Disability Income Insurance

What if you lost your ability to earn your income? A serious sickness or accident can affect your earning power and your future. Maybe you think it won't happen to you, but a disabling illness or injury may be more likely than you think.

A long term disability can keep you away from work for months, or even years.

Disability insurance can help secure your quality of life---and your plans for the future--while you recover from a disability that keeps you from working and earning your income. 

If you'd like a quote, please go to"Request a Quote" for Disability Insurance.

 

The Need for Disability Income Insurance

Expenses associated with a disability can quickly exhaust your savings and create substantial debt.

Just as life insurance provides needed funds in case of the insured's death, disability insurance provides needed funds in the event of a disability. The amount of your insurance benefit, the length of time benefits are paid and premiums are based on age, income, gender, and occupation.

Key to the disability insurance planning process, is to ask yourself " If I became disabled, where will the money I need come from"?  When asked, some of the common replies are:

  • From my employer provided disability insurance? Even if you have benefits through your employer, they may not be adequate over the long term. Many employer plans are designed to replace only about half your net income and are taxable.
  • From Social Security. Maybe not. Half of all disability claims are denied initially because the applicant doesn't qualify for the strict definition of disability used by the government. Appealing and reapplying again takes more time often up to a year or more.
  • I have personal savings. Even if you have saved 10 percent of your income for 10 years, you'd likely end up using most of it during just 1 year of disability. Not to mention what you'll do for the future if long term savings were depleted (before you planned to use them) to cover current expenses due to a disability.
  • My spouse or family can cover the shortfall. Can one income realistically be enough to cover ALL your living expenses that were once covered by two incomes? Could your spouse or supporting family member, earn as much while trying to juggle work, running a home and taking care of you while you're disabled? Family members may be able to offer short term financial assistance; but their resources are finite too.

Disability Defined

Disability income policies define what constitutes a disability that triggers payments. There can be substantial differences in how disability is defined, so it's important to understand their definition.

Most insurers use a two-step definition:

  • First, total disability is defined as the inability of the insured to perform the duties of your own occupation for a specified period of time.
  • Second, after the specified period ends, total disability is redefined as the inability to perform duties of any gainful occupation for which you are reasonably suited by education, training or experience.
  • Some insurers use more restrictive definitions, other use less restrictive definitions. It is important to understand the definition in a particular disability income policy.

Disabilty Insurance Policy Premium Factors

  • Disability income plans have a waiting period called an "elimination period (EP)" (similar to a deductible on medical insurance). During the EP, the insurance company pays no benefits. 
  • Disability income benefits are available once a disability continues beyond the EP. For example, if your policy has a 60 day elimination period, no benefits are paid during those 60 days. Long term disability policies pay monthly benefits so your first benefit check will be paid at the end of the following month (on day 90).
  • Policies with a shorter EP have higher premiums since the insurance company will become obligated to pay benefits sooner rather than later.
  • Policies with a longer EP have lower premiums since there is a chance the insured will recover before payments begin (or soon after payments begin).
  • Another factor impacting premiums is the length of the benefit period (discussed below). Longer benefit periods have higher premiums. 

Disability Insurance Underwriting Factors

  • A stable long-term financial history in a current occupation is viewed positively.
  • An applicant in recent start up business or in a new or unrelated occupation is viewed less positively (thus a higher premium or lower benefit).
  • Your health history is also reviewed. Certain health conditions are viewed as:
    • acceptable
    • acceptable but at a higher premium
    • excludable (no benefits are payable due to claim for a specific condition)
    • or uninsurable
Determining Disability Income Benefits
  • Disability Insurance payments are INCOME TAX FREE and designed to replace your take home (net after tax) earned income.
  • As such, most disability insurance plans provide a benefit of 40% to 70% of your gross salary.
  • If you are self-employed, disability insurance benefits are based on your taxable net adjusted income after expenses.
  • If a substantial portion of your taxable income is from unearned income sources (dividends, interest, rental income) you may not qualify.
  • The length of time benefits are payable is called the Benefit Period 
  • Long term disability insurance pays benefits on a monthly basis. For example; if your policy has a 5 year benefit period and you had a claim; you would receive your monthly checks during the 5 years. After that, no further benefits are payable. 
  • At certain ages, disability insurance companies offer a reduced benefit period or  decline to offer any coverage.
  • Most occupations are offered 2 or 5 year benefit periods; although many occupations are offered coverage to age 65 or longer.
  • There are certain occupations where no coverage may be available.
  • Home based businesses are evaluated on a case by case basis for eligibility.
  • If your disability only allows you to work part time, some policies encourgage your recovery & return to work by offering a (reduced) benefit for a partial disability to supplement your transitional earnings.

 Tax Considerations

  •  When individuals pay disabilitiy insurance premiums; they are not tax-deductible therefore any benefits paid will be received income tax-free.
  • When employers pay premiums on a disability income policy, the insured employee must pay income taxes on any benefits received. The premiums are tax-deductible by the employer.
  • When the premiums paid by the employer are included in employee's taxable income, the benefit remains tax free. The premiums are tax-deductible by the employer.