Disability Income Insurance

What Is Disability Income Insurance?

Disability income insurance provides an income to an insured who becomes totally disabled and unable to work. The amount is always a specified percentage—always less than 100%—of the insured person’s income when the disability occurs.

How Is Disability Defined?

The policy includes a precise definition of what constitutes a total disability that will qualify for benefit payments. Most policies have a two-step definition of total disability.

Initially, disability is defined as the insured’s inability to perform the duties of his or her own occupation for a specified period of time. If the insured is still unable to return to work after the specified period ends, total disability is redefined as the inability to perform the duties of any gainful occupation for which the insured is reasonably suited by education, training or experience. Because policies can differ significantly, it’s important to read and understand the definition in each policy.

Some policies pay a residual benefit if the insured is able to return to work but can no longer earn income at the pre-disability level. The formula for determining the amount of the residual benefit is specified in the policy.

When Do Payments Begin?

Disability policies have a waiting or elimination period that starts when the insured becomes disabled and extends for a specified length of time, typically from 30 to 120 days or longer. During this period, no benefits are paid. If the insured is still totally disabled at the end of the period, payments begin. This feature helps control the cost of the policy, with a longer waiting period generating smaller premiums and a shorter period generating larger premiums.

The length of the benefit period during which income payments will be made also affects the premium. Insurers commonly offer periods of one, two and five years, to age 65, or for life. The longer the period, the greater the premium.

Depending on who pays the premiums for a disability income policy, benefits paid might be received by the insured wholly or partly free of federal income tax.

Why Is Disability Income Insurance Important?

Most wage earners will need a source of ongoing income during their working years if they aren’t able to work. A disability income policy provides that income. A disability that isn’t covered by insurance can wreck an individual’s or family’s efforts to create a retirement income or to build and conserve an estate