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.
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.
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.
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.