can provide financial assistance in the event of a disability. These riders offer additional coverage and customisation to meet specific needs, ensuring income protection during periods of disability. It's crucial to carefully review the terms, conditions, and limitations of life insurance policies, including any available riders, to make an informed decision about the most suitable coverage options.

Life insurance and disability insurance are different

Life insurance and disability insurance are two distinct types of insurance policies that serve different purposes. While both are designed to provide financial protection, they are triggered by different circumstances.

Life insurance is an agreement between an individual and an insurance provider, where the insurer pays a lump sum, tax-free benefit to a chosen beneficiary upon the insured person's death. The policyholder pays a monthly or annual premium, which is a small amount over the length of the policy. The primary purpose of life insurance is to provide financial protection to beneficiaries in the event of the insured person's death.

On the other hand, disability insurance, also known as long-term disability insurance, is designed to provide income protection to the policyholder during their lifetime. If the insured person becomes disabled due to an injury or illness and is unable to work, disability insurance will make benefit payments directly to them. These payments serve as income replacement while they are alive and unable to earn an income.

It is important to note that life insurance policies do not typically cover disability by default. However, some life insurance companies offer optional riders or add-ons that can provide additional coverage in the event of disability. These riders may include features such as a waiver of premium payments or access to a portion of the death benefit while the policyholder is still alive.

In contrast, disability insurance policies focus solely on providing income protection during the policyholder's lifetime. This type of insurance is specifically tailored to those who have lost income due to a disability and ensures they receive financial support while they are alive.

In summary, life insurance and disability insurance serve different purposes. Life insurance provides financial protection to beneficiaries upon the insured person's death, while disability insurance offers income replacement to the policyholder during their lifetime if they become disabled and unable to work. While life insurance policies may offer disability riders, disability insurance provides comprehensive coverage specifically tailored to income protection during disability.

Riders can be added to a life insurance policy to cover disability

With long-term disability, your income is protected while you are still alive. If you were to become seriously ill and your new disability prevents you from working and earning an income, a long-term disability policy will make benefit payments directly to you while you are unable to work. Therefore, for disability payments to be distributed, the policyholder must remain alive. With a life insurance policy, the death benefit is paid to your beneficiaries to help replace some of your lost income upon your death.

However, many life insurance policies have optional riders that can be added when purchasing a policy that hinges upon medical conditions. They can include the accelerated death benefit rider and the waiver of premium rider. The accelerated death benefit rider allows you, as the policyholder, to use all or a portion of the policy death benefit for various expenses in the event you are diagnosed with a chronic or terminal illness. If you've been diagnosed with a certain disease or are suffering from an illness that significantly affects your quality of life or requires constant care, the insurer will pay you the death benefit or a portion of it prior to your death.

During a period of disability, it may become difficult to keep a life insurance policy in force. If you were to become totally disabled, unable to work, and couldn't afford to pay your life insurance premiums, the waiver of premium rider could allow you to stop making your premium payments while continuing to keep your policy in force until you are able to return to work full-time. It can help ensure that your policy remains in force while you are unable to work - a better choice than allowing your policy to lapse due to temporary financial challenges. When the waiver of premium rider is in effect, your life insurance policy remains in force - just as if you were making premium payments yourself.

There are several other riders that can be added to a life insurance policy to cover disability, including:

• Total Disability Waiver of Premium Rider: Under this rider, life insurance premiums are waived if the life insured suffers a permanent total disability. Total Disability Waiver of premium covers disabilities due to accidents and illnesses. To claim under this rider, the life insured must: not be able to perform the essential duties of their occupation, not be engaged in any other occupation, and be receiving medical care for the condition that has caused total disability.
• Disability Income Rider: A Disability Income rider provides monthly payments to the life insured in the event they become disabled and unable to work. The policyholder will need to choose the time period for which the payments are to be made and the monthly payment (which is usually capped). This rider typically has a 30 or 90-day waiting period, with retrospective payments that start after the waiting period is over.
• Mortgage Disability or Credit Disability Insurance Rider: A Mortgage Disability rider covers all or part of the life insured’s line of credit or monthly mortgage payments in the event of their temporary or permanent disability. The payments are made for a specified period, such as 2 years from the disability, 5 years from the disability, or up to the age of 65. Credit riders typically have a waiting period of 90 days, although they can be retroactive to 31 days in the event of disability from an accident. Proof of the outstanding loan is usually required at the time of the claim.

Life insurance for disabled adults

However, it is important to note that for traditional life insurance types, your overall health and life expectancy will be factored into your eligibility and your rate. If your disability affects your overall health and/or life expectancy, it can change your risk and therefore your life insurance premium. For example, if your disability is the result of a chronic illness or other health issue that is expected to shorten your lifespan, your premium may be higher.

If you have trouble qualifying due to your disability or health-related factors, consider applying for a policy that doesn't require a medical exam. These include:

• Simplified issue: These term and permanent life insurance policies work like traditional ones but don't require a medical exam. They typically have some health-related questions in the application and can be more expensive and provide less coverage than traditional policies.
• Guaranteed issue: Guaranteed issue policies don't require a medical exam and don't ask any health-related questions in the application. They are more expensive and provide less coverage, but they can be a way for disabled adults to get a policy if they are otherwise struggling to qualify.

Additionally, adding a life insurance rider to your policy can provide support for adults with disabilities. Riders that may be useful for disabled adults include:

• Accelerated death benefit rider: If you're diagnosed with a qualifying serious or terminal illness, this rider could allow you to use some of your policy's death benefit while you're alive and the policy is still active.
• Term conversion rider: This gives you the option to convert your term life insurance policy to a whole life policy at the end of the policy's term, extending coverage through the end of your life and giving you a cash value feature.
• Guaranteed insurability rider: Typically only available on permanent life insurance policies, this rider gives you the option to increase your death benefit at certain points in your life without undergoing a medical exam.
• Long-term care rider: Also typically reserved for permanent life insurance policies, this rider gives you the option to use your death benefit for qualifying long-term care costs.

It is important to note that denying someone a life insurance policy solely because they have a disability may violate the Americans with Disabilities Act. However, insurance companies do factor in your life expectancy when evaluating your risk, and life expectancy can be affected by health conditions.

Qualifying for life insurance with a disability

According to the U.S. Census Bureau, 27% of American adults live with a disability. For those with disabilities, qualifying for life insurance can be challenging. Insurers often view applicants with disabilities as a greater risk, and so it can be harder to find suitable coverage options. However, it is not impossible, and there are steps you can take to increase your chances of qualifying.

Firstly, it is important to note that if your disability does not affect your life expectancy, you can still qualify for life insurance. The nature and severity of your disability will determine your available policy choices. For example, if you are disabled due to a physical impairment, such as blindness or deafness, you may be able to qualify for a traditional term policy.

However, if your disability does affect your life expectancy, it can impact your options. You may face higher premiums, limited coverage options, or even denial of coverage. Severe disabilities, especially when combined with other health issues, may result in your application being denied.

Increasing Your Chances of Qualifying

Even if you have a disability, there are things you can do to increase your chances of qualifying for a life insurance policy:

• Work with an experienced professional: An experienced life insurance agent can determine which companies are more likely to offer coverage for your specific condition. They can also anonymously shop your application around to find insurers willing to cover you.
• Apply for an appropriate amount of coverage: It is crucial to apply for a reasonable amount of coverage based on your income prior to your disability. Applying for too much coverage is a common reason for application denial.
• Focus on your health: Insurance companies will want to see that you are actively working to improve your health. This includes following medical treatments, exercising, eating well, regulating your blood pressure, and not smoking.

Alternative Options

If you cannot qualify for traditional life insurance, there are still alternative options available:

• Guaranteed issue life insurance: With guaranteed acceptance, there are no medical questions or exams, and you cannot be denied. However, coverage limits are minimal, usually ranging from $5,000 to $25,000. These policies also have graded death benefits, meaning your beneficiaries will not receive the full death benefit if you pass away within 2-3 years of buying the policy.
• Group or supplemental life insurance: These policies are often offered through your employer, and you typically do not have to go through any underwriting process. Base coverage is usually equal to one year of your salary.
• Funeral and burial insurance: These policies are designed to help your beneficiaries pay for final expenses such as funeral costs, and they typically do not require a medical exam.
• Veterans Affairs Life Insurance (VALife): For veterans with service-related disabilities, VALife offers guaranteed acceptance whole life coverage in $10,000 increments up to $40,000.

Disability insurance riders

• Automatic increase rider: This rider raises your monthly benefit for a few years without requiring you to go through the underwriting process again.
• Catastrophic disability rider: This rider pays additional benefits on top of your regular benefits if you lose cognitive function or the ability to perform two or more activities of daily living, such as bathing, eating, or getting dressed.
• Cost-of-living adjustment: Also called the COLA rider, this add-on increases your monthly benefit to account for inflation.
• Future increase option: Also known as a future insurability rider, this add-on lets you increase your disability benefits in the future without the hassle of the medical underwriting process.
• Guaranteed renewable and non-cancelable: This rider guarantees that your insurance company cannot cancel your policy or raise your rates as long as you continue to pay your premiums on time. This is usually a standard feature of disability insurance policies.
• Lifetime extended benefit: The lifetime extended benefit allows you to continue collecting disability insurance benefits for total disabilities beyond your policy's expiration date.
• Own-occupation rider: This rider changes the policy's definition of what a disability is and when you receive benefits. With own-occupation disability insurance, you receive benefits as long as you can't do the specific job you were trained for, even if you get a different job.
• Partial or residual disability benefit rider: This rider lets you collect benefits if you can still perform some, but not all, of your job due to a disability.
• Presumptive total disability: This rider allows you to receive your disability insurance benefits immediately after losing your hearing, speech, sight in both eyes, or the use of at least two limbs, even if you're still able to work.
• Rehabilitation waiver: This rider helps you pay for the cost of occupational or vocational rehab after a disability. A rehabilitation waiver can be valuable if you have an own-occupation policy, as you can collect the benefit while still working another job.
• Retirement protection rider: The retirement protection rider covers payments you would have made to a retirement account, such as a 401(k) or IRA, by paying the funds into a trust while you can't work.
• Return of premium rider: This rider returns a part of your paid premiums when you cancel a policy, allowing you to receive some money back if you never use your disability benefits.
• Social insurance benefit rider: With this rider, you agree to apply for Social Security disability insurance (SSDI) in the event of a disability. If you qualify, your insurer will subtract your SSDI benefit from the amount it pays you and lower your premiums.
• Student loan protection rider: This rider helps you continue making student loan payments after you file for disability insurance.
• Survivor benefit or death benefit: This disability rider pays money to your beneficiary if you die while receiving disability benefits.
• Unemployment premium suspension: With this rider, you can stop paying premiums when you're unemployed. You'll still own the policy, but your coverage will be suspended during that time.
• Waiver of premium rider: This rider waives your premiums after you file a claim, so you don't have to pay your premiums until you're able to work again.

Frequently asked questions