What is Disability Income Insurance?
For most people, an illness or injury that stops their paychecks would create hardships for them and their families. In the event of a disability or long-term illness, disability income insurance provides cash for spending on mortgage payments or rent, groceries, utility bills, car payments, etc. And you can avoid depleting savings for your children’s education or your retirement. This policy can pay also for training or other assistance needed to return to work.
3 Categories of Disability Income Insurance:
Individual Disability Income
Policies bought by individuals to guarantee income when government-sponsored or employer-sponsored coverage is not enough.
Government-Sponsored
Programs include Workers’ Compensation and the Social Security Disability Insurance (SSDI) program.
Private Employer-Sponsored
Group disability plans provide income replacement for disabled employees.
Protect Income
Helps protect a portion of earned income, usually 50-60%.
Complementary
Can complement any existing disability benefit coverage
Portable
Is fully portable so the policy stays with the owner regardless of employer.
Tax-free Benefits
Usually provides benefits tax-free.
Fit your Budget
Offers flexible solutions for various income levels.
Business Protection for Small Business Owners
If you own a small business, disability insurance is especially important. In addition to standard disability income replacement, business protection is also available. When you return to work full-time and are re-establishing a customer or client base, recovery benefits apply. Overhead expense coverage pays for specific office expenses.
For jointly owned businesses, there is a disability buy-out policy that provides funds for one partner (or the business entity) to buy a disabled partner’s share of the business. And key-person insurance protects a firm against the loss of income resulting from the disability of a key employee.
Disability Income Insurance - FAQ's
What is the likelihood of a disability?
The chances of an illness or disability befalling you aren’t quite as remote as you might think. According to the Council for Disability Awareness:
A Typical Female - Age 35, 5’4", 125 Pounds, Non-Smoker, who works mostly an office job, with some outdoor physical responsibilities, and leads a healthy lifestyle has the following risks:
24% - Chance of becoming disabled for 3 months or longer during her working career.
38% - Chance the disability would last 5 years or longer.
82 Months - Average duration of a disability for someone like her.
If this same person used tobacco and weighed 160 pounds, the risk would increase to a 41% chance of becoming disabled for 3 months or longer.
A Typical Male - Age 35, 5’10", 170 Pounds, Non-Smoker, who works an office job, with some outdoor physical responsibilities, and who leads a healthy lifestyle has the following risks:
21% - Chance of becoming disabled for 3 months or longer during his working career.
38% - Chance the disability would last 5 years or longer.
82 Months - Average length of a disability for someone like him.
If this same person used tobacco and weighed 210 pounds, the risk would increase to a 45% chance of becoming disabled for 3 months or longer.
Most Common Causes of Long-Term Disability:
27% - Injuries to Muscles, Bones, or Joints
12% - Heart and Blood Vessel Problems
12% - Spinal System Diseases
10% - Cancers
6% - Mental Disorders
How are premiums calculated?
- Definition of disability: A policy that pays benefits if you are unable to perform the duties of your own occupation is more expensive than a policy that pays benefits if you are unable to perform the duties of any job for which you are reasonably qualified.
- Age: Younger people pay less per year for a policy than those who are older and more likely to become disabled.
- Gender: Women usually pay more than men for an individual policy because claim costs are higher for women than men.
- Type of job: Expect to pay more for a policy that covers a high-risk occupation compared to a low-risk line of work.
- Current health status: Your health status determines whether you are eligible for standard rates or rates that are higher. A policy also may exclude from coverage any health conditions that exist before the policy is issued. Some companies only cover disability and exclude illness.
- Smoker/tobacco use: Most companies either give a discount to non-tobacco users or add a surcharge to the premium for tobacco use.
- Benefit amount: Policies that replace more of an individual's salary, say 80 percent instead as opposed to 60 percent, are more expensive.
- Benefit period: The shorter the benefit period, the less expensive the policy. For example, a policy with a two-year benefit period costs less than a policy that pays benefits to age 65.
- Extent of disability: A policy that pays benefits only if the policyholder is totally and permanently disabled costs less than a policy that also pays benefits for a partial or temporary disability.
- Optional benefits: For an extra premium, some policies offer additional benefits, such as cost-of-living increases or the option to purchase higher benefits in the future.
How are premiums paid?
Premiums may be “level,” meaning they stay constant over the life of the policy or they may increase as the policyholder ages. Waiting periods, also called elimination periods, establish the length of time before benefits are received. By waiting 90 days, six months or even longer before receiving benefits, policyholders can reduce premium amounts.
Choices for keeping your disability policy in force include non-cancelable and guaranteed renewable options. Non-cancelable policies enable you to continue a policy by paying the premiums on time. Guaranteed renewable policies will be automatically renewed with the same benefits. The premium, however, may go up if it is changed for everyone who has the same insurance policy from the company.