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What is Disability Insurance?

Disability Insurance (DI) serves to replace 40 to 60 percent of an individual's gross income, tax free, should a sickness or injury prevent the individual from earning an income in his or her occupation. The most common DI policies require a ninety-day waiting period from the onset of the disability, called the Elimination Period, before the individual can apply for disability benefits. An individual can choose a shorter Elimination Period; however, this increases the premiums on the policy. Elimination Periods can be as short as thirty days or as long as 720 days.

Once the Elimination Period has expired, the individual can apply for the disability benefits, provided that he or she is disabled under the terms of the policy. In general, DI policies contain one of three definitions for disability.

"Own-Occupation Disability" defines disability as "The inability to perform the major duties of your occupation. The insurance company will consider your occupation to be the occupation you are engaged in at the time you become disabled. They will pay the claim even if you are engaged in another occupation." This definition represents the broadest terms under which an individual can claim a disability. Under Own-Occupation Disability, an individual can continue to work in another occupation, provided that the sickness or injury prevents the individual from performing the occupation that he or she engaged in prior to the sickness or injury. Under this definition, the DI insurer does not penalize the disabled individual for attempting to remain productive despite their sickness or injury.

The "Income Replacement" definition of disability has become the most common definition in the insurance market. "Income Replacement" defines disability under terms such as, "Because of sickness or injury you are unable to perform the material and substantial duties of your occupation, and are not engaged in any other occupation." This definition still measures disability by the individual's ability to perform the occupation he or she engaged in prior to the sickness or injury. The critical difference in this definition is that the insurer will reduce the disability benefit by any amount the insured earns in a different occupation. Therefore, if an individual who qualifies as disabled wishes to work, the insurer will reduce the benefits the DI policies pays out by the amount that the individuals new job pays. By penalizing those individuals who chose to work, "Income Replacement" provides a disincentive for individuals to find work that they can perform after suffering from a disability.

Finally, the "Gainful Occupation" definition of disability usually appears in language such as, "Because of sickness or injury you are unable to perform the material and substantial duties of your occupation, or any occupation for which you are deemed reasonably qualified by education, training, and experience." This definition of disability gives nearly complete discretion to an insurance company in determining whether an individual has a disability, because the types of occupations for which a person could "reasonably qualify" represents a broad range of occupations. While it is unlikely that an insurance company would require a dentist to work at a fast food restaurant, the use of the "Gainful Occupation" definition in a DI policy makes it more likely that litigation will arise if an individual attempts to make a claim on a policy.

In addition to these definitions, many DI policies identify "Presumptive" disabilities. Presumptive disabilities are a list of injuries that automatically qualify as disabilities, and usually includes the loss of hearing, sight, speech, or the use of any two limbs. The major difference between contracts is the use of the terms Total, Permanent, and Irrecoverable. Under a presumptive disability that requires total loss, an individual is protected when they lose total loss of sight, hearing, speech, or use of two limbs, even if that loss is only temporary. Under the permanent and irrecoverable loss definition of presumptive disabilities, temporary losses of sight, hearing, speech, or use of two limbs are not covered. The distinctions in definition help to determine the utility of the presumptive disability clause to individual DI policyholders.

The majority of litigation concerning Disability Insurance policies focuses on the definition of disability. For this reason, it is important that an individual understand the terms of a DI policy and select the policy the best serves his or her needs. Such diligence, however, cannot prevent all litigation from occurring. As such, it may help to understand the basis under which people litigate most DI claims.

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