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A Guide to Disability Income Insurance

Personal Finance
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Older couple who just got a disability income insurance policy hiking
If you become sick or injured and can no longer work, you could lose your ability to pay your regular bills and provide for your family while you recover. While health insurance can cover your medical costs, disability income insurance can provide a stream of income to help replace your lost paycheck if you become disabled and are unable to work.

If you're considering buying a disability income policy, here's an overview of how it works.

What Is Disability Income Insurance?

This type of insurance can replace a portion of a covered person's income when they are unable to work during a period of disability, which can be the result of injury, illness or accident.

Why Consider Disability Insurance?

More than a quarter of today's 20-year-olds will become disabled before they are old enough to retire, according to the Social Security Administration. As people age, those odds tend to increase. In fact, according to the Insurance Information Institute, 43% of people age 40 will experience long-term disability by the age of 65.

Without some form of disability income coverage, people who become temporarily or permanently disabled and unable to work may face the possibility of losing income and being unable to afford expenses. Disability income insurance can help you continue to receive income even if you are unable to work because of sickness or injury.

What Are the Different Types of Disability Income Insurance?

There are two main types of disability income insurance: short-term and long-term disability.

Short-term Disability

These policies can have a waiting period of up to two weeks before benefits kick in. They typically have a maximum period of coverage of up to two years, but the exact length of time will depend on the policy.

Long-term Disability

Long-term disability insurance policies have longer waiting periods before the benefits can be used. These can be anywhere from several weeks to several months. Benefits may be paid for a few years or even for life, depending on the terms of the policy. Often, a long-term disability policy starts coverage when a short-term disability policy coverage ends. For example, a policyholder might have a short-term policy that replaces income for six months and a long-term policy that begins coverage six months after the start of a disability.

What Are the Different Types of Renewal Provisions?

There are also different types of renewal provisions for long-term and short-term disability insurance. They can be noncancelable or guaranteed renewable.

Noncancelable

These policies must be renewed by the insurance company unless the policyholder fails to pay premiums. Insurance companies also are not allowed to increase the cost of the premiums or reduce the amount of benefits on these policies if the insured continues to pay premiums.

Guaranteed Renewable

This means the insured can renew the policy with no change in benefits but may face increased premiums. However, if premiums are raised, they must be increased over entire classes of policyholders and not just on individual policies.

Federal Disability Insurance & Other Options

Some people qualify for federal Social Security disability benefits. There are two federal programs for disabled individuals:

  • Social Security Disability Insurance, or SSDI, is for people who become disabled after meeting qualifications for amount and length of work and payment into the Social Security system. It is typically only for people who are disabled for at least a year and are unable to earn any money by working. SSDI is also for those who have a disability that will result in their death.
  • Supplemental Security Income, or SSI, is for people who are disabled and age 65 or older with little to no income or savings.

What Does Disability Insurance Cover?

Different long- and short-term disability insurance policies define a disability in different ways. Before purchasing a policy, it's important to understand what it covers. Before the benefit is disbursed, the policy may require that the insured person must be unable to perform any work, or it may only require that the covered individual is unable to perform the requirements of their current occupation.

Disability income policies typically cover various illnesses and injuries, regardless of where these conditions occur, depending on the terms of the policy. It could also cover recovery time following surgery. Some policies cover you only if you are injured in an accident, while others will also cover you for illnesses. Policies may not cover preexisting conditions.

How Much Does Disability Insurance Cost?

The cost of disability insurance premiums varies. Exactly how much a policy's premiums cost can depend on several factors, including:

  • Your age
  • Your sex
  • Your occupation
  • The amount of income you want to insure

Some policies may charge more to individuals with certain preexisting health conditions. And some people with preexisting conditions may not qualify for disability insurance at all. Plus, if you add features to your policy, such as cost-of-living adjustments, you will likely have to pay more. If you work at a job at which you are less likely to become disabled, such as a desk job, then the cost for disability insurance is typically lower than if you hold a higher-risk job, such as in construction.

How Does Disability Income Insurance Work?

Most policies will require an individual to be between the ages of 18 and 60 to purchase disability insurance. Should you become injured or sick, disability insurance will replace a percentage of your income, often ranging from 40% to 70% of your taxable earnings. A typical policy replaces 60% of your earnings. The higher the portion of your earnings that will be replaced, the more the policy will cost. Policies generally will not pay more than what your income was prior to becoming sick or injured.

Keep in mind that, like other forms of insurance, disability insurance policies typically come with a period after you buy the policy in which you are not covered. If you are disabled during this time, you won't receive any benefits from the policy. The shorter the waiting period, the more expensive your policy will be.

How Do You Get Disability Insurance?

Although there is no law requiring it, many workers can get disability insurance through their jobs, often funded by their employers. But sometimes, employer-provided disability insurance plans may be insufficient to meet workers' income needs in the event they become disabled. In those cases, workers may consider purchasing private policies to supplement their coverage.

Also, employer-provided disability insurance is generally not portable. That means, when you leave that job, you will likely lose that coverage. Privately purchased plans are portable and as long as you continue to pay premiums when due, stay with you no matter where you work.

In addition, if disability insurance isn't provided through your job or if you are self-employed, then you may want to purchase a disability income insurance policy from an insurance company.

Questions to Ask When Buying a Disability Income Insurance Policy

The federal government recommends asking key questions about a disability insurance policy before you buy it.

These questions include:

  • How does the policy define disability?
  • When will my benefits kick in?
  • How long will the benefits last?
  • How much of my income will the policy replace?

You may also ask what degree of disability you must have to collect benefits and whether or not the policy pays if you are partially disabled or able to work part-time. Finally, you can also ask about exclusions in the policy. Some policies will not pay benefits under certain circumstances. For example, you may not be able to collect benefits if you were injured while serving in the military.

Are Disability Insurance Benefits Taxable Income?

Whether disability insurance benefits are subject to taxes depends on how the policy was funded. Any income you receive through an employer-provided disability income policy will be taxed. In some instances, your employer may pay the taxes. If you pay the premiums for disability insurance, then the benefits are typically not taxed.

For more information on disability income insurance, and how it works, consider speaking with a financial representative.

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Information provided is general and educational in nature, and all products or services discussed may not be provided by Western & Southern Financial Group or its member companies (“the Company”). The information is not intended to be, and should not be construed as, legal or tax advice. The Company does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.