Disability Insurance is Income Protection Insurance
Disability income insurance policy components affect how your income is protected and the cost of that protection. Disability income protection insurance replaces part of your income if you became unable to work due to an illness or injury. According to the Council for Disability Awareness, almost half of American adults indicate they can’t pay an unexpected $400 bill without having to take out a loan or selling something. A disability income protection insurance policy protects your most valuable asset – your ability to earn a living.
Amount of coverage
While there’s no substitute for a thorough needs analysis from an insurance professional, you’ll find that most policies cover between 50% and 70% of your income. When thinking about how much coverage you need, consider both short-term and long-term expenses, as well as any other sources of disability income, such as investment income or group disability income coverage.
Group disability coverage
Some employers, including most larger ones, offer group disability insurance. However, an employee may still need to consider individual disability insurance because the coverage offered by the company might be insufficient. In this case, the amount of individual insurance you can obtain will be affected by the amount of group coverage you receive.
Referred to as a Waiting Period by some of the carriers we work with, the Elimination Period is the amount of time you are required to wait after a disability occurs before you can receive benefits. It can vary from as short as 30-days to 90-days or longer. Longer elimination periods generally translate into lower premiums. However, you should be certain that you could afford to meet all of your immediate needs for that period of time if you were to become disabled.
The Benefit Period is probably the most important disability income insurance policy component to consider. The Benefit Period is the amount of time you will receive benefits. They can last for between one and five years, up to age 65, or even for life, depending on your specific needs. The benefit period will directly impact your premiums-the longer the period, the higher the premium.
Taxable or tax-free income
If your employer pays your insurance premiums, any benefits you receive will be taxable because they are considered income. If you pay your premiums with aftertax dollars, then your benefits will be tax free (according to current IRS regulations).
When considering the amount of coverage you need, keep in mind that you will probably want to continue funding your retirement needs, even if you are not working.
Definition of disability
Some plans pay claims if you can no longer perform the duties of your current occupation, while other plans will pay benefits only if you are unable to perform the duties of any occupation. Still others will pay benefits based upon loss of earned income. Each option offers a different level of cost and benefit.
If you have any questions about these disability income insurance policy components, give us a call!