Disability insurance

This page was last updated on 1 June 2021

Disability Insurance In 2021 – All you need to know

According to recent statistics from the Council for Disability Awareness, a quarter of people in their twenties have a large risk of experiencing a disability before they retire. These disabilities take people away from their desk for 3 years, on average.  Not being able to work for a long period of time would bring financial problems for many workers. This is where income protection insurance can help.  Below we discuss one type of protection, known as long term disability insurance.

Topics that you will find covered on this page

You can listen to an audio recording of this page below.

What is long-term disability insurance?

If you are involved in an accident, suffer sickness, or experience an injury, you might be left with a disability. Regardless of whether this is a short term disability or a long term disability, it might leave you unable to work. This is where your disability insurance policy can help. 

Disability policies are a type of income protection insurance. If you are unable to work, your benefits package will pay a monthly benefit amount to replace your lost income. Disability insurance policies typically pay between 50-70% of your salary. 

Some employers offer coverage as part of their employee benefits. Companies that do this typically only offer short term disability insurance, though. Before getting a quote, check exactly what your workplace offer. 

What is the difference between short term and long term disability coverage?

Short term coverage is a disability policy that will normally pay benefits for 30 days to a year. This type of plan is more likely to be included in your employment package since it is cheaper. It is designed to kick in once you run out of statutory sick pay.  

However, more serious health problems could leave you out of work, and needing your disability benefit, for a longer length of time. 

Long term disability insurance can pay disability benefits for anything from 2-10 years. The exact duration depends on your policy terms, and whether you return to work or not. 

Essentially, long term disability insurance provides a bigger safety net. If you are the main breadwinner for your family, have little savings, and/or could not afford your cost of living without your salary, you might want to consider this option.

Here is a short video about the principles of disability insurance.

What does disability insurance cover?

Any illness or injury that results in disabilities that leave you out of work should be covered by your insurer. Therefore, illnesses such as cancer, and injuries such as falls and car accidents are all eligible for a payout.  

Accidents that happen whilst at work, however, are normally not covered. Such incidents are instead covered by workers’ compensation insurance. 

With so many different policies on the market, you should check exactly what events are covered with your provider. Different insurers might not cover the same circumstances, so be sure to check the fine print of your contract.  

Better still, get a professional to have a look through the terms and conditions of your different quotes. An expert adviser can help you consider your needs, and decide what service and providers will give you the best support. 

Will insurance cover long term care?

Disability insurance gives a monthly benefit to employees that are unable to work. These payments replace a portion of the individuals lost earnings, to help them meet their living costs. Unfortunately, the insurance payments are not designed to cover the costs of long term care. 

If you do suffer a disability, treatment and rehabilitation can be expensive. If treatment costs are a concern of yours, there are alternative sources of protection out there. Seek advice from experts, who can point you in the right direction. 

How long will my policy last?

This will depend on the specific terms of your policy and is something you can decide with your insurer. Normally a policy will last for 2 to 10 years, with benefits being paid until you either return to work or until the policy ends. 

Sometimes, a policy will continue to pay out until the employee reaches retirement age. This can be useful, as some people will never be able to return to the office. However, it can be more expensive. 

If I already have a disability can I still get insured?

If you already have a disability, you can still reap the policy benefits. However, insurance companies generally won’t cover you for your existing condition. 

You will need to give details of your disability on your initial application. Then, when calculating your quotes, your existing conditions will be taken into consideration. Your insurer will use their knowledge of your risks to decide what to cover in your policy. 

If you fail to declare your pre-existing disability when you take out your disablement insurance, future claims you make might be denied. 

"If you are involved in an accident, suffer sickness, or experience an injury, you might be left with a disability. Regardless of whether this is a short term disability or a long term disability, it might leave you unable to work. This is where your disability insurance policy can help. "

Do I have to pay tax on the benefits?

If you receive monthly benefits from your long term disability insurance these are unlikely to be tax-free. 

The exception to this is if you pay your premiums personally, rather than having employment cover. In the instance that you pay your own long term disability insurance premium, your benefits might not be taxed. 

In some cases, other arrangements can be made so that your policy is not subject to taxes. Speak to an advisor to see if this might be an option, given your situation. 

What are the advantages of disability insurance?

If you cannot work for a long period of time, you may run out of sick pay entitlement. Whilst some employees will offer protection for a short term disability, it is rare that long term cover is available through your work. 

Critical illness cover can be a useful solution, but might not pay out in as wide a range of circumstances as disability insurance will. Furthermore, it only pays a one-off lump sum, regardless of how long you are out of work for. 

For those with dependents such as children, or major outgoings such as a mortgage on a house, disability insurance might be better. This is because it gives a program of regular payments and ensures a regular income is received.

What are the alternatives?

If your job role does not come with disability insurance, and you do not want to take out independent disability cover, there are other options out there. 

One option could be to make regular investments in a savings plan so that you have a stash of cash should you need a replacement income. 

You could also consider other types of health insurance, such as critical illness cover. Furthermore, the state benefits on offer might be sufficient for your needs if you did suffer an accident or illness.

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Should I get disability insurance or critical illness cover? 

The main difference between the two is the type of benefit you receive. Disability insurance gives you a regular income for a set period of time. 

Critical illness cover (CIC) gives you a lump sum payment. 

The type that is best for you depends on your circumstances. Often, the definitions of illnesses that are eligible for critical illness cover are more limited. 

For example, if you lack the ability to budget well, or have commitments such as mortgage payments for your home, disability insurance might be a better form of accident cover. However, in the event you suffer a major health complication, CIC might be better. 

With disability insurance you only receive benefits whilst you are out of work, until you reach retirement age, or until your policy ends. With CIC, you can continue to work after receiving your lump sum. 

Sometimes, your life insurance policy will include CIC, in which case you might already be covered by an incapacity to work benefit. Speak to representatives to understand which cover is best for you. 

How do I get disability insurance?

First, check what cover your employer offers to their workforce. Make sure to question whether the cover is short term or long term, as this could have a big effect down the line. 

If your employer doesn’t offer disability insurance, or the form offered has limitations, you’ll need to take out cover independently. There are many discrepancies between providers and policies, so use online guides and an independent advice company when making your decision. 

Where can I buy insurance?

If your place of work does not offer group disability insurance, you will need to seek cover independently. Some of the top providers in the UK are Aviva, British Friendly, The Exeter, Legal and General, LVE, Royal London, and Vitality. 

However, these are just a small group of the many providers that are out there. For this reason, you should shop the market carefully, and discuss your needs and options with an expert and independent adviser. 

When should I buy my cover?

The majority of people prefer guaranteed premiums, over reviewable premiums that are subject to inflation. Because of this, it is normally a good choice to take out your policy at a younger age.

The reasons for this are simple. You are less likely to have an incident that causes you to become disabled when you are younger. Therefore, if you take out long term disability insurance when you are young, you can lock in cheap premiums for the future. 

On the other hand, there is a chance you never need to go through the claims process. By taking out a policy at a young age, you might end up paying a lot to the insurance company, without ever getting the payback. 

Seek expert advice to discuss when is best for you to start your long term disability insurance. This will depend on a variety of factors, including your occupation and lifestyle. 

Can I get insurance if I’m self-employed?

Injury or illness can be even riskier for self-employed workers. This is because they cannot claim sick pay. Should such an individual become disabled as a result of illness, the financial loss can be huge. 

Luckily, you can still protect your finances with long term disability insurance. As long as you work a minimum of 16 hours per week, and can give evidence of the value of your income, you are eligible for insurance. 

Is disability insurance based on income?

Yes, the payment you get is a percentage of your jobs current salary. The level of cover can range from 50-70% of your salary, depending on the policy you choose. The level of cover, along with other factors, affect the price of your premiums. 

What is the average cost of disability insurance?

Ultimately, the cost of ones disability insurance will change depending on their preferences and lifestyle. 

For example, accident insurance is likely to be more expensive for those in high-risk occupations. Insurers will also want to look at your medical records, and any pre-existing health conditions might affect the premiums. 

You will need to decide on the amount of disability benefits you wish to receive, the deferment period, and the length of the policy term. These also affect your premiums. 

Typically, people pay anywhere between £20 and £100 per month. This is for the UK, policies and costs will differ for other countries. 

What is the deferment period?

The deferment period is also called the elimination period. The definition of this is ‘the time between one’s disability onset and when they start receiving benefits’. 

The deferment period will affect the premiums you pay. Generally, if you choose a longer elimination period the premium offers you get will be cheaper. However, a long period of deferment can be a risk for many. 

You should think about how long you could survive without your salary, in the event you were unable to go to work. Do you have access to savings? Do you have debts to pay off, such as a mortgage?  These are just a few examples of things to consider when you set your premiums. 

You should also check how long your standard sick leave will be covered by statutory sick pay. Most people do not need their long term disability insurance benefits to begin until the sick pay that comes with their job ends. As a worker, you can check this with your boss. 

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Learn more about health insurance and related topics

Permanent Health Insurance

Permanent health insurance is one type of protection available for your wages. A PHI policy offers financial protection and peace of mind, in the event that you suffer an illness or disability that takes you out of work.

Whole Life Insurance

Whole life insurance is a type of life insurance policy that, unlike term life insurance, provides life insurance cover for the rest of your lifetime. Read more about them here.

Family Income Benefit

Family income benefit is one of the three main types of life insurance policy. It guarantees your loved ones a regular monthly income if you die during the term.  Read more about it here and see if it could help you.

Disability Insurance

Disability policies are a type of income protection insurance. If you are unable to work, your benefits package will pay a monthly benefit amount to replace your lost income.

Group Income protection

Group Income Protection (gip) gives employees that find themselves unable to work due to illness or injury a replacement income. It is salary protection insurance, taken out by companies as an employee benefit.

Endowment Policy

An endowment policy is a type of life insurance policy. As well as acting as a life insurance policy, it is also an investment fund. Read more about them here.

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