Disability Income

Disability Income Insurance

Disability insurance protects your source of income if injury or illness limits your ability to work. Also known as disability income insurance and income protection insurance, it is designed to replace a portion of your monthly earnings while you are disabled. There are various types of disability insurance, such as short-term and long-term disability insurance, and ways to get coverage, like as an individual and as part of a group.

Typically, it is recommended that working individuals spend between 1 percent and 4 percent of their annual income on disability insurance. It’s possible that you pay more or less than those ranges depending on your coverage needs. How much you pay in disability insurance premiums is based on the likelihood of you filing a claim. There are a number of factors that disability insurance carriers use to determine your risk level.

We recommend taking inventory of your monthly obligations, necessities, and investing activities to calculate your coverage needs. Obligations include mortgage/rent payments, student loan payments, credit card payments, and any other monthly debt obligations. Necessities include utilities, groceries, gas, and any other recurring expenses for you and your dependents. You will also want to consider the amount of emergency savings that you already have.

Most long-term disability insurance carriers have special programs that enable applicants to skip the standard medical exam during underwriting. Insurers offer this option to select applicants as a way to save on the cost of conducting an exam and sending samples to a lab. These programs are often restricted to certain occupations, benefit amounts, and age limits.

Disability income insurance is an agreement made between insurance companies and policyholders. In exchange for the monthly payments you make, the insurance company agrees to pay you a monthly benefit amount if you suffer a disability that affects your ability to work.

Disability insurance is designed to replace a percentage of the income you lose due to your inability to earn a paycheck. Having disability insurance means being able to meet your financial obligations — paying bills, covering household expenses, providing for your family — while you’re unable to work.

A disability insurance policy will spell out:

• How much you will pay in premium. Just like any other type of insurance, this is the payment you must make each month to keep your coverage in force.
• How the policy defines disability. Some policies will pay out a monthly benefit if an injury prevents you from working at your normal job, but allows you to do other types of work that will nonetheless reduce your income. Other policies will not pay benefits if you are able to work in another type of profession, even if you earn less money.
• How much you will receive in benefits. In most cases, your benefit amount will be a percentage of your income. Policies typically pay 60 to 80 percent of what you earned before your disability.
• How long your benefits will last. The benefit period may be a certain number of months or years, or up to a certain age.

Employer-sponsored coverage is a great start, but it may not be enough to maintain your lifestyle if you become disabled. Most group plans only cover a small percentage of your income. Additionally, any benefits you receive from your employer plan will be taxed as ordinary income if you become disabled. On the other hand, the benefits you receive from an individual policy will be tax-free since the premiums are paid with after-tax money.

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