What is Disability Insurance?
Disability insurance provides you with an income if illness or injury prevents you from being able to work for an extended period of time. It is an important but often overlooked form of insurance.
There are other possible sources of income if you are disabled. Social Security provides protection, but only to those who are severely disabled and unable to work at all; workers’ compensation provides benefits if the illness or injury is work-related; civil service disability covers federal or state government workers; and automobile insurance may pay benefits if the disability results from an automobile accident. But these sources are limited.
Some employers offer short- and long-term disability coverage. If you are self-employed, you can buy individual disability income insurance policies. Generally:
- Monthly benefits are usually 60 percent of your income at the time of purchase, although cost-of-living adjustments may be available.
- Some policies pay benefits only if someone is unable to perform the duties of their customary occupation, while others pay only if the person can engage in no gainful employment at all. Make sure that you know the insurer’s definition of disability.
- If you pay the premiums for an individual disability policy, payments you receive under the policy are not subject to income tax. If your employer has paid some or all of the premiums under a group disability policy, some or all of the benefits may be taxable.
Whether you are an employer shopping for a group disability policy or someone thinking of purchasing disability income insurance, you will need to evaluate different policies. Here are some things to look for:
- Some policies pay only for accidents, but it’s important to be insured for illness, too. Be sure, as you evaluate policies, that both accident and illness are covered.
- Benefits may begin anywhere from one month to six months or more after the onset of disability. A later starting date can keep your premiums down. But remember, if your policy only starts to pay (for example) three months after the disability begins, you may lose a considerable amount of income.
- Benefits may be payable for a period ranging anywhere from one year to a lifetime. Since disability benefits replace income, most people do not need benefits beyond their working years. But it’s generally wise to insure at least until age 65 since a lengthy disability threatens financial security much more than a short disability.