Disability Insurance

What Is Disability Income Insurance?

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

How Is Disability Determined?

The policy includes a precise definition of what constitutes total disability to qualify for benefit payments. Most policies have a two-step definition of total disability. Initially, it’s defined as the inability of the insured to perform the duties of his or her own occupation for a specified period of time.

Later, after the specified period ends, and if the insured is still unable to return to work, 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 any particular policy. Some policies pay a residual benefit if the insured person is able to return to work, but can no longer earn income at the predisability 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, benefit 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, any benefits paid might be received by the insured federal income tax-free, in whole or in part.

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.

The best time to plan is before you have to. If you wait until you have to plan, you are reacting and not planning, and your options are very limited.
Stephen Hull MBA, RFC
Registered Financial Consultant
Our firm philosophy is simple: protect assets, grow wealth & live well.
William E. Watson III
Registered Financial Consultant President General Agent
Compound interest is good, compound taxation is bad.
Registered Financial Consultant Managing Partner - Denton
The success of a financial strategy is often more dependent on its systematic nature than its rate of return.
Kurt G. Poetschke
Private Client Division
All well managed portfolios hold defensive reserves.
Harlan W. Wiese RFC LUTCF CLTC
Private Client Division Brokerage Manager
Successful people make a habit of doing what unsuccessful people are unwilling to do.
Holly L. Hullum
Private Client Division